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The EU Law of Economic and Monetary Union

The EU Law of Economic and Monetary Union Edited by

FA B IA N A M T E N B R I N K CHRISTOPH HERRMANN Assisted by

R E N É   R E PA SI

1

3 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © The several contributors 2020 The moral rights of the authors have been asserted Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Crown copyright material is reproduced under Class Licence Number C01P0000148 with the permission of OPSI and the Queen’s Printer for Scotland Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2019951119 ISBN 978–0–19–879374–8 Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

List of Contributors Dariusz Adamski University of Wrocław Jasper Aerts European Stability Mechanism Kern Alexander University of Zürich Fabian Amtenbrink Erasmus University Rotterdam Phoebus L Athanassiou European Central Bank and Goethe University Frankfurt Wolfgang Bergthaler International Monetary Fund Vestert Borger Leiden University Katharine Christopherson International Monetary Fund Francesco Costamagna University of Turin Paul Craig University of Oxford Marise Cremona European University Institute Shawn Donnelly University of Twente Kees van Duin European Commission Leo Flynn European Commission Ulrich Forsthoff General Court of the EU, formerly European Stability Mechanism Robert Freitag Friedrich-Alexander-University of Erlangen-Nürnberg

vi List of Contributors Christos V Gortsos National and Kapodistrian University of Athens Christos Hadjiemmanuil University of Piraeus and London School of Economics Mortiz Hartmann Court of Justice of the European Union Christoph Herrmann University of Passau Alicia Hinarejos University of Cambridge Michael Ioannidis European Central Bank and Max-Planck-Institute for Comparative Public Law and International Law Erik Jones Johns Hopkins University Jean-Paul Keppenne European Commission Julian Langner Deutsche Bundesbank Rosa M Lastra Queen Mary University of London Nathalie Lauer General Court of the European Union, formerly European Stability Mechanism Päivi Leino-Sandberg University of Helsinki Vivienne Madders University of Zürich Cornelia Manger-Nestler Leipzig University of Applied Sciences Menelaos Markakis Erasmus University Rotterdam Francesco Martucci University of Paris 2 Panthéon-Assas Donato Masciandaro Bocconi University Alberto de Gregorio Merino Council of the European Union

List of Contributors vii Emmanuel Mourlon-Druol University of Glasgow Till Müller-Ibold Cleary Gottlieb Steen & Hamilton LLP Ulla Neergaard University of Copenhagen Christoph Ohler Friedrich-Schiller-University of  Jena Jennifer Payne University of Oxford Charles Proctor Fladgate LLP Georgios Psaroudakis Aristotle University of Thessaloniki René Repasi Erasmus University Rotterdam Davide Romelli Trinity College Dublin Daniel Sarmiento University Complutense of Madrid Eugenia Dumitriu Segnana European Commission Alexander Thiele Georg-August-University of Göttingen Klaus Tuori University of Turku Ramses A Wessel University of Groningen Bruno de Witte Maastricht University and European University Institute

Preface The idea to this edited volume dates back to 2015, when in the midst of the Euro area sovereign debt crisis (the European Central Bank had just announced its expanded asset purchase programme and Greece was on the eve of a third time financial assistance programme) Oxford University Press approached us with the question whether we would be interested in authoring a book on ‘Monetary Governance’. After some short deliberations we came to the conclusion that a broader approach was called for, namely because discussing EU monetary governance without including also economic governance would provide an incomplete picture. What is more, while the interest of lawyers in the EU’s Economic and Monetary Union (EMU) by that time had already increased dramatically, being less and less limited to a small group of specialized (central bank) lawyers and academics, a comprehensive and systematic English-language examination of the EU legal framework pertaining to EMU, of the likes already existing for other policy fields, had been absent. Throughout the whole process of editing this volume it has been our grand ambition to close this gap. The attentive reader will notice that apart from a brief introductory chapter the editors of this volume have not authored any substantive chapters themselves. This has been a deliberate choice, as both of us have on one or two occasions published on one or more topics covered by this volume. From the outset this project was not about (re-)stating our own analyses and views flanked by a collection of contributions by like-minded, but rather to assemble and work with as many well-known specialists as possible and covering as many relevant angles as feasible. This has resulted in a unique group of authors working on different aspects of EMU as well as financial market regulation and supervision that do not only have different disciplinary and professional backgrounds, but that also do not necessarily share the same views on some of the overarching legal, economic, and political themes that connect the different topics covered in this volume. It should be noted that bringing into line these different views has not been something we have strived for. For us as editors, the exercise in self-restraint in pronouncing our own understandings and views, something that does not necessarily come natural to (legal) academics, has certainly been very stimulating, as it has widened our own horizon. This edited volume owes large debts to a number of people that were instrumental in allowing us to advance this ambitious project passed the finishing line. First of all, there are the numerous authors themselves whom we would like to thank for their trust in us and for their patience and professionalism in coping with at times very detailed feedback and the lengthy editorial process. We would also like to thank Oxford University Press, and in particular Alexander Flach, both for the trust they vested in us and this project, and for all the work the team at OUP put into realizing it. A special thanks goes to the colleagues both at the Erasmus School of Law of the Erasmus University Rotterdam and the Faculty of Law of the University of Passau that have relentlessly supported us in our efforts. First to mention is Dr Rene Repasi, who at an early stage of

x preface the project agreed to assist us in the monumental task of managing the (ever-growing) pool of contributors to this edited volume. He would regularly remind authors and editors of outstanding tasks and—in the final stages of the project—would form the linking pin with the project editors at Oxford University Press. If it wasn’t for Dr Repasi’s relentless efforts the almost unavoidable delays associated with an edited volume project of this size would have been considerably longer. Moreover, we would like to thank (in alphabetic order!) Anna Espenschied, Simon Guilliard, Mirjam Herrmann, Beth Houghton, Gesa Kübek, Karen Sievert, Fien van Solinge, and Laurenz Weigand, for the handling of the voluminous manuscripts. Well done everybody! Rotterdam/Passau, February 2020 Fabian Amtenbrink Christoph Herrmann

Table of Cases 1. TABLE OF COURT OF JUSTICE AND THE GENERAL COURT OF THE EUROPEAN UNION CASES (INCLUDING OPINIONS OF ADVOCATE GENERALS) A. Alphabetical (Court of Justice, General Court of the European Union and Opinions of Advocate Generals Combined) A2A (C-89/14) ECLI:EU:C:2015:537�� 39.221 Accorinti and Others v ECB (T-79/13) ECLI:EU:T:2015:756�� 14.16, 14.73, 19.92, 19.95–19.98 ADEDY and Others v Council (T-541/10) ECLI:EU:T:2012:626�� 19.138 Adria-Wien Pipeline (C-143/99) [2001] ECR I-8365 ��39.16 Afton Chemical Limited v Secretary of State for Transport (C-343/09) ECLI:EU:C:2010:419�� 22.172, 22.250 AGET Iraklis (C-201/15) ECLI:EU:C:2016:972��13.12 Air France v Commission (T-358/94) [1996] ECR II-2109��39.11 Åklagare v Hans Åkerberg Fransson (C-617/10) ECLI:EU:C:2013:105 ��19.156, 19.180, 30.65 Alitalia v Commission (T-296/97) [2000] ECR 2000 II-3871��39.15 Alpine Investments BV v Minister van Financiën (C-384/93) [1995] ECR I-1141 ��10.47 Anagnostakis v Commission (T-450/12) ECLI:EU:T:2015:739��27.11 ANAV (C-410/04) [2006] ECR I-3303�� 39.206 Associação Sindical dos Juízes Portugueses (C-64/16) (Opinion of AG Saugmandsgaard Øe) ECLI:EU:C:2017:395�� 13.59, 41.66 Associação Sindical dos Juízes Portugueses v Tribunal de Contas (C-64/16) ECLI:EU:C:2018:117��12.54, 13.59, 30.59, 41.66 Ax v Council (T-259/10) ECR II-176��32.39 Ayuntamiento de Madrid et Madrid Calle 30 SA (Madrid) v Commission (T-177/06) [2007] ECR II-88 ��28.76 Banco Privado Português et al v Commission (T-487/11) ECLI:EU:T:2014:1077�� 39.135, 39.218 Bank Burgenland v European Commission (T-268/08) ECLI:EU:T:2012:90�� 39.151 Belgium v Commission (‘Tubemeuse’) (C-142/87) [1990] ECR I-959 �� 39.14, 39.221 Belgium v Commission (C-75/97) [1999] ECR I-3671��39.16 Belgium v Commission (T-403/06) ECLI:EU:T:2008:99��28.76 Berlusconi and Fininvest v Banca d’Italia (C-219/17) ECLI:EU:C:2018:1023 ��19.40 BNP Paribas v ECB (T-768/16) ECLI:EU:T:2018:471�� 19.184 Bourdouvali and Others v Council and Others (T-786/14) ECLI:EU:T:2018:487�� 19.110, 27.26, 30.59, 30.126, 30.180 BPCE v ECB (T-745/16) ECLI:EU:T:2018:476�� 19.184 Braesch and Others v Commission (T-161/18) �� 39.151 Carl Schlüter v Hauptzollamt Lörrach (9/73) [1973] ECR-1135��28.3 Carmine Salvatore Tralli v ECB (C-301/02 P) [2005] ECR I-4071�� 14.23, 37.82 Chatziioannou v Commission and ECB (T-330/13) ECLI:EU:T:2014:904��19.91 Chatzithoma v Commission and ECB (T-329/13) ECLI:EU:T:2014:908 ��19.91 CIRFS and Others v Commission (C-313/90) [1993] ECR I-1125�� 39.20, 39.157 Commission v Alrosa (C-441/07) [2010] ECR I-5949��39.19 Commission v Council (ERTA) (22/70) [1971] ECR 263��6.24, 6.26 Commission v Council (242/87) [1989] ECR I-1425��11.18 Commission v Council (C-25/94) [1996] ECR I-1469�� 6.94, 16.26

xlii tABLE OF CASES Commission v Council (C-27/04) [2004] ECR I-6649��9.39, 9.52, 10.32, 11.19, 13.19, 16.89, 18.12, 19.17, 28.3, 28.5, 28.11, 28.48, 28.51, 40.21 Commission v Council (C-28/12) ECLI:EU:C:2015:282��6.98 Commission v Council (C-114/12) ECLI:EU:C:2014:2151 �� 6.24, 6.26, 7.14 Commission v Council (C-425/13) ECLI:EU:C:2015:483 ��7.21 Commission v Council (AMP Antarctique) (C‑626/15 and C‑659/16) ECLI:EU:C:2018:925�� 16.27 Commission v ECB (C-11/00) [2003] ECR I-7147��14.51, 14.54, 14.76, 19.16 Commission v France (6 and 11/69) [1969] ECR 523 ��34.22 Commission v FrieslandCampina (C-519/07) [2009] ECR I-8495 �� 39.205 Commission v Germany (Alcan No 1) (94/87) [1989] ECR 175�� 39.221 Commission v Germany (BUG-Alutechnik) (C-5/89) [1990] ECR I-3437 �� 39.221 Commission v Greece (C-45/07) [2009] ECR I-701�� 6.23, 6.29, 6.86 Commission v Greece (Olympic Airways) (C-369/07) [2009] ECR I-5703 �� 39.221, 39.222 Commission v Ireland (C-272/12) ECLI:EU:C:2013:812��39.12 Commission v Italian Republic (118/85) [1987] ECR 2599��39.10 Commission v Italian Republic (C-35/96) [1998] ECR I-3851��39.10 Commission v Italy (C-467/15) ECLI:EU:C:2017:799�� 39.134, 39.210 Commission v Italy (73/79) [1980] ECR 1533 �� 39.232 Commission v Lübeck (C‑524/14) ECLI:EU:C:2016:971�� 39.111 Commission v Luxembourg (C-319/06) [2008] ECR I-4323 ��13.13 Commission v Luxembourg (C-684/15) ECLI:EU:C:2016:318 �� 39.232 Commission v Poland (C-683/15) ECLI:EU:C:2017:535 �� 39.232 Commission v Sweden (C-246/07) [2010] ECR I-3317��6.33 Comunidad Autónoma de Galicia et al v Commission (C‑70/16) ECLI:EU:C:2017:1002�� 39.111 Comunidad Autónoma de Madrid and Madrid, infraestructuras del transporte (Mintra) v Commission of the European Communities (T-148/05) [2006] ECR II-61��28.76 Confédération nationale du Crédit mutuel v ECB (T-751/16) ECLI:EU:T:2018:475�� 19.184 Convention No 170 of the ILO concerning safety in the use of chemicals at work (Opinion 2/91) [1993] ECR I-1061 �� 6.24, 6.32, 6.38, 6.52, 7.14 Convention on the civil aspects of international child abduction (Opinion 1/13) ECLI:EU:C:2014:2303��6.32 Corpul Naţional al Poliţiştilor v Ministerul Administraţiei şi Internelor and Others (C-134/12) ECLI:EU:C:2012:288��41.55 Corpul Naţional al Poliţiştilor v Ministerul Administraţiei şi Internelor and Others (C-369/12) ECLI:EU:C:2012:725��41.55 Corpul Naţional al Poliţiştilor v Ministerul Administraţiei şi Internelor and Others (C-434/11) [2011] ECR I-196�� 30.181, 41.55 Council v Commission (C-660/13) ECLI:EU:C:2016:616 �� 6.95, 11.17 Council v K Chrysostomides & Co and Others (C-597/18 P) ECLI:EU:C:2019:743��27.29 Crédit agricole v ECB (T-758/16) ECLI:EU:T:2018:472 �� 19.184 Crédit Mutuel Arkéa v ECB (T-712/15) ECLI:EU:T:2017:900��37.67 Deutsche Bahn v Commission (T-351/02) [2006] ECR II-1047��39.11, 39.12, 39.105 Donatella Calfa (C-348/96) [1999] ECR I-11��10.47 Ducros v Commission (T-149/95) [1997] ECR II-2031��39.20 ECB and others v Trasta Komercbanka and others (C-663/17 P, C-665/17 P and C-669/17 P) ECLI:EU:C:2019:923�� 19.184, 41.87 ECB v Latvia (C-238/18) pending ��15.64 Eleftheriou and Papachristofi v Commission and ECB (T-291/13) ECLI:EU:T:2014:978 ��19.81 Ellinika Nafpigeia v Commission (T-391/08) ECLI:EU:T:2012:126 �� 39.209 Emilio De Capitani v European Parliament (T-540/15) ECLI:EU:T:2018:167��17.22 Eric Libert and Others v Gouvernement flamand and All Projects & Developments NV and Others v Vlaamse Regering (C‑197/11 and C‑203/11) ECLI:EU:C:2013:288��39.18 Espírito Santo Financial (Portugal), SGPS, SA v ECB (T-251/15) ECLI:EU:T:2018:234��14.57 Espírito Santo Financial Group SA v ECB (T‑730/16) ECLI:EU:T:2019:161 ��14.73 Estado português v Banco Privado Português et al (C-667/13) ECLI:EU:C:2015:151��39.135, 39.218

TABLE OF CASES xliii Eugenia Florescu and Others v Casa Judeţeană de Pensii Sibiu (C-258/14) ECLI:EU:C:2017:448��12.54, 13.38, 13.58, 13.60, 19.72, 19.179, 30.59, 30.60, 30.63, 30.84, 30.167, 30.182, 41.64 European Parliament and Commission v Council (C‑103/12 and C‑165/12) ECLI:EU:C:2014:2400��16.86 European Parliament v Council (C-295/90) [1992] ECR I-4230��26.39 European Parliament v Council (C-316/91) [1994] ECR I-625 �� 12.25, 12.48 European Parliament v Council (C-65/93) [1995] ECR I-643 ��17.24 European Parliament v Council (C-417/93) [1995] ECR I-1185��17.24 European Parliament v Council (C-133/06) [2008] ECR I-3189��13.13 European Parliament v Council (C-658/11) ECLI:EU:C:2014:2025��7.16, 7.22 European Parliament v Council and Commission (C-181/91 and C-248/91) [1993] ECR I-3685�� 12.25, 12.48 Eventech v The Parking Adjudicator (C-518/13) ECLI:EU:C:2015:9��39.18 Fahnenbrock and Others v Hellenic Republic (C-226/13, C-245/13, C-247/13 and C-578/13) ECLI:EU:C:2015:383�� 40.204 Forum 187 v Commission (C‑182/03) [2006] ECR I‑5479�� 39.205 France v Commission (Stardust) (C-482/99 [2002] ECR I-4397��39.11 France v Commission (C-233/02) [2004] ECR I-2759��5.83 Frank Steinhoff and Others v ECB (T-107/17) ECLI:EU:T:2019:353�� 13.59, 14.73 Free Trade Agreement with Singapore (Opinion 2/15) ECLI:EU:C:2017:376��6.47 Frucona v Commission (C-73/11) ECLI:EU:C:2013:32 ��39.14 Gauweiler and Others v Deutscher Bundestag (C‑62/14) (Opinion of AG Cruz Villalón) ECLI:EU:C:2015:7�� 14.45, 22.175, 22.245, 30.191, 41.21 Gauweiler and Others v Deutscher Bundestag (C-62/14) ECLI:EU:C:2015:400��9.81, 9.83, 9.84, 9.86, 10.21, 10.37, 11.2, 11.15, 11.21, 11.22, 11.31, 14.41, 14.42, 14.45, 14.48, 14.51, 14.73, 14.76, 14.83, 15.73, 19.23, 19.49, 22.145, 22.170, 22.171, 22.173, 22.175, 22.176, 22.177, 22.190, 22.209, 22.214, 22.217–22.220, 22.224, 22.225, 22.233, 22.234, 22.236–22.238, 22.240, 22.250, 26.40, 26.101, 37.6, 40.253, 41.3, 41.11, 41.16, 41.17, 41.18, 41.20, 41.22–41.27 Gerard Dowling and Others v Ministry of Finance (C-41/15) ECLI:EU:C:2016:836 �� 26.96, 40.141 Germany v Commission (248/84) [1987] ECR 4013��39.11 Germany v Commission (281, 283 to 285 and 287/85) [1987] ECR I-3203 ��26.39 Germany v Commission (C-242/00 [2002] ECR I-5603��39.20 Germany v Council (C-399/12) ECLI:EU:C:2014:2258 �� 6.41, 6.50, 6.53, 6.89 Germany v Commission (C-446/14) ECLI:EU:C:2016:97 ��39.20 Germany v Commission (C-405/16) P) ECLI:EU:C:2019:268�� 39.150 Germany v European Parliament and Council (C-113/14) ECLI:EU:C:2016:635��16.86 Hellenic Republic v Leo Kuhn (C-308/17) ECLI:EU:C:2018:911�� 40.204 Hermès International v FHT Marketing Choice BV (C-53/96) ECLI:EU:C:1997:539 ��6.87 Iccrea Banca v Banca d’Italia (C-414/18) ECLI:EU:C:2019:1036�� 19.184 Ilmārs Rimšēvičs and ECB v Republic of Latvia (C-202/18 and C-235/18) ECLI:EU:C:2019:139��14.11, 14.18, 14.57, 19.19 International Agreement on Natural Rubber (Opinion 1/78) [1979] ECR 2871 ��6.35 Intertanko and Others v Secretary of State for Transport (C-308/06) [2008] ECR I-4057��6.32 Italy and others v Commission (T-98/16, T-196/16 and T-198/16) ECLI:EU:T:2019:167�� 39.150, 39.152 Italy v Commission (C-303/88) [1991] ECR I-1433��39.20 Italy v Commission (C-305/89) [1991] ECR I-01603��39.14 Italy v Commission (T-225/04) [2006] II-56��29.63 Italy v Commission (T-122/14) ECLI:EU:T:2016:342�� 39.221

xliv tABLE OF CASES K Chrysostomides & Co and Others v Council and Others (T-680/13) ECLI:EU:T:2018:486��16.102, 16.103, 19.110, 27.28, 30.59, 30.153, 30.180 Kerafina v Greece (C-134/91) [1992] ECR I-5699�� 39.232 Kotnik and Others v Državni zbor Republike Slovenije (C-526/14) (Opinion of AG Wahl) ECLI:EU:C:2016:102�� 19.107, 26.96 Kotnik and Others v Državni zbor Republike Slovenije (C-526/14) ECLI:EU:C:2016:570��19.106–19.109, 26.96, 38.60, 39.166 La Banque Postale v ECB (T-733/16) ECLI:EU:T:2018:477 ��11.21, 11.22, 14.73, 19.184 Land Burgenland v Commission (C-214/12 P, C-215/12 P and C-223/12 P) ECLI:EU:C:2013:682��39.15 Land Rheinland-Pfalz v Alcan Deutschland (Alcan No 2) (C-24/95) [1997] ECR I-1591�� 39.221 Landeskreditbank Baden-Württemberg -Förderbank v ECB (C-450/17 P) ECLI:EU:C:2019:372��14.14, 14.15, 14.43, 26.92 Landeskreditbank Baden-Württemberg -Förderbank v ECB (T-122/15) ECLI:EU:T:2017:337��26.32, 26.34, 26.92, 37.57 Laval un Partneri Ltd v Svenska Byggnadsarbetareförbundet and Others (C-341/05) [2007] ECR I-11767��13.13 Ledra Advertising v Commission and ECB (T-289/13) ECLI:EU:T:2014:981��19.81, 19.82, 30.175 Ledra Advertising and Others v Commission and ECB (C-8/15 P to C-10/15 P) (Opinion of AG Wahl) ECLI:EU:C:2016:290�� 30.57, 30.84 Ledra Advertising Ltd and Others v Commission and ECB (C-8/15 P to C-10/15 P) ECLI:EU:C:2016:701�� 6.90, 9.60, 11.27, 12.52, 13.59, 14.16, 17.70, 19.83–19.85, 19.87, 19.111, 19.169–19.171, 26.96, 30.48, 30.50, 30.52, 30.53, 30.56, 30.59, 30.62, 30.71, 30.78, 30.153, 30.162, 30.175, 30.178–30.180, 40.287, 41.56, 41.57, 41.62, 41.65, 42.111 Les Verts v European Parliament (294/83) [1986] ECR I-1339�� 19.7, 19.43 M.A.S. and M.B. (C-42/17) ECLI:EU:C:2017:936 �� 19.44, 19.182 Mallis and Malli v Commission and ECB (T-327/13) ECLI:EU:T:2014:909��19.91 Mallis and Others v Commission and ECB (C‑105/15 P to C‑109/15 P) (Opinion of AG Wathelet) ECLI:EU:C:2016:294�� 30.62, 30.84, 30.85 Mallis and Others v Commission and ECB (C-105/15 P to C-109/15 P) ECLI:EU:C:2016:702��6.97, 7.15, 10.14, 10.16, 10.49, 12.50, 16.101, 19.89, 27.27, 30.153, 40.286, 41.56, 41.57 María Martínez Sala v Freistaat Bayern (C-85/96) [1998] ECR I-2691��19.7 Massimo Romanelli and Paolo Romanelli (C-366/97) [1999] ECR I-855��37.59 Maurizio Giovanardi (C‑79/11) ECLI:EU:C:2012:297 �� 39.206 Maximillian Schrems v Data Protection Commissioner (C-362/14) ECLI:EU:C:2015:650��30.53 Melloni v Ministerio Fiscal (C-399/11) ECLI:EU:C:2013:107 ��30.65 Meroni & Co, Industrie Metallurgiche, SpA v ECSC High Authority (9/56) [1957-58] ECR 133��12.60, 18.39, 20.21, 36.78, 37.14, 41.82, 42.107 Meroni & Co, Industrie Metallurgiche, società in accomandita semplice v ECSC High Authority (10/56) [1957-58] ECR 157 �� 18.39, 42.107 Meryem Demirel v Stadt Schwäbisch Gmünd (12/86) [1987] ECR 3719 ��7.9 Ministero dell’Economia e delle Finanze v Cassa di Risparmio di Firenze SpA and Others (C-222/04) [2006] ECR I-289 ��39.10 Nausicaa Anadyomène SAS and Banque d’escompte v ECB (T-749/15) ECLI:EU:T:2017:21 �� 14.73, 40.204 Netherlands and ING Group (T-29/10) ECLI:EU:T:2012:98�� 39.151 Netherlands v Commission and Council (C-377/98) [2001] ECR I-7079��19.7 Neue Maxhütte v Commission (T-129/95, T-2/96 and T-97/96) [1999] ECR II-17��39.14 Nikolaou v Commission and ECB (T-331/13) ECLI:EU:T:2014:905��19.91

TABLE OF CASES xlv Omega Spielhallen-und Automatenaufstellungs GmbH v Oberbürgermeisterin der Bundesstadt Bonn (C-36/02) [2004] ECR I-9609 ��19.7 P&O European Ferries v Commission (T-116/01 and T-118/01) [2003] ECR II-2957��39.15 Pavel Pavlov and Others v Stichting Pensioenfonds Medische Specialisten (C-180/98 to C-184/98) [2000] ECR I-6451��39.10 Peter Paul and Others v Bundesrepublik Deutschland (C-222/02) [2004] ECR I-9425��26.80, 37.48 Preussen Elektra (C-379/98) [2001] ECR I-2159�� 39.150 Pringle v Government of Ireland and Others (C-370/12) ECLI:EU:C:2012:756 ��6.90, 9.60, 9.73–9.75, 10.21, 10.37, 11.15, 11.26, 11.31, 12.13, 12.23, 12.38, 12.46, 12.48, 12.52, 12.54, 12.61, 13.35, 13.41, 14.41, 16.117, 17.36, 19.4, 19.77, 19.79, 19.178, 20.18, 20.52, 22.142, 22.145, 22.229, 22.232, 27.11, 27.12, 27.49, 27.52, 30.2, 30.19, 30.20, 30.22, 30.23, 30.42, 30.44, 30.51, 30.53, 30.54, 30.71, 30.78, 30.190, 32.3,32.10, 32.29, 32.32, 32.34, 32.36, 32.38, 32.39, 33.109, 34.2, 37.8, 40.119, 41.20, 41.32, 41.36, 41.41–41.48 Puffer v Unabhängiger Finanzsenat (C-460/07) [2009] ECR I-3251�� 39.12, 39.105 Residex Capital IV (C-275/10) [2011] ECR I-13043 �� 39.226 Rewe-Zentral AG (120/78) [1979] ECR 649��13.9 Roland Rutili v Minister for the Interior (36/75) [1975] ECR 1219��10.47 Romano (98/80) [1981] ECR 1241��41.82 Roquette Frères v Council (138/79) [1980] ECR 3333��17.24 Rüffert v Land Niedersachsen (C-346/06) [2008] ECR I-1989��13.13 Rush Portuguesa Lda v Office national d’immigration (C-113/89) [1990] ECR I-1417 ��13.13 SFEI (C-39/94) [1996] ECR I-3547 �� 39.13, 39.14 Sindicato dos Bancários do Norte and Others v BPN (C-128/12) ECLI:EU:C:2013:149�� 13.39, 19.72, 30.181, 40.166, 41.55 Sindicato Nacional dos Profissionais de Seguros e Afins v Fidelidade Mundial-Companhia de Seguros SA (C-264/12) ECLI:EU:C:2014:2036��19.72, 30.181, 40.166, 41.55 Sindicato Nacional dos Profissionais de Seguros e Afins v Via Directa -Companhia de Seguros SA (C-665/13) ECLI:EU:C:2014:2327�� 40.166, 41.55 Société générale v ECB (T-757/16) ECLI:EU:T:2018:473�� 19.184 Sotiropoulou and Others v Council (T-531/14) ECLI:EU:T:2017:297 �� 16.89, 30.59 Spain v Commission (C-342/96) [1999] ECR I-2459��39.13 Spain v Commission (C-351/98) [2002] ECR I-8031��39.20 Spain v Commission (C-525/04) [2007] ECR I-9947��39.14 Spain v Commission (T-676/14) ECLI:EU:T:2015:602��28.90 Spain v Council (C-521/15) ECLI:EU:C:2017:982�� 16.86, 19.18, 28.94 Spiegel-Verlag Rudolf Augstein and Sauga v ECB (T-116/17) ECLI:EU:T:2018:614��14.64 Sweden and Maurizio Turco v Council of the European Union (C-39/05 P and C-52/05 P) [2008] ECR I-4723��14.64 Tameio Pronoias Prosopikou Trapezis Kyprou v Commission and ECB (T-328/13) ECLI:EU:T:2014:906��19.91 Territorio Histórico de Álava v Commission (T-92/00 and T-103/00) [2002] ECR II-1385��39.11 The International Transport Workers’ Federation and The Finnish Seamen’s Union v Viking Line ABP and Others (C-438/05) [2007] ECR I-10779��13.13 Theophilou v Commission and ECB (T-293/13) ECLI:EU:T:2014:979��19.81 Thesing and Bloomberg Finance v ECB (T-590/10) ECLI:EU:T:2012:635�� 11.21, 11.27, 14.64 United Kingdom v ECB (T-496/11) ECLI:EU:T:2015:133 �� 5.99, 11.19, 24.16 United Kingdom v European Parliament and Council (C-66/04) [2005] ECR I-10533 ��20.11 United Kingdom v European Parliament and Council (C-217/04) [2006] ECR I-3771 ��20.11

xlvi tABLE OF CASES United Kingdom v European Parliament and Council (C-270/12) ECLI:EU:C:2014:18�� 16.86, 17.76, 20.11, 20.22, 41.82, 41.83 United Kingdom v European Parliament and Council (C-507/13) ECLI:EU:C:2014:2481 ��41.82 van Calster (C-261/01) [2003] ECR I-12249�� 39.232 Verbraucherzentrale Baden-Württemberg v Germanwings GmbH (C-330/17) ECLI:EU:C:2018:916�� 21.51, 21.52 Verein für Konsumenteninformation v Deutsche Bahn AG (C-28/18) ECLI:EU:C:2019:673�� 24.49 Versorgungswerk der Zahnärztekammer Schleswig-Holstein v ECB (T-376/13) ECLI:EU:T:2015:361�� 14.64, 14.73 Von Storch and Others v ECB (T-492/12) ECLI:EU:T:2013:702 ��19.22, 19.60, 41.16, 41.17 Von Storch and Others v ECB (C-64/14 P) ECLI:EU:C:2015:300 �� 19.23, 41.16, 41.17 Weiss and Others (C‑493/17) (Opinion of AG Wathelet) ECLI:EU:C:2018:815 �� 22.213 Weiss and Others (C-493/17) ECLI:EU:C:2018:1000 ��9.100, 9.101, 11.2, 11.21, 14.41, 14.48, 14.73, 19.64, 19.67, 19.68, 26.40, 40.331, 41.3, 41.35 Westdeutsche Landesbank v Commission (T-228/99 and T-233/99) [2003] ECR II-435��39.14 Westfälisch-Lippischer Sparkassen und Giroverband v Commission (T-457/09) ECLI:EU:T:2014:683��39.58 Zweckverband Tierkörperbeseitigung v Commission (T‑309/12) ECLI:EU:T:2014:676��39.20 B. Numerical Table of Court of Justice Cases including Opinions of Advocate Generals 9/56 Meroni & Co, Industrie Metallurgiche, SpA v ECSC High Authority [1957-58] ECR 133��12.60, 18.39, 20.21, 36.78, 37.14, 41.82, 42.107 10/56 Meroni & Co, Industrie Metallurgiche, società in accomandita semplice v ECSC High Authority [1957-58] ECR 157 �� 18.39, 42.107 6 and 11/69 Commission v France [1969] ECR 523��34.22 22/70 Commission v Council (ERTA) [1971] ECR 263��6.24, 6.26 9/73 Carl Schlüter v Hauptzollamt Lörrach [1973] ECR-1135��28.3 36/75 Roland Rutili v Minister for the Interior [1975] ECR 1219��10.47 Opinion 1/78 International Agreement on Natural Rubber [1979] ECR 2871��6.35 120/78 Rewe-Zentral AG [1979] ECR 649��13.9 73/79 Commission v Italy [1980] ECR 1533�� 39.232 138/79 Roquette Frères v Council [1980] ECR 3333 ��17.24 98/80 Romano [1981] ECR 1241 ��41.82 294/83 Les Verts v European Parliament [1986] ECR I-1339�� 19.7, 19.43 248/84 Germany v Commission [1987] ECR 4013��39.11 118/85 Commission v Italian Republic [1987] ECR 2599��39.10 281, 283 to 285 and 287/85 Germany v Commission [1987] ECR I-3203��26.39 12/86 Meryem Demirel v Stadt Schwäbisch Gmünd [1987] ECR 3719��7.9 94/87 Commission v Germany (Alcan No. 1) [1989] ECR 175�� 39.221 242/87 Commission v Council [1989] ECR I-1425 ��11.18 C-113/89 Rush Portuguesa Ldª v Office national d’immigration [1990] ECR I-1417��13.13 C-142/87 Belgium v Commission (‘Tubemeuse’) [1990] ECR I-959�� 39.14, 39.221 C-5/89 Commission v Germany (BUG-Alutechnik) [1990] ECR I-3437�� 39.221 C-303/88 Italy v Commission [1991] ECR I-1433��39.20 C-305/89 Italy v Commission [1991] ECR I-01603��39.14 C-295/90 Parliament v Council [1992] ECR I-4230��26.39 C-313/90 CIRFS and Others v Commission [1993] ECR I-1125�� 39.20, 39.157 Opinion 2/91 Convention No 170 of the International Labour Organization concerning safety in the use of chemicals at work [1993] ECR I-1061�� 6.24, 6.32, 6.38, 6.52, 7.14 C-134/91 Kerafina v Greece [1992] ECR I-5699�� 39.232 C-181/91 and C-248/91 European Parliament v Council of the European Communities and Commission of the European Communities [1993] ECR I-3685�� 12.25, 12.48 C-316/91 Parliament v Council [1994] ECR I-625�� 12.25, 12.48

TABLE OF CASES xlvii C-65/93 Parliament v Council [1995] ECR I-643��17.24 C-384/93 Alpine Investments BV v Minister van Financiën [1995] ECR I-1141��10.47 C-417/93 Parliament v Council [1995] ECR I-1185��17.24 C-25/94 Commission v Council [1996] ECR I-1469�� 6.94, 16.26 C-39/94 SFEI [1996] ECR I-3547�� 39.13, 39.14 C-24/95 Land Rheinland-Pfalz v Alcan Deutschland (Alcan No. 2) [1997] ECR I-1591 �� 39.221 C-53/96 Hermès International v FHT Marketing Choice BV ECLI:EU:C:1997:539��6.87 C-85/96 María Martínez Sala v Freistaat Bayern [1998] ECR I-2691��19.7 C-35/96 Commission v Italian Republic [1998] ECR I-3851 ��39.10 C-342/96 Spain v Commission [1999] ECR I-2459��39.13 C-348/96 Donatella Calfa [1999] ECR I-11��10.47 C-75/97 Belgium v Commission [1999] ECR I-3671��39.16 C-366/97 Massimo Romanelli and Paolo Romanelli [1999] ECR I-855 ��37.59 C-180/98 to C-184/98 Pavel Pavlov and Others v Stichting Pensioenfonds Medische Specialisten [2000] ECR I-6451 ��39.10 C-351/98 Spain v Commission [2002] ECR I-8031��39.20 C-377/98 Netherlands v Commission and Council [2001] ECR I-7079��19.7 C-379/98 Preussen Elektra [2001] ECR I-2159�� 39.150 C-143/99 Adria-Wien Pipeline [2001] ECR I-8365��39.16 C-482/99 France v Commission (Stardust) [2002] ECR I-4397��39.11 C-242/00 Germany v Commission [2002] ECR I-5603��39.20 C-11/00 Commission v ECB [2003] ECR I-7147��14.51, 14.54, 14.76, 19.16 C-261/01 van Calster [2003] ECR I-12249 �� 39.232 C-36/02 Omega Spielhallen-und Automatenaufstellungs GmbH v Oberbürgermeisterin der Bundesstadt Bonn [2004] ECR I-9609 ��19.7 C-222/02 Peter Paul and Others v Bundesrepublik Deutschland [2004] ECR I-9425�� 26.80, 37.48 C-233/02 France v Commission [2004] ECR I-2759��5.83 C-301/02 P Carmine Salvatore Tralli v ECB [2005] ECR I-4071 �� 14.23, 37.82 C‑182/03 Forum 187 v Commission [2006] ECR I‑5479 �� 39.205 C-27/04 Commission v Council [2004] ECR I-6649�� 9.39, 9.52, 10.32, 11.19, 13.19, 16.89, 18.12, 19.17, 28.3, 28.5, 28.11, 28.48, 28.51, 40.21 C-66/04 United Kingdom v European Parliament and Council [2005] ECR I-10533��20.11 C-217/04 United Kingdom v European Parliament and Council [2006] ECR I-3771��20.11 C-222/04 Ministero dell’Economia e delle Finanze v Cassa di Risparmio di Firenze SpA and Others [2006] ECR I-289��39.10 C-410/04 ANAV [2006] ECR I-3303�� 39.206 C-525/04 Spain v Commission [2007] ECR I-9947��39.14 C-39/05 P and C-52/05 P Kingdom of Sweden and Maurizio Turco v Council of the European Union [2008] ECR I-4723��14.64 C-341/05 Laval un Partneri Ltd v Svenska Byggnadsarbetareförbundet and Others [2007] ECR I-11767��13.13 C-438/05 The International Transport Workers’ Federation and The Finnish Seamen’s Union v Viking Line ABP and Others [2007] ECR I-10779 ��13.13 C-133/06 European Parliament v Council [2008] ECR I-3189��13.13 C-308/06 Intertanko and Others v Secretary of State for Transport [2008] ECR I-4057��6.32 C-319/06 Commission v Luxembourg [2008] ECR I-4323��13.13 C-346/06 Dirk Rüffert v Land Niedersachsen [2008] ECR I-1989��13.13 C-45/07 Commission v Greece [2009] ECR I-701�� 6.23, 6.29, 6.86 C-246/07 Commission v Sweden [2010] ECR I-3317 ��6.33 C-369/07 Commission v Greece (Olympic Airways) [2009] ECR I-5703�� 39.221, 39.222 C-441/07 Commission v Alrosa [2010] ECR I-5949 ��39.19 C-460/07 Puffer v Unabhängiger Finanzsenat [2009] ECR I-3251�� 39.12, 39.105 C-519/07 Commission v FrieslandCampina [2009] ECR I-8495�� 39.205 C-343/09 Afton Chemical Limited v Secretary of State for Transport ECLI:EU:C:2010:419��22.172, 22.250 C-275/10 Residex Capital IV [2011] ECR I-13043�� 39.226 C-617/10 Åklagare v Hans Åkerberg Fransson ECLI:EU:C:2013:105��19.156, 19.180, 30.65

xlviii tABLE OF CASES C-73/11 Frucona v Commission ECLI:EU:C:2013:32��39.14 C‑79/11 Maurizio Giovanardi ECLI:EU:C:2012:297�� 39.206 C‑197/11 and C‑203/11 Eric Libert and Others v Gouvernement flamand and All Projects & Developments NV and Others v Vlaamse Regering ECLI:EU:C:2013:288��39.18 C-399/11 Stefano Melloni v Ministerio Fiscal ECLI:EU:C:2013:107��30.65 C-434/11 Corpul Naţional al Poliţiştilor v Ministerul Administraţiei şi Internelor and Others [2011] ECR I-196�� 30.181, 41.55 C-658/11 European Parliament v Council ECLI:EU:C:2014:2025��7.16, 7.22 C-28/12 Commission v Council ECLI:EU:C:2015:282��6.98 C‑103/12 and C‑165/12 European Parliament and Commission v Council ECLI:EU:C:2014:2400��16.86 C-114/12 Commission v Council ECLI:EU:C:2014:2151�� 6.24, 6.26, 7.14 C-128/12 Sindicato dos Bancários do Norte and Others v BPN ECLI:EU:C:2013:149 �� 13.39, 19.72, 30.181, 40.166, 41.55 C-134/12 Corpul Naţional al Poliţiştilor v Ministerul Administraţiei şi Internelor and Others ECLI:EU:C:2012:288��41.55 C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland v Commission ECLI:EU:C:2013:682��39.15 C-264/12 Sindicato Nacional dos Profissionais de Seguros e Afins v Fidelidade Mundial -Companhia de Seguros SA ECLI:EU:C:2014:2036 ��19.72, 30.181, 40.166, 41.55 C-270/12 United Kingdom v European Parliament and Council ECLI:EU:C:2014:18�� 16.86, 17.76, 20.11, 20.22, 41.82, 41.83 C-272/12 Commission v Ireland ECLI:EU:C:2013:812��39.12 C-369/12 Corpul Naţional al Poliţiştilor v Ministerul Administraţiei şi Internelor and Others ECLI:EU:C:2012:725��41.55 C-370/12 Thomas Pringle v Government of Ireland and Others ECLI:EU:C:2012:756��6.90, 9.60, 9.73–9.75, 10.21, 10.37, 11.15, 11.26, 11.31, 12.13, 12.23, 12.38, 12.46, 12.48, 12.52, 12.54, 12.61, 13.35, 13.41, 14.41, 16.117, 17.36, 19.4, 19.77, 19.79, 19.178, 20.18, 20.52, 22.142, 22.145, 22.229, 22.232, 27.11, 27.12, 27.49, 27.52, 30.2, 30.19, 30.20, 30.22, 30.23, 30.42, 30.44, 30.51, 30.53, 30.54, 30.71, 30.78, 30.190, 32.3, 32.10, 32.29, 32.32, 32.34, 32.36, 32.38, 32.39, 33.109, 34.2, 37.8, 40.119, 41.20, 41.32, 41.36, 41.41–41.48 C-399/12 Germany v Council ECLI:EU:C:2014:2258�� 6.41, 6.50, 6.53, 6.89 Opinion 1/13 Convention on the civil aspects of international child abduction ECLI:EU:C:2014:2303��6.32 C-226/13, C-245/13, C-247/13 and C-578/13 Fahnenbrock and Others v Hellenic Republic ECLI:EU:C:2015:383�� 40.204 C-425/13 Commission v Council ECLI:EU:C:2015:483��7.21 C-507/13 United Kingdom v Parliament and Council ECLI:EU:C:2014:2481��41.82 C-518/13 Eventech v The Parking Adjudicator ECLI:EU:C:2015:9��39.18 C-660/13 Council v Commission ECLI:EU:C:2016:616�� 6.95, 11.17 C-665/13 Sindicato Nacional dos Profissionais de Seguros e Afins v Via Directa -Companhia de Seguros SA ECLI:EU:C:2014:2327 �� 40.166, 41.55 C-667/13 Estado português v Banco Privado Português et al ECLI:EU:C:2015:151�� 39.135, 39.218 C‑62/14 Peter Gauweiler and Others v Deutscher Bundestag (Opinion of AG Cruz Villalón) ECLI:EU:C:2015:7�� 14.45, 22.175, 22.245, 30.191, 41.21 C-62/14 Peter Gauweiler and Others v Deutscher Bundestag ECLI:EU:C:2015:400�� 9.81, 9.83, 9.84, 9.86, 10.21, 10.37, 11.2, 11.15, 11.21, 11.22, 11.31, 14.41, 14.42, 14.45, 14.48, 14.51, 14.73, 14.76, 14.83, 15.73, 19.23, 19.49, 22.145, 22.170, 22.171, 22.173, 22.175–22.177, 22.190, 22.209, 22.214, 22.217–22.220, 22.224, 22.225, 22.233, 22.234, 22.236–22.238, 22.240, 22.250, 26.40, 26.101, 37.6, 40.253, 41.3, 41.11, 41.16–41.18, 41.20, 41.22–41.27 C-64/14 P Von Storch and Others v ECB ECLI:EU:C:2015:300�� 19.23, 41.16, 41.17

TABLE OF CASES xlix C-89/14 A2A ECLI:EU:C:2015:537�� 39.221 C-113/14 Germany v European Parliament and Council ECLI:EU:C:2016:635 ��16.86 C-258/14 Eugenia Florescu and Others v Casa Judeţeană de Pensii Sibiu ECLI:EU:C:2017:448��12.54, 13.38, 13.58, 13.60, 19.72, 19.179, 30.59, 30.60, 30.63, 30.84, 30.167, 30.182, 41.64 C-362/14 Maximillian Schrems v Data Protection Commissioner ECLI:EU:C:2015:650��30.53 C-446/14 Germany v Commission ECLI:EU:C:2016:97��39.20 C‑524/14 Commission v Lübeck ECLI:EU:C:2016:971�� 39.111 C-526/14 Tadej Kotnik and Others v Državni zbor Republike Slovenije (Opinion of AG Wahl) ECLI:EU:C:2016:102�� 19.107, 26.96 C-526/14 Tadej Kotnik and Others v Državni zbor Republike Slovenije ECLI:EU:C:2016:570��19.106–19.109, 26.96, 38.60, 39.166 Opinion 2/15 Free Trade Agreement with Singapore ECLI:EU:C:2017:376��6.47 C-8/15 P to C-10/15 P Ledra Advertising and Others v Commission and ECB (Opinion of AG Wahl) ECLI:EU:C:2016:290�� 30.57, 30.84 C-8/15 P to C-10/15 P Ledra Advertising Ltd and Others v Commission and ECB ECLI:EU:C:2016:701�� 6.90, 9.60, 11.27, 12.52, 13.59, 14.16, 17.70, 19.83–19.85, 19.87, 19.111, 19.169, 19.170, 19.171, 26.96, 30.48, 30.50, 30.52, 30.53, 30.56, 30.59, 30.62, 30.71, 30.78, 30.153, 30.162, 30.175, 30.178–30.180, 40.287, 41.56, 41.57, 41.62, 41.65, 42.111 C-41/15 Gerard Dowling and Others v Ministry of Finance ECLI:EU:C:2016:836�� 26.96, 40.141 C‑105/15 P to C‑109/15 P Mallis and Others v Commission and ECB (Opinion of AG Wathelet) ECLI:EU:C:2016:294�� 30.62, 30.84, 30.85 C-105/15 P to C-109/15 P Mallis and Others v Commission and ECB ECLI:EU:C:2016:702�� 6.97, 7.15, 10.14, 10.16, 10.49, 12.50, 16.101, 19.89, 27.27, 30.153, 40.286, 41.56, 41.57 C-201/15 AGET Iraklis ECLI:EU:C:2016:972��13.12 C-467/15 Commission v Italy ECLI:EU:C:2017:799�� 39.134, 39.210 C-521/15 Kingdom of Spain v Council of the European Union ECLI:EU:C:2017:982�� 16.86, 19.18, 28.94 C‑626/15 and C‑659/16 Commission v Council (AMP Antarctique) ECLI:EU:C:2018:925��16.27 C-683/15 European Commission v Republic of Poland ECLI:EU:C:2017:535�� 39.232 C-684/15 European Commission v Grand Duchy of Luxembourg ECLI:EU:C:2016:318 �� 39.232 C-64/16 Associação Sindical dos Juízes Portugueses (Opinion of AG Saugmandsgaard Øe) ECLI:EU:C:2017:395�� 13.59, 41.66 C-64/16 Associação Sindical dos Juízes Portugueses v Tribunal de Contas ECLI:EU:C:2018:117��12.54, 13.59, 30.59, 41.66 C‑70/16 Comunidad Autónoma de Galicia et al v Commission ECLI:EU:C:2017:1002�� 39.111 C-405/16 P Germany v Commission ECLI:EU:C:2019:268�� 39.150 C-42/17 M.A.S. and M.B. ECLI:EU:C:2017:936�� 19.44, 19.182 C-219/17 Berlusconi and Fininvest v Banca d’Italia ECLI:EU:C:2018:1023��19.40 C-308/17 Hellenic Republic v Leo Kuhn ECLI:EU:C:2018:911�� 40.204 C-330/17 Verbraucherzentrale Baden-Württemberg v Germanwings GmbH ECLI:EU:C:2018:916�� 21.51, 21.52 C-450/17 P Landeskreditbank Baden-Württemberg -Förderbank v ECB ECLI:EU:C:2019:372��14.14, 14.15, 14.43, 26.92 C‑493/17 Heinrich Weiss and Others (Opinion of AG Wathelet) ECLI:EU:C:2018:815�� 22.213 C-493/17 Heinrich Weiss and Others ECLI:EU:C:2018:1000�� 9.100, 9.101, 11.2, 11.21, 14.41, 14.48, 14.73, 19.64, 19.67, 19.68, 26.40, 40.331, 41.3, 41.35 C-663/17 P, C-665/17 P and C-669/17 P ECB and others v Trasta Komercbanka and others ECLI:EU:C:2019:923�� 19.184, 41.87 C-28/18 Verein für Konsumenteninformation v Deutsche Bahn AG ECLI:EU:C:2019:673 ��24.49 C-202/18 and C-235/18 Ilmārs Rimšēvičs and ECB v Republic of Latvia ECLI:EU:C:2019:139��14.11, 14.18, 14.57, 19.19

l tABLE OF CASES C-238/18 ECB v Latvia pending��15.64 C-414/18 Iccrea Banca v Banca d’Italia ECLI:EU:C:2019:1036 �� 19.184 C-597/18 P Council v K Chrysostomides & Co and Others ECLI:EU:C:2019:743 ��27.29 C. Numerical Table of General Court Cases T-358/94 Air France v Commission [1996] ECR II-2109 ��39.11 T-149/95 Ducros v Commission [1997] ECR II-2031��39.20 T-129/95, T-2/96 and T-97/96 Neue Maxhütte v Commission [1999] ECR II-17 ��39.14 T-296/97 Alitalia v Commission [2000] ECR 2000 II-3871 ��39.15 T-228/99 and T-233/99 Westdeutsche Landesbank v Commission [2003] ECR II-435 ��39.14 T-92/00 and T-103/00 Territorio Histórico de Álava v Commission [2002] ECR II-1385 ��39.11 T-116/01 and T-118/01 P&O European Ferries v Commission [2003] ECR II-2957��39.15 T-351/02 Deutsche Bahn v Commission [2006] ECR II-1047 ��39.11, 39.12, 39.105 T-225/04 Italy v Commission [2006] II-56��29.63 T-148/05 Comunidad autónoma de Madrid and Madrid, infraestructuras del transporte (Mintra) v Commission of the European Communities [2006] ECR II-61 ��28.76 T-177/06 Ayuntamiento de Madrid et Madrid Calle 30 SA (Madrid) v Commission [2007] ECR II-88 ��28.76 T-403/06 Belgium v Commission ECLI:EU:T:2008:99��28.76 T-268/08 Bank Burgenland v European Commission ECLI:EU:T:2012:90 �� 39.151 T-391/08 Ellinika Nafpigeia v Commission ECLI:EU:T:2012:126�� 39.209 T-457/09 Westfälisch-Lippischer Sparkassen und Giroverband v Commission ECLI:EU:T:2014:683��39.58 T-29/10 Netherlands and ING Group ECLI:EU:T:2012:98�� 39.151 T-259/10 Thomas Ax v Council ECR II-176��32.39 T-541/10 ADEDY and Others v Council ECLI:EU:T:2012:626�� 19.138 T-590/10 Thesing and Bloomberg Finance v ECB ECLI:EU:T:2012:635�� 11.21, 11.27, 14.64 T-487/11 Banco Privado Português et al v Commission ECLI:EU:T:2014:1077 �� 39.135, 39.218 T-496/11 United Kingdom v ECB ECLI:EU:T:2015:133�� 5.99, 11.19, 24.16 T‑309/12 Zweckverband Tierkörperbeseitigung v Commission ECLI:EU:T:2014:676��39.20 T-450/12 Anagnostakis v Commission ECLI:EU:T:2015:739 ��27.11 T-492/12 Von Storch and Others v ECB ECLI:EU:T:2013:702��19.22, 19.60, 41.16, 41.17 T-79/13 Accorinti and Others v ECB ECLI:EU:T:2015:756 �� 14.16, 14.73, 19.92, 19.95–19.98 T-289/13 Ledra Advertising v Commission and ECB ECLI:EU:T:2014:981��19.81, 19.82, 30.175 T-291/13 Eleftheriou and Papachristofi v Commission and ECB ECLI:EU:T:2014:978��19.81 T-293/13 Theophilou v Commission and ECB ECLI:EU:T:2014:979��19.81 T-327/13 Mallis and Malli v Commission and ECB ECLI:EU:T:2014:909��19.91 T-328/13 Tameio Pronoias Prosopikou Trapezis Kyprou v Commission and ECB ECLI:EU:T:2014:906��19.91 T-329/13 Chatzithoma v Commission and ECB ECLI:EU:T:2014:908��19.91 T-330/13 Chatziioannou v Commission and ECB ECLI:EU:T:2014:904 ��19.91 T-331/13 Nikolaou v Commission and ECB ECLI:EU:T:2014:905��19.91 T-376/13 Versorgungswerk der Zahnärztekammer Schleswig-Holstein v ECB ECLI:EU:T:2015:361�� 14.64, 14.73 T-680/13 K Chrysostomides & Co and Others v Council and Others ECLI:EU:T:2018:486��16.102, 16.103, 19.110, 27.28, 30.59, 30.153, 30.180 T-676/14 Spain v Commission ECLI:EU:T:2015:602��28.90 T-122/14 Italy v Commission ECLI:EU:T:2016:342�� 39.221 T-531/14 Sotiropoulou and Others v Council ECLI:EU:T:2017:297�� 16.89, 30.59 T-786/14 Bourdouvali and Others v Council and Others ECLI:EU:T:2018:487�� 19.110, 27.26, 30.59, 30.126, 30.180 T-749/15 Nausicaa Anadyomène SAS and Banque d’escompte v ECB ECLI:EU:T:2017:21 �� 14.73, 40.204 T-122/15 Landeskreditbank Baden-Württemberg -Förderbank v ECB ECLI:EU:T:2017:337��26.32, 26.34, 26.92, 37.57 T-712/15 Crédit Mutuel Arkéa v ECB ECLI:EU:T:2017:900��37.67

TABLE OF CASES li T-540/15 Emilio De Capitani v European Parliament ECLI:EU:T:2018:167 ��17.22 T-251/15 Espírito Santo Financial (Portugal), SGPS, SA v ECB ECLI:EU:T:2018:234 ��14.57 T-98/16, T-196/16, and T-198/16 Italy and others v Commission ECLI:EU:T:2019:167 39.150, 39.152 T‑730/16 Espírito Santo Financial Group SA v ECB ECLI:EU:T:2019:161��14.73 T-733/16 La Banque Postale v ECB ECLI:EU:T:2018:477��11.21, 11.22, 14.73, 19.184 T-745/16 BPCE v ECB ECLI:EU:T:2018:476 �� 19.184 T-751/16 Confédération nationale du Crédit mutuel v ECB ECLI:EU:T:2018:475�� 19.184 T-757/16 Société générale v ECB ECLI:EU:T:2018:473�� 19.184 T-758/16 Crédit agricole v ECB ECLI:EU:T:2018:472�� 19.184 T-768/16 BNP Paribas v ECB ECLI:EU:T:2018:471�� 19.184 T-107/17 Frank Steinhoff and Others v ECB ECLI:EU:T:2019:353�� 13.59, 14.73 T-116/17 Spiegel-Verlag Rudolf Augstein and Sauga v ECB ECLI:EU:T:2018:614 ��14.64 T-161/18 Braesch and Others v Commission�� 39.151 2. TABLE OF EUROPEAN COURT OF HUMAN RIGHTS DECISIONS A. Alphabetical Table Da Conceição Mateus and Santos Januário v Portugal (62235/12 and 57725/12) ECLI:CE:ECHR:2013:1008DEC006223512��12.56 da Silva Carvalho Rico v Portugal (13341/14) ECLI:CE:ECHR:2015:0901DEC001334114��12.56 Koufaki and Adedy v Greece (57665/12 and 57657/12) ECLI:CE:ECHR:2013:0507DEC005766512��12.56 Mamatas and Others v Greece (63066/14, 64297/14 and 66106/14) ECLI:CE:ECHR:2016:0721JUD006306614 ��12.56 B. Numerical Table 57665/12 and 57657/12 Koufaki and Adedy v Greece ECLI:CE:ECHR:2013:0507DEC005766512��12.56 62235/12 and 57725/12 Da Conceição Mateus and Santos Januário v Portugal ECLI:CE:ECHR:2013:1008DEC006223512��12.56 13341/14 da Silva Carvalho Rico v Portugal ECLI:CE:ECHR:2015:0901DEC001334114 ��12.56 63066/14, 64297/14 and 66106/14 Mamatas and Others v Greece ECLI:CE:ECHR:2016:0721JUD006306614 ��12.56 3. TABLES OF EUROPEAN COMMISSION DECISIONS A. Alphabetical Table Austria –Austrian asset relief scheme (N 557/2008) [2009] OJ C3/01 �� 39.202 Austria –Bank Burgenland (2005/691/EC) [2005] OJ L263/8��39.57 Belgium –Garantie Fortis BE (N 574/2008) [2009] OJ C38/1 �� 39.110 Belgium, France and Luxembourg –Dexia (2010/606/EU) [2010] OJ L274/54�� 39.11, 39.151 Belgium, France and Luxemburg -Dexia –Guarantee (2014/189/EU) [2014] OJ L110/1 ��39.143, 39.218, 39.220 Belgium, France and Luxemburg –Dexia Additional measures (SA.33760, SA.33763 and SA.33764) [2012] OJ C345/50�� 39.203 Belgium, France and Luxembourg – Dexia (C 9/2009 (ex NN45/2008, NN49/2008 and NN50/2008)) [2009] OJ C181/42�� 39.151, 39.11, 39.110, 39.124, 39.203 Bulgaria –First Investment Bank (SA.39854) [2015] OJ C98/1 �� 39.119, 39.123 Bulgaria –Liquidity scheme in favour of Bulgarian banks (SA.38994 ) [2014] OJ C301/1�� 39.122 France –Crédit Immobilier (SA.35389) [2013] OJ C134/1�� 39.143 France -Crédit Lyonnais Group (95/547/EC) [1995] OJ L308/92�� 39.35, 39.56 France –Crédit Lyonnais Group (98/490/EC) [1998] OJ L221/28�� 39.34, 39.56 France –Stardust Marine (2000/513/EC) [2000] OJ L206/6��39.56 Germany –Capital injection into Commerzbank (NN 244/2009) [2009] OJ C147/01�� 39.181 Germany –German asset relief scheme (N 314/2009) [2009] OJ C199/01�� 39.202

lii tABLE OF CASES Germany –HRE (2012/118/EU) [2012] OJ L60/1�� 39.200 Germany –Hypo Steiermark (NN 40/2009) [2009] OJ C260/1 �� 39.151 Germany –IKB Deutsche Industriebank (2009/775/EC) [2009] OJ L278/32 ��39.58 Germany -Reactivation of German rescue scheme (SA.34345) [2012] OJ C108/01�� 39.142, 39.182 Germany –Rescue package for credit institutions (N 512/2008) [2008] OJ C293/1 �� 39.142 Germany –Restructuring aid for Bayern LB (C 16/2009 (ex N 254/2009)) [2009] OJ C134/31�� 39.181 Germany –Restructuring of LBBW (2010/395/EU) [2010] OJ L188/1�� 39.200, 39.202 Germany –Sachsen LB (2009/341/EC) [2009] OJ L104/34�� 39.36, 39.58 Germany –West LB (NN 25/2008) [2008] OJ C189/1�� 39.36, 39.58 Germany –West LB AG (2013/245/EU) [2013] OJ L148/1�� 39.200, 39.220 Germany –West LB restructuring aid (2009/971/EC) [2009] OJ L345/1 ��39.58 Germany HSH Nordbank (C 29/2009 (ex N 264/2009)) [2012] OJ L225/1 �� 39.143 Greece –Eurobank group (2014/885/EU) [2014] OJ L357/112�� 39.110 Greece –Hellenic Shipyard (2009/610/EC) [2008] OJ L225/104�� 39.220 Greece –Piraeus Bank (SA.43364) [2016] OJ C104/1 ��39.146, 39.169, 39.232 Hungary –MKB Bank (SA.40441) [2016] OJ C46/1 �� 39.176 Ireland –Irish Allied Bank (N 553/2010) [2011] OJ C76/3�� 39.194 Ireland –Irish impaired asset relief scheme (National Asset Management Agency) (N 725/2009) [2010] OJ C94/06�� 39.202 Italy –Banco di Napoli (99/288/EC) [1999] OJ L116/36�� 39.34, 39.57 Italy –Banco di Sicilia and Sicilcassa (2000/600/EC) [2000] OJ L256/21��39.57 Italy –Italian securitisation scheme (SA.43390) [2016] OJ C161/1�� 39.195 Italy –MPS Bank (SA 47081) [2018] OJ C121/01��39.249, 39.251, 39.136–39.138, 39.144 Italy –Orderly liquidation of Banca Popolare di Vicenza and Veneto Banca -Liquidation aid (SA.45664) [2018] OJ C 236/1��39.239, 39.248, 39.254 Italy - Banca Monte dei Paschi di Siena (SA.47677) [2018] OJ C40/01 �� 39.165 Netherlands –ABN AMRO Group NV (2011/823/EU) [2011] OJ L333/1�� 39.152 Portugal –BPP (2011/346/EU) [2011] OJ L159/95 ��39.135, 39.218, 39.224 Portugal –Caixa Geral de Depósitos (2014/767/EU) [2014] OJ L323/19�� 39.152 Slovenia – Factor Banka (SA.37315) [2013] OJ C314/2�� 39.137 Slovenia – Probanka (SA.37314) [2013] OJ C314/1�� 39.137 Spain –Banco de Valencia (SA.33917) [2012] OJ C63/1�� 39.119, 39.123 Spain -Restructuring of BFA/Bankia (SA.35253) [2013] OJ C77/1�� 39.143, 39.203 Spain –Spanish recapitalisation Scheme for credit institutions (N 28/2010) [2010] OJ C57/01�� 39.202 United Kingdom –Northern Rock (NN 70/2007) [2008] OJ C43/1 �� 39.110 United Kingdom –RBS restructuring plan (N 422/2009) [2010] OJ C119/04�� 39.181 B. Numerical Table 95/547/EC France -Crédit Lyonnais Group [1995] OJ L308/92�� 39.35, 39.56 98/490/EC France –Crédit Lyonnais Group [1998] OJ L221/28 �� 39.34, 39.56 99/288/EC Italy –Banco di Napoli [1999] OJ L116/36 �� 39.34, 39.57 2000/513/EC France –Stardust Marine [2000] OJ L206/6 ��39.56 2000/600/EC Italy –Banco di Sicilia and Sicilcassa [2000] OJ L256/21��39.57 2005/691/EC Austria –Bank Burgenland [2005] OJ L263/8��39.57 2009/341/EC Germany –Sachsen LB [2009] OJ L104/34�� 39.36, 39.58 2009/610/EC Greece –Hellenic Shipyard [2008] OJ L225/104�� 39.220 2009/775/EC Germany –IKB Deutsche Industriebank [2009] OJ L278/32��39.58 2009/971/EC Germany –West LB restructuring aid [2009] OJ L345/1��39.58 2010/395/EU Germany –Restructuring of LBBW [2010] OJ L188/1 �� 39.200, 39.202 2010/606/EU Belgium, France and Luxembourg –Dexia [2010] OJ L274/54 �� 39.11, 39.151 2011/346/EU Portugal –BPP [2011] OJ L159/95��39.135, 39.218, 39.224 2011/823/EU Netherlands –ABN AMRO Group NV [2011] OJ L333/1 �� 39.152 2012/118/EU Germany –HRE [2012] OJ L60/1�� 39.200 2013/245/EU Germany –West LB AG [2013] OJ L148/1 �� 39.200, 39.220

TABLE OF CASES liii 2014/189/EU Belgium, France and Luxemburg -Dexia –Guarantee [2014] OJ L110/1 ��39.143, 39.218, 39.220 2014/767/EU Portugal –Caixa Geral de Depósitos [2014] OJ L323/19�� 39.152 2014/885/EU Greece –Eurobank group [2014] OJ L357/112�� 39.110 C 9/2009 (ex NN45/2008, NN49/2008 and NN50/2008) Belgium, France and Luxembourg – Dexia [2009] OJ C181/42 �� 39.151, 39.11, 39.110, 39.124, 39.203 C 16/2009 (ex N 254/2009) Germany –Restructuring aid for Bayern LB [2009] OJ C134/31�� 39.181 C 29/2009 (ex N 264/2009) Germany HSH Nordbank [2012] OJ L225/1�� 39.143 N 512/2008 Germany –Rescue package for credit institutions [2008] OJ C293/1�� 39.142 N 557/2008 Austria –Austrian asset relief scheme [2009] OJ C3/01�� 39.202 N 574/2008 Belgium –Garantie Fortis BE [2009] OJ C38/1�� 39.110 N 314/2009 Germany –German asset relief scheme [2009] OJ C199/01 �� 39.202 N 422/2009 United Kingdom –RBS restructuring plan [2010] OJ C119/04�� 39.181 N 725/2009 Ireland –Irish impaired asset relief scheme (National Asset Management Agency) [2010] OJ C94/06 �� 39.202 N 28/2010 Spain –Spanish recapitalisation Scheme for credit institutions [2010] OJ C57/01�� 39.202 N 553/2010 Ireland –Irish Allied Bank [2011] OJ C76/3 �� 39.194 NN 70/2007 United Kingdom –Northern Rock [2008] OJ C43/1�� 39.110 NN 25/2008 Germany –West LB [2008] OJ C189/1 �� 39.36, 39.58 NN 40/2009 Germany –Hypo Steiermark [2009] OJ C260/1�� 39.151 NN 244/2009 Germany –Capital injection into Commerzbank [2009] OJ C147/01 �� 39.181 SA.33760, SA.33763 and SA.33764 Belgium, France and Luxemburg –Dexia Additional measures [2012] OJ C345/50 �� 39.203 SA.33917 Spain –Banco de Valencia [2012] OJ C63/1 �� 39.119, 39.123 SA.34345 Germany -Reactivation of German rescue scheme [2012] OJ C108/01 �� 39.142, 39.182 SA.35253 Spain -Restructuring of BFA/Bankia [2013] OJ C77/1 �� 39.143, 39.203 SA.35389 France –Crédit Immobilier [2013] OJ C134/1 �� 39.143 SA.37314 Slovenia – Probanka [2013] OJ C314/1 �� 39.137 SA.37315 Slovenia – Factor Banka [2013] OJ C314/2 �� 39.137 SA.38994 Bulgaria –Liquidity scheme in favour of Bulgarian banks [2014] OJ C301/1�� 39.122 SA.39854 Bulgaria –First Investment Bank [2015] OJ C98/1�� 39.119, 39.123 SA.40441 Hungary –MKB Bank [2016] OJ C46/1�� 39.176 SA.43364 Greece –Piraeus Bank [2016] OJ C104/1��39.146, 39.169, 39.232 SA.43390 Italy –Italian securitisation scheme [2016] OJ C161/1 �� 39.195 SA.45664 Italy –Orderly liquidation of Banca Popolare di Vicenza and Veneto Banca -Liquidation aid [2018] OJ C 236/1��39.239, 39.248, 39.254 SA.47081 Italy –MPS Bank [2018] OJ C121/01��39.249, 39.251, 39.136–39.138, 39.144 SA.47677 Italy – Banca Monte dei Paschi di Siena [2018] OJ C40/01 �� 39.165 4. TABLE OF NATIONAL AND OTHER CASES Austria VfGH (Austrian Constitutional Court) Judgment of 16 March 2013, SV 2/12-18�� 30.2, 41.41 Estonia Riigikohus (Supreme Court of Estonia), Judgment of 12 July 2012 (en banc), 3-4-1-6-12��19.145, 19.148, 30.2, 41.41 European Committee of Social Rights (alphabetical order) Federation of employed pensioners of Greece (IKA-ETAM) v Greece, No 76/2012��12.56 General Federation of Employees of the National Electric Power Corporation (GENOP-DEI) and Confederation of Greek Civil Servants’ Trade Unions (ADEDY) v Greece, No 66/2011�� 12.56 Panhellenic Federation of pensioners of the public electricity corporation (POS-DEI) v Greece, No 79/2012��12.56 Panhellenic Federation of public service pensioners v Greece, No 77/2012��12.56

liv tABLE OF CASES Pensioner’s Union of the Agricultural Bank of Greece (ATE) v Greece, No 80/2012��12.56 Pensioner’s Union of the Athens-Piraeus Electric Railways (I.S.A.P.) v Greece, No 78/2012��12.56 France Conseil Constitutionnel (French Constitutional Council), Decision of 9 August 2012, 2012-653 DC��41.41 Germany (chronological order) BVerfG (German Federal Constitutional Court), Judgment of the Second Senate of 12 October 1993, 2 BvR 2134/92 and 2 BvR 2159/92�� 4.65, 19.55, 22.176, 22.240, 22.247, 41.9, 41.51 BVerfG (German Federal Constitutional Court), Order of the Second Senate of 31 March 1998, 2 BvR 1877/97��8.53 BVerfG (German Federal Constitutional Court), Judgment of the Second Senate of 30 June 2009, 2 BvE 2/08�� 17.13, 19.55 BVerfG (German Federal Constitutional Court), Judgment of the Second Senate of 7 September 2011, 2 BvR 987/10 �� 19.55, 30.2, 30.144, 40.131, 41.41, 41.78 BVerfG (German Constitutional Court), Judgment of the Second Senate of 28 February 2012, 2 BvE 8/11��30.2, 30.144, 40.131 BVerfG (German Federal Constitutional Court), Judgment of the Second Senate of 19 June 2012, 2 BvE 4/11��30.2, 30.144, 40.132 BVerfG (German Constitutional Court), Judgment of the Second Senate of 12 September 2012, 2 BvR 1390/12 �� 4.109, 30.2, 30.144, 40.132, 41.41, 41.78 BVerfG (German Federal Constitutional Court), Order of the Second Senate of 14 January 2014, 2 BvR 2728/13�� 8.5, 14.74, 19.52, 19.56, 19.59, 19.61, 22.107, 22.140, 22.147, 22.168, 22.173, 22.174, 22.176, 22.177, 22.219–22.222, 22.224, 22.226, 22.231, 22.240, 22.245, 37.4, 37.6, 40.253, 41.16, 41.18, 41.19, 41.32 BVerfG (German Federal Constitutional Court), Judgment of the Second Senate of 18 March 2014, 2 BvR 1390/12�� 19.53, 19.55, 22.147, 30.2, 30.16, 40.133 BVerfG (German Federal Constitutional Court), Judgment of the Second Senate of 21 June 2016, 2 BvR 2728/13�� 10.21, 14.74, 15.41, 22.148, 22.170, 22.171, 22.173, 22.190 , 40.253, 41.16, 41.30 BVerfG (German Federal Constitutional Court), Order of the Second Senate of 18 July 2017, 2 BvR 859/15 �� 9.100, 14.74, 15.41, 15.44, 15.47, 15.50, 41.34 BVerfG (German Federal Constitutional Court), Judgment of the Second Senate of 30 July 2019 2 BvR 1685/14��41.87 Greece Council of State (Plenary Assembly), Decision of 20 February 2012, 668/2012�� 12.55, 19.133 International Centre for Settlement of Investment Disputes (ICSID) (alphabetical order) Poštová Banka, a.s. and Istrokapital SE v Hellenic Republic, Decision of 29 September 2016, ARB/13/8 �� 40.204 Marfin Investment Group Holdings S.A., Alexandros Bakatselos and others v Republic of Cyprus, Award of 26 July 2018, ARB/13/27 �� 30.153 Ireland (chronological order) High Court of Ireland, Decision of 17 July 2012 Pringle v The Government of Ireland [2012] IEHC 296��30.20 Supreme Court of Ireland, Decision of 31 July 2012 Pringle v The Government of Ireland [2012] IESC 47�� 30.2, 41.41

TABLE OF CASES lv Netherlands Rechtbank ‘s-Gravenhage (Court of The Hague), Judgment of 1 June 2012, No 419556/KG ZA 12–523��41.41 Permanent Court of International Justice Serbian and Brazilian Loans Cases, Judgment of 12 July 1929 [1929] PCIJ Ser A, Nos 20/21��10.5 Poland (chronological order) Trybunał Konstytucyjny (Polish Constitutional Tribunal), Judgment of 28 March 2013, K 11/13 and K 12/13��41.41 Trybunał Konstytucyjny (Polish Constitutional Tribunal), Judgment of 26 June 2013, K 33/12��41.41 Portugal (chronological order) Tribunal Constitucional (Portuguese Constitutional Court), Judgment of 5 April 2013, Acórdão Nº187/2013��12.55, 19.122, 30.85, 40.166 Tribunal Constitucional (Portuguese Constitutional Court), Judgment of 26 June 2014, Acórdão Nº413/2014�� 12.55, 19.122, 19.123, 40.166 Slovenia Constitutional Court of Slovenia, Judgment of 15 November 2011, U-I-178/10 ECLI:SI:USRS:2011:U.I.178.10��19.139, 19.141, 19.142 United Kingdom UK Supreme Court, Judgment of 24 January 2017. R (on the application of Miller) v Secretary of State for Exiting the European Union [2017] UKSC 5��10.5

Table of Legislation 1. TABLE OF INTERNATIONAL TREATIES Monetary Agreement between the Government of the French Republic, on behalf of the European Community, and the Government of His Serene Highness the Prince of Monaco [2002] OJ L142/59�� 7.30, 21.64 Monetary Agreement between the European Union and the Vatican City State [2010] OJ C28/13 �� 7.30, 8.68 Monetary Agreement between the European Union and the Principality of Monaco [2012] OJ C23/13 �� 7.30, 7.31, 8.68 Monetary Agreement between the European Union and the French Republic on keeping the euro in Saint-Barthélemy [2011] OJ L189/3�� 7.25, 7.26, 21.64 Monetary Agreement between the European Union and the Republic of San Marino [2012] OJ C317/3�� 7.30, 8.68 Monetary Agreement between the Italian Republic, on behalf of the European Community, and the Republic of San Marino [2001] OJ C209/1 �� 7.3, 7.30, 21.64 Monetary Agreement between the Italian Republic, on behalf of the European Community, and the Vatican City State and, on its behalf, the Holy See [2001] OJ C299/1 �� 7.30, 21.64 Monetary Agreement between the European Union and the Principality of Andorra [2011] OJ C369/1��7.30, 7.31, 7.32, 8.68, 21.64 Treaty on Stability, Coordination and Governance��9.89, 16.90, 28.4, 42.15 Treaty establishing the European Stability Mechanism�� 9.71, 13.33, 16.108, 18.14, 20.18, 22.232, 26.26, 30.9, 40.68, 40.114 2. TABLES OF EU/E C LEGISLATION A. Table of Regulations Council Regulation (EEC) 3/1958 [concernant la sécurité sociale des travailleurs migrants] [not available in English] [1958] OJ L30/561 ��13.7

Council Regulation (EEC) 4/1958 [fixant les modalités d’application et complétant les dispositions du règlement no 3] [not available in English] [1958] OJ L30/597��13.7 Council Regulation No 31 (EEC), 11 (EAEC) laying down the Staff Regulations of Officials and the Conditions of Employment of Other Servants of the European Economic Community and the European Atomic Energy Community [1962] OJ 45/1385�� 16.79 Council Regulation (EEC) 1408/71 on the application of social security schemes to employed persons and their families moving within the Community [1971] OJ L149/2 ��13.7 Council Regulation (EEC) 397/75 concerning Community loans [1975] OJ L46/1 ��34.4 Council Regulation (EEC) 682/81 adjusting the Community loan mechanism designed to support the balance of payments of Member States [1981] OJ L73/1��34.4 Council Regulation (EEC) 1969/ 88 establishing a single facility providing medium-term financial assistance for Member States’ balances of payments [1988] OJ L 178/1 �� 32.19, 34.4 Council Regulation (EC) 3603/93 specifying definitions for the application of the prohibitions referred to in Articles 104 and 104b (1) of the Treaty [1993] OJ L332/1 ��9.30, 14.45, 15.74, 22.189, 32.10 Council Regulation (EC) 3604/93 specifying definitions for the application of the prohibition of privileged access referred to in Article 104a of the Treaty [1993] OJ L332/4�� 15.76, 32.10 Council Regulation (EC) 3320/94 on the consolidation of the existing Community legislation on the definition of the ecu following the entry into force of the Treaty on the European Union [1994] OJ L350/27��21.13

lviii Table of Legislation Council Regulation (EC) 2223/96 on the European system of national and regional accounts in the Community [1996] OJ L310/1 �� 28.79 Council Regulation (EC) 1103/97 on certain provisions relating to the introduction of the euro [1997] OJ L162/1�� 21.14 Council Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1997] OJ L209/1��40.20 Council Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6 ��40.20 Council Regulation (EC) 974/98 on the introduction of the euro [1998] OJ L139/1�� 21.14 European Council Regulation (EC) 2531/1998 concerning the application of minimum reserves by the European Central Bank [1998] OJ L318/1 �� 22.36 Council Regulation (EC) 2532/98 concerning the powers of the European Central Bank to impose sanctions [1998] OJ L318/4�� 37.104 Council Regulation (EC) 2866/98 on the conversion rates between the euro and the currencies of the Member States adopting the euro [1998] OJ L359/1�� 8.18, 21.14 Council Regulation (EC) 1009/2000 concerning capital increases of the European Central Bank [2000] OJ L115/1�� 15.33 Council Regulation (EC) 1010/2000 concerning further calls of foreign reserve assets by the European Central Bank [2000] OJ L115/2 �� 15.83 Council Regulation (EC) 1478/2000 amending Regulation (EC) 2866/98 on the conversion rates between the euro and the currencies of the Member States adopting the euro [2000] OJ L167/1 ��8.21 European Parliament and Council Regulation (EC) 1049/2001 regarding public access to European Parliament, Council andCommission documents [2001] OJ L145/43 �� 14.64, 42.114 Council Regulation (EC) 1338/2001 of 28 June 2001 laying down measures necessary for the protection of the euro against counterfeiting [2001] OJ L181/6��7.8

Council Regulation (EC) 332/2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments [2002] OJ L53/1�� 9.43, 12.4, 17.37, 18.14, 30.63, 30.136, 31.58, 34.2, 40.64, 41.37 European Parliament and Council Regulation (EC) 847/2004 on the negotiation and implementation of air service agreements between Member States and third countries [2004] OJ L157/7 ��7.13 Council Regulation (EC) 139/2004 on the control of concentrations between undertakings [2004] OJ L24/1 �� 35.34 Council Regulation (EC) 1055/2005 amending Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2005] OJ L174/1 ��9.52 Council Regulation (EC) 1056/2005 amending Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2005] OJ L174/5 ��9.52 European Parliament and Council Regulation (EC) 1889/2005 on controls of cash entering or leaving the Community [2005] OJ L309/9�� 21.66 Council Regulation (EC) 1086/2006 amending Regulation (EC) 2866/98 on the conversion rates between the euro and the currencies of the Member States adopting the euro [2006] OJ L195/1 ��8.21 Council Regulation (EC) 1134/2007 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Malta [2007] OJ L256/1��8.21 Council Regulation (EC) 1135/2007 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Cyprus [2007] OJ L256/2 ��8.21 Council Regulation (EC) 694/2008 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Slovakia [2008] OJ L195/3��8.21 European Parliament and Council Regulation (EC) 1008/2008 of on common rules for the operation of air services in the Community (Recast) [2008] OJ L293/3�� 21.51

Table of Legislation lix Council Regulation (EC) 431/2009 amending Council Regulation (EC) 332/2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments [2009] OJ L128/1�� 12.4, 34.2 European Parliament and Council Regulation (EC) 662/2009 establishing a procedure for the negotiation and conclusion of agreements between Member States and third countries on particular matters concerning the law applicable to contractual and non- contractual obligations [2009] OJ L200/25 ��7.13 Council Regulation (EC) 664/2009 establishing a procedure for the negotiation and conclusion of agreements between Member States and third countries concerning jurisdiction, recognition and enforcement of judgments and decisions in matrimonial matters, matters of parental responsibility and matters relating to maintenance obligations, and the law applicable to matters relating to maintenance obligations [2009] OJ L200/46 ��7.13 European Parliament and Council Regulation (EC) 924/2009 on cross- border payments in the Community and repealing Regulation (EC) 2560/2001 [2009] OJ L266/11�� 21.28, 24.44 European Parliament and Council Regulation (EC) 1060/2009 on credit rating agencies [2009] OJ L302/1��20.33, 20.42, 20.44, 36.12 European Parliament and Council Regulation (EC) 223/2009 on European statistics [2009] OJ L87/164 �� 28.75 Council Regulation (EU) 407/2010 establishing a European Financial Stabilisation Mechanism [2010] OJ L118/1��9.69, 12.7, 13.33, 17.37, 18.14, 20.14, 32.21, 40.102, 41.37 Council Regulation (EU) 671/2010 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Estonia [2010] OJ L196/4��8.21 Council Regulation (EU) 679/2010 amending Regulation (EC) 479/2009 as regards the quality of statistical data in the context of the excessive deficit procedure [2010] OJ L198/1��40.73

European Parliament and Council Regulation (EU) 1093/2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/ 2009/EC and repealingCommission Decision 2009/78/EC [2010] OJ L331/12 ��17.40, 17.74–17.76, 17.91, 17.95, 18.37, 20.9, 26.21, 36.7, 37.11, 37.87, 37.88, 38.7, 40.61, 41.79, 42.10 Council Regulation (EU) 1096/2010 conferring specific tasks upon the European Central Bank concerning the functioning of the European Systemic Risk Board [2010] OJ L331/162 �� 5.89, 14.43, 20.12, 26.21, 36.7, 40.61 European Parliament and Council Regulation (EU) 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealingCommission Decision 2009/79/EC [2010] OJ L331/48 �� 17.74, 18.37, 20.9, 26.21, 36.7, 37.11, 38.7, 40.61, 41.79, 42.10 European Parliament and Council Regulation (EU) 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealingCommission Decision 2009/77/EC [2010] OJ L331/84 �� 17.74–17.76, 17.91, 17.95, 18.37, 20.9, 26.21, 36.7, 37.11, 38.7, 40.61, 41.79, 42.10 European Parliament and Council Regulation (EU) 1092/2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board [2010] OJ L331/1 ��5.89, 9.126, 18.37, 26.21, 26.64, 26.66, 26.69–26.71, 26.72, 26.74, 26.78, 29.79, 36.7, 37.42, 40.61, 41.79, 42.10 European Parliament and Council Regulation (EU) 513/2011 amending Regulation (EC) 1060/2009 on credit rating agencies [2011] OJ L145/30�� 20.42 European Parliament and Council Regulation (EU) 1173/2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1 �� 9.89, 13.21, 16.88, 17.27, 18.18, 19.18, 29.27, 30.10, 30.13, 40.110, 41.70, 42.9

lx Table of Legislation European Parliament and Council Regulation (EU) 1175/2011 amending Council Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2011] OJ L306/12 �� 9.89, 13.21, 18.18, 29.27, 30.13, 40.110, 41.70, 42.8 European Parliament and Council Regulation (EU) 1176/2011 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/25 ��9.89, 13.21, 17.27, 18.19, 27.38, 29.34, 30.13, 40.110, 41.70, 42.8 Council Regulation (EU) 1177/2011 amending Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2011] OJ L306/33 ��12.74, 13.21, 18.18, 28.44, 30.13, 40.110, 41.70, 42.8 European Parliament and Council Regulation (EU) 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8��9.89, 11.31, 13.21, 16.73, 17.27, 18.19, 29.27, 30.10, 30.13, 40.110, 41.70, 42.9 European Parliament and Council Regulation (EU) 182/2011 laying down the rules and general principles concerning mechanisms for control by Member States of the Commission’s exercise of implementing powers [2011] OJ L55/13�� 14.36 European Parliament and Council Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade repositories [2012] OJ L201/1�� 5.88, 20.33 European Parliament and Council Regulation (EU) 651/2012 on the issuance of euro coins [2012] OJ L201/135 �� 21.18 European Parliament and Council Regulation (EU, Euratom) 966/2012 on the financial rules applicable to the general budget of the Union and repealing Council Regulation (EC, Euratom) 1605/2002 [2012] OJ L298/1�� 38.51 European Parliament and Council Regulation (EU) 1215/2012 on

jurisdiction and the recognition and enforcement of judgments in civil and commercial matters [2012] OJ L351/1�� 40.204 European Parliament and Council Regulation (EU) 236/2012 on short selling and certain aspects of credit default swaps [2012] OJ L86/1�� 20.11, 41.82 European Parliament and Council Regulation (EU) 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) 924/2009 [2012] OJ L94/22�� 21.28, 24.43 European Parliament and Council Regulation (EU) 1219/2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries [2012] OJ L351/40�� 7.13 European Parliament and Council Regulation (EU) 472/2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1��9.89, 11.7, 12.49, 13.24, 14.76, 16.32, 17.37, 18.27, 20.58, 27.52, 28.26, 29.65, 30.10, 30.13, 30.49, 32.22, 40.128, 41.70, 42.9 European Parliament and Council Regulation (EU) 473/2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area [2013] OJ L140/11��9.89, 11.11, 13.24, 16.32, 16.86, 18.21, 29.27, 30.13, 40.128, 41.70, 42.9 European Parliament and Council Regulation (EU) 462/2013 amending Regulation (EC) 1060/2009 on credit rating agencies [2013] OJ L146/1 �� 20.42 Council Regulation (EU) 549/2013 (and its Annex I) on the European system of national and regional accounts in the European Union (ESA 2010) [2013] OJ L174/1 �� 39.129 European Parliament and Council Regulation (EU) 575/2013 on prudential requirements for credit institutions and investment firms

Table of Legislation lxi and amending Regulation (EU) 648/ 2012 [2013] OJ L176/1�� 9.111, 10.36, 18.37, 19.36, 35.18, 36.8, 36.14, 37.44, 37.93, 38.1, 38.6, 38.26, 38.31, 38.38, 40.58, 40.263, 42.85 Council Regulation (EU) 870/2013 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Latvia [2013] OJ L243/1 ��8.21 European Parliament and Council Regulation (EU) 1022/2013 amending Regulation (EU) 1093/ 2010 establishing a European Supervisory Authority (European Banking Authority) as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation (EU) 1024/2013 [2013] OJ L287/5 �� 26.21, 38.7, 40.262, 41.86 Council Regulation (EU) 1024/2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63 �� 9.113, 11.16, 12.37, 14.8, 14.9, 14.14, 14.15, 14.17, 14.20, 14.23, 14.25, 14.26, 14.58, 14.59, 14.67, 14.68, 14.69, 14.71, 15.3, 17.40, 18.41, 19.36, 26.27, 26.29, 26.80, 26.92, 30.156, 33.68, 35.15, 35.17, 35.19, 35.20, 35.24, 35.25, 35.29, 35.30, 35.35, 36.30, 37.16, 37.19, 37.23, 37.43, 37.45, 37.47, 37.49, 37.50, 37.51, 37.53–37.56, 37.58, 37.60, 37.61, 37.64, 37.66, 37.69, 37.71, 37.72, 37.78, 37.80, 37.89, 37.90, 37.91, 37.100, 38.8, 38.55, 38.61, 39.230, 40.262, 40.268, 41.86, 42.10 European Parliament and Council Regulation (EU) 1303/2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) 1083/2006 [2013] OJ L347/320 ��13.47–13.50, 27.13, 29.70

European Parliament and Council Regulation (EU) 1309/2013 on the European Globalisation Adjustment Fund (2014-2020) [2013] OJ L347/855 �� 17.89 European Parliament and Council Regulation (EU) 596/2014 on market abuse and repealing Directive 2003/6/EC of the European Parliament and of the Council andCommission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC [2014] OJ L173/1 �� 20.29, 36.62 European Parliament and Council Regulation (EU) 600/2014 on markets in financial instruments and amending Regulation (EU) 648/2012 [2014] OJ L173/84�� 20.42, 36.41, 36.58, 36.62, 36.69–36.72, 36.76 Council Regulation (EU) 851/2014 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Lithuania [2014] OJ L233/21�� 8.21 European Parliament and Council Regulation (EU) 1286/2014 on key information documents for packaged retail and insurance-based investment products [2014] OJ L352/1�� 36.54, 36.88 Commission Regulation (EU) 651/2014 declaring certain categories of aid compatible with the internal market [2014] OJ L187/1 �� 39.31 European Parliament and Council Regulation (EU) 806/2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation 1093/2010 [2014] OJ L225/1�� 9.115, 18.41, 30.156, 35.15, 37.22, 37.23, 37.24, 38.8–38.11, 38.13, 38.15, 38.19, 38.20–38.31, 38.33–38.46, 38.48–38.56, 38.58–38.61, 38.63–38.65, 38.67, 38.68, 38.71–38.78, 38.80, 38.81, 38.84, 39.230, 39.231, 39.236, 39.237, 39.238, 39.241, 39.242, 40.269, 41.76, 42.10 European Parliament and Council Regulation (EU) 2015/751 on interchange fees for card-based payment transactions [2015] OJ L123/1�� 24.45

lxii Table of Legislation European Parliament and Council Regulation (EU) 2015/1017 on the European Fund for Strategic Investments, the European Investment Advisory Hub and the European Project Investment Portal and amending Regulations (EU) 1291/2013 and (EU) 1316/2013 – the European Fund for Strategic Investments [2015] OJ L169/1 �� 16.17 Council Regulation (EU) 2015/1360 amending Regulation (EU) 407/2010 establishing a European financial stabilisation mechanism [2015] OJ L210/1 �� 32.21, 32.29 Council Regulation (EU) 2015/1589 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union [2015] OJ L248/9�� 39.22, 39.25, 39.27–39.30, 39.134, 39.204, 39.205, 39.210 Council Regulation (EU) 2015/159 amending Regulation (EC) 2532/98 concerning the powers of the European Central Bank to impose sanctions [2015] OJ L27/1�� 37.104 Commission Delegated Regulation (EU) 2016/778 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to the circumstances and conditions under which the payment of extraordinary ex post contributions may be partially or entirely deferred, and on the criteria for the determination of the activities, services and operations with regard to critical functions, and for the determination of the business lines and associated services with regard to core business lines [2016] OJ L131/41��38.19 European Parliament and Council Regulation (EU) 2016/1033 amending Regulation (EU) 600/2014 on markets in financial instruments, Regulation (EU) 596/2014 on market abuse and Regulation (EU) 909/2014 on improving securities settlement in the European Union and on central securities depositories [2016] OJ L175/1 ��36.62 Council Regulation (EU) 2016/369 on the provision of emergency support within the Union [2016] OJ L70/1 �� 16.86 Commission Delegated Regulation (EU) 2017/653 supplementing Regulation

(EU) 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products (PRIIPs) by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents [2017] OJ L100/1�� 36.88 European Parliament and Council Regulation (EU) 2017/825 on the establishment of the Structural Reform Support Programme for the period 2017 to 2020 and amending Regulations (EU) 1303/2013 and (EU) 1305/2013 [2017] OJ L129/1�� 29.86, 42.47 European Parliament and Council Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/ 71/EC [2017] OJ L168/12�� 9.122, 36.53 Commission Delegated Regulation (EU) 2017/2361 on the final system of contributions to the administrative expenditures of the Single Resolution Board [2017] OJ L337/6��38.51 Commission Delegated Regulation (EU) 2017/565 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive [2017] OJ L87/1 �� 36.62 Commission Delegated Regulation (EU) 2017/567 supplementing Regulation (EU) 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions [2017] OJ L87/90�� 36.62 European Parliament and Council Regulation (EU) 2018/1671 amending Regulation (EU) 2017/ 825 to increase the financial envelope of the Structural Reform Support Programme and adapt its general objective [2018] OJ L284/3 ��29.89, 42.49

Table of Legislation lxiii European Parliament and Council Regulation (EU) 2019/630 amending Regulation (EU) 575/ 2013 as regards minimum loss coverage for non-performing exposures [2019] OJ L111/4 �� 42.87 European Parliament and Council Regulation (EU) 2019/876 amending Regulation (EU) 575/ 2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) 648/2012 [2019] OJ L150/1 �� 38.16, 42.85 European Parliament and Council Regulation (EU) 2019/877 amending Regulation (EU) 806/ 2014 as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms [2019] OJ L150/226 �� 38.15, 42.85 European Parliament and Council Regulation (EU) 2019/2175 amending Regulation (EU) 1093/ 2010 establishing a European Supervisory Authority (European Banking Authority), Regulation (EU) 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), Regulation (EU) 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority), Regulation (EU) 600/2014 on markets in financial instruments, Regulation (EU) 2016/ 1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, and Regulation (EU) 2015/847 on information accompanying transfers of funds [2019] OJ L334/1�� 17.74, 17.75, 20.9, 20.29, 20.37, 20.39, 38.7 B. Table of Directives Council Directive 75/117/EEC on the approximation of the laws of the Member States relating to the

application of the principle of equal pay for men and women [1975] OJ L45/19��13.7 Council Directive 77/780/EEC on the coordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions [1977] OJ L322/30 ��2.43 Council Directive 88/361/EEC for the implementation of Article 67 of the Treaty [1988] OJ L178/5 ��9.10 Council Directive 89/646//EEC on the coordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/ EEC [1989] OJ L386/1��36.3 Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering [1991] OJ L166/77 �� 21.49 European Parliament and Council Directive (EC) 94/19/EC on deposit- guarantee schemes [1994] OJ L135/5�� 17.103 European Parliament and Council Directive 96/71/EC concerning the posting of workers in the framework of the provision of services [1996] OJ L18/1 �� 13.5, 13.13 European Parliament and Council Directive 97/9/EC on investor- compensation schemes [1997] OJ L84/22�� 38.19 European Parliament and Council Directive 2000/46/EC on the taking up, pursuit of and prudential supervision of the business of electronic money institutions [2000] OJ L275/39 �� 21.33 European Parliament and Council Directive 2001/97/EC amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering [2001] OJ L344/76 �� 21.49 Council Directive 2001/23/EC on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses [2001] OJ L82/16�� 28.22

lxiv Table of Legislation European Parliament and Council Directive 2002/65/EC concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC [2002] OJ L271/16 �� 21.41 European Parliament and Council Directive 2002/87/EC on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/ EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/ EC of the European Parliament and of the Council [2002] OJ L35/1�� 26.14 European Parliament and Council Directive 2002/92/EC on insurance mediation [2002] OJ L9/3 �� 36.56 European Parliament and Council Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC [2003] OJ L345/64 �� 36.53 Council Directive 2004/67/EC concerning measures to safeguard security of natural gas supply [2004] OJ L127/92�� 32.14 European Parliament and Council Directive 2004/39/EC on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC [2004] OJ L145/1�� 9.120, 36.41 European Parliament and Council Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing [2005] OJ L309/15 �� 21.48 European Parliament and Council Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions (recast) [2006] OJ L177/1�� 24.21, 36.18 European Parliament and Council Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions (recast) [2006] OJ L177/201 �� 36.18

Council Directive 2006/67/EC imposing an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products [2006] OJ L217/8 �� 32.14 European Parliament and Council Directive 2007/64/EC on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC [2007] OJ L319/1�� 21.28, 24.7, 24.16 Commission Directive 2009/83/ EC amending certain Annexes to Directive 2006/48/EC of the European Parliament and of the Council as regards technical provisions concerning risk management [2009] OJ L196/14�� 36.18 European Parliament and Council Directive 2009/110/EC on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/ EC and 2006/48/EC and repealing Directive 2000/46/EC [2009] OJ L267/7�� 21.33, 24.21 European Parliament and Council Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities [2009] OJ L302/32�� 9.120, 36.55, 36.63 European Parliament and Council Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) [2009] OJ L335/1�� 9.120 European Parliament and Council Directive 2009/14/EC amending Directive 94/19/EC on deposit- guarantee schemes as regards the coverage level and the payout delay [2009] OJ L68/3 �� 17.103, 40.42 European Parliament and Council Directive 2010/76/EU amending Directives 2006/48/EC and 2006/49/ EC as regards capital requirements for the trading book and for re- securitisations, and the supervisory review of remuneration policies [2010] OJ L329/3 �� 36.11

Table of Legislation lxv European Parliament and Council Directive 2010/78/EU amending Directives 98/ 26/EC, 2002/87/EC, 2003/6/EC, 2003/ 41/EC, 2003/71/EC, 2004/39/EC, 2004/ 109/EC, 2005/60/EC, 2006/48/EC, 2006/ 49/EC and 2009/65/EC in respect of the powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority) [2010] OJ L331/120�� 20.12, 40.61 European Parliament and Council Directive 2011/61/EU on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) 1060/2009 and (EU) 1095/2010 [2011] OJ L174/1 �� 20.29 European Parliament and Council Directive 2011/83/EU of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/ 577/EEC and Directive 97/7/EC of the European Parliament and of the Council [2011] OJ L304/64 ��21.39 Council Directive 2011/85/EU on requirements for budgetary frameworks of the Member States [2011] OJ L306/41 �� 9.89, 11.11, 13.21, 18.18, 27.7, 28.96, 30.13, 40.110, 41.70, 42.08 European Parliament and Council Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC [2013] OJ L176/338 �� 9.111, 18.37, 19.36, 26.68, 35.18, 36.8, 36.16, 37.44, 37.59, 37.93, 37.99, 37.100, 38.1, 40.58, 40.263, 42.85 European Parliament and Council Directive 2014/49/EU on deposit guarantee schemes [2014] OJ L173/149 �� 9.117, 18.37, 36.8, 37.59, 38.1, 40.362 European Parliament and Council Directive 2014/57/EU on criminal sanctions for market abuse

prescribing that criminal penalties be available to deal with market abuse (market abuse directive) [2014] OJ L173/179 �� 20.29 European Parliament and Council Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/ EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) 1093/2010 and (EU) 648/2012 of the European Parliament and of the Council [2014] OJ L173/190�� 9.115, 18.37, 35.16, 36.8, 37.9, 38.1, 39.4, 39.165, 39.180, 39.230, 39.231, 39.234, 39.235–39.239, 39.248, 40.59, 42.85 European Parliament and Council Directive 2014/65/EU on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU [2014] OJ L173/349 �� 36.41, 36.58, 36.62–36.66, 36.68, 36.71, 36.74, 36.80, 36.81, 36.84, 38.5 European Parliament and Council Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) 648/ 2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC [2015] OJ L141/73 �� 21.46 European Parliament and Council Directive (EU) 2015/2366 on payment services in the internal market amending Directives 2002/ 65/EC, 2009/110/EC and 2013/36/ EU and Regulation (EU) 1093/2010, and repealing Directive 2007/64/EC [2015] OJ L337/35 �� 21.28, 24.24 European Parliament and Council Directive (EU) 2016/1034 amending Directive 2014/65/EU on markets in financial instruments [2016] OJ L175/8�� 36.62 European Parliament and Council Directive (EU) 2016/97 on insurance distribution (recast) [2016] OJ L26/19 �� 36.56

lxvi Table of Legislation European Parliament and Council Directive 2017/1132/EU relating to certain aspects of company law [2017] OJ L169/46 �� 39.147 Commission Delegated Directive (EU) 2017/ 593 supplementing Directive 2014/ 65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits [2017] OJ L87/500��36.62 European Parliament and Council Directive (EU) 2018/843 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU [2018] OJ L156/43 �� 24.53 European Parliament and Council Directive 2018/957 amending Directive 96/71/EC concerning the posting of workers in the framework of the provision of services [2018] OJ L173/16 �� 13.13 European Parliament and Council Directive (EU) 2019/713 of 17 April 2019 on combating fraud and counterfeiting of non-cash means of payment and replacing Council Framework Decision 2001/413/JHA [2019] OJ L123/18 �� 24.53 European Parliament and Council Directive (EU) 2019/878 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures [2019] OJ L150/253 �� 38.16, 42.85 European Parliament and Council Directive (EU) 2019/879 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC [2019] OJ L150/296�� 38.15, 42.85 European Parliament and Council Directive (EU) 2019/1023 on preventive restructuring

frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) [2019] OJ L172/18��42.86 C. Table of Decisions Council Decision 64/300/EEC on cooperation between the Central Banks of the Member States of the European Economic Community [1964] OJ L77/1206 ��14.3 Council Decision 71/143/EEC setting up machinery for medium-term financial assistance [1971] OJ L73/15��34.4 Council Decision 74/120/EEC on the attainment of a high degree of convergence of the economic policies of the Member States of the European Economic Community [1974] OJ L63/16 ��2.30 Council Decision 74/122/EEC setting up an Economic Policy Committee [1974] OJ L63/21 �� 29.110 Council Decision 75/250/EEC on the definition and conversion of the European unit of account used for expressing the amounts of aid mentioned in Article 42 of the ACP-EEC convention of Lomé [1975] OJ L104/35 �� 21.12 Council Decision 76/332/EEC concerning a Community loan in favour of the Italian Republic and of Ireland [1976] OJ L77/12�� 34.54 Council Decision 91/136/EEC concerning a Community loan in favour of the Hellenic Republic [1991] OJ L66/22 �� 34.54 European Parliament, the Council and theCommission Decision 95/167/ EC, Euratom, ECSC on the detailed provisions governing the exercise of the European Parliament’s right of inquiry [1995] OJ L113/1 �� 17.83 Council Decision 98/311/EC abrogating the Decision on the existence of an excessive deficit for Italy [1998] OJ L139/15 ��8.52 Council Decision 98/317/EC in accordance with Article 109j(4) of the Treaty [1998] OJ L139/30�� 8.18, 14.7

Table of Legislation lxvii Council Decision 98/307/EC abrogating the Decision on the existence of an excessive deficit for Belgium [1998] OJ L139/9��8.52 Council Decision 98/683/EC concerning exchange rate matters relating to the CFA Franc and the Comorian Franc [1998] OJ L320/58 ��7.28 Council Decision 98/743/EC on the detailed provisions concerning the composition of the Economic and Financial Committee [1998] OJ L358/109�� 16.33 Council Decision 98/744/EC concerning exchange rate matters relating to the Cape Verde escudo [1998] OJ L358/111��7.3 Council Decision 1999/95/EC concerning the monetary arrangements in the French territorial communities of Saint-Pierre-et-Miquelon and Mayotte [1999] OJ L30/29�� 7.25 Council Decision 1999/96/EC on the position to be taken by the Community regarding an agreement concerning the monetary relations with the Principality of Monaco [1999] OJ L30/31 ��7.19 Council Decision 1999/97/EC on the position to be taken by the Community regarding an agreement concerning the monetary relations with the Republic of San Marino [1999] OJ L30/33 ��7.3 Council Decision 1999/8/EC adopting the Statutes of the Economic and Financial Committee [1999] OJ L5/71�� 16.33 Council Decision 1999/98/EC on the position to be taken by the Community regarding an agreement concerning the monetary relations with Vatican City [1999] OJ L30/35��7.19 Council Decision 2000/427/EC in accordance with Article 122(2) of the Treaty on the adoption by Greece of the single currency on 1 January 2001 [2000] OJ L167/19�� 8.21, 8.52 Council Decision 2000/604/EC on the composition and the statutes of the Economic Policy Committee [2000] OJ L257/28 �� 27.20 Commission Decision 2001/528/EC establishing the European Securities Committee [2001] OJ L 191/45�� 26.14 Commission Decision 2001/527/EC establishing Committee of European

Securities Regulators [2001] OJ L191/43 �� 20.7, 26.14, 36.5 Commission Decision 2004/10/EC establishing the European Banking Committee [2003] OJ L 3/36�� 26.14 Council Decision 2003/476/EC on a revision of the Statutes of the Economic and Financial Committee [2003] OJ L158/58 �� 27.19 Council Decision 2003/487/EC on the existence of an excessive deficit in France − Application of Article 104(6) of the Treaty establishing the European Community [2003] OJ L165/29 ��13.19 Council Decision 2003/89/EC on the existence of an excessive deficit in Germany − Application of Article 104(6) of the Treaty establishing the European Community [2003] OJ L34/16�� 13.19 Council Decision (EC) 2003/165 concerning the establishment of the Financial Services Committee [2003] OJ L67/17 �� 16.28, 16.34 Council Decision 2003/223/EC on an amendment to Article 10.2 of the Statute of the European System of Central Banks and of the ECB [2003] OJ L83/66�� 14.19, 15.9 Council Decision 2004/548/EC on the position to be taken by the Community regarding an agreement concerning the monetary relations with the Principality of Andorra [2004] OJ L244/47 ��7.32 Commission Decision 2004/5/EC establishing the Committee of European Banking Supervisors [2004] OJ L3/28 �� 20.7, 26.14, 36.5 Commission Decision 2004/6/EC establishing the Committee of European Insurance and Occupational Pensions Supervisors [2004] OJ L3/30 �� 20.7, 26.14, 36.5 Commission Decision 2004/9/EC establishing the European Insurance and Occupational Pensions Committee [2004] OJ L3/34�� 26.14 Council Decision 2006/344/EC giving notice to Germany, in accordance with Article 104(9) of the Treaty establishing the European Community, to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit [2006] OJ L126/20��28.51

lxviii Table of Legislation Council Decision 2006/495/EC in accordance with Article 122(2) of the Treaty on the adoption by Slovenia of the single currency on 1 January 2007 [2006] OJ L195/25��8.21 Council Decision 2007/503/EC in accordance with Article 122(2) of the Treaty on the adoption by Cyprus of the single currency on 1 January 2008 [2007] OJ L186/29��8.21 Council Decision 2007/504/EC in accordance with Article 122(2) of the Treaty on the adoption by Malta of the single currency on 1 January 2008 [2007] OJ L186/32��8.21 Council Decision 2008/608/EC in accordance with Article 122(2) of the Treaty on the adoption by Slovakia of the single currency on 1 January 2009 [2008] OJ L195/24��8.21 Council Decision 2009/458/EC granting mutual assistance for Romania [2009] OJ L150/6 �� 12.5, 34.59 Council Decision 2009/459/EC providing Community medium-term financial assistance for Romania [2009] OJ L150/8 �� 9.43, 12.5, 13.32, 34.2 Commission Decision 2009/77/EC establishing the Committee of European Securities Regulators [2009] OJ L25/18 ��20.7 Commission Decision 2009/78/EC establishing the Committee of European Banking Supervisors [2009] OJ L25/23 ��20.7 Commission Decision 2009/79/ EC establishing the Committee of European Insurance and Occupational Pensions Supervisors [2009] OJ L25/28 ��20.7 Council Decision 2009/881/EU on the exercise of the Presidency of the Council [2009] OJ L315/50�� 16.41 Council Decision 2009/895/EC on the position to be taken by the European Community regarding the renegotiation of the Monetary Agreement with the Vatican City State [2009] OJ L321/36��7.20 Council Decision 2009/102/EC providing Community medium-term financial assistance for Hungary [2009] OJ L37/5 �� 9.43, 34.2 Council Decision 2009/103/EC granting mutual assistance for Hungary [2009] OJ L37/7 �� 34.55

Council Decision 2009/289/EC granting mutual assistance for Latvia [2009] OJ L79/37�� 9.43, 13.32, 34.2 Council Decision 2009/290/EC providing Community medium-term financial assistance for Latvia [2009] OJ L79/39�� 34.57 Council Decision 2009/904/EC on the position to be taken by the European Community regarding the renegotiation of the Monetary Agreement with the Republic of San Marino [2009] OJ L322/12 ��7.20 Council Decision 2010/416/EU in accordance with Article 140(2) of the Treaty on the adoption by Estonia of the euro on 1 January 2011 [2010] OJ 196/24��8.21 Council Decision 2010/320/EU addressed to Greece with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit [2010] OJ L145/6��19.134, 28.106 Council Decision 2010/427/EU establishing the organisation and functioning of the European External Action Service [2010] OJ L201/30 ��6.12 Council Decision 2010/486/EU amending Decision 2010/320/EU addressed to Greece with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit [2010] OJ L241/12 �� 19.134 Council Decision 2010/718/EU amending the status with regard to the European Union of the island of Saint-Barthélemy [2010] OJ L325/4��7.25 Council Decision 2011/288/EU providing precautionary EU medium-term financial assistance for Romania [2011] OJ L132/15��34.2 Council Decision 2011/344/EU on granting Union financial assistance to Portugal [2011] OJ L159/88 �� 19.120, 41.55 Council Decision 2011/433/EU on the signing and conclusion of the Monetary Agreement between the European Union and the French

Table of Legislation lxix Republic on keeping the euro in Saint-Barthélemy following the amendment of its status with regard to the European Union [2011] OJ L189/1��7.25 Council Decision 2011/734/EU addressed to Greece with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit [2011] OJ L296/38 �� 28.106 Council Implementing Decision 2011/ 77/EU on granting Union financial assistance to Ireland [2011] OJ L30/34�� 32.22 Council Decision 2011/190/EU on the arrangements for the renegotiation of the Monetary Agreement between the Government of the French Republic, on behalf of the European Community, and the Government of His Serene Highness the Prince of Monaco [2011] OJ L81/3��7.20 European Council Decision 2011/199/ EU amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro [2011] OJ L91/1 �� 9.72, 12.22, 13.35, 18.50, 32.25, 37.8, 40.113, 41.39 Council Decision 2012/443/EU addressed to Spain on specific measures to reinforce financial stability [2012] OJ L202/17�� 28.106 Commission Delegated Decision 2012/ 678/EU on investigations and fines related to the manipulation of statistics as referred to in Regulation (EU) 1173/2011 of the European Parliament and of the Council on the effective enforcement of budgetary surveillance in the euro area [2012] OJ L306/21 �� 28.88 Council Decision 2012/156/EU suspending commitments from the Cohesion Fund for Hungary with effect from 1 January 2013 [2012] OJ L78/19�� 18.28 Council Decision 2013/236/EU addressed to Cyprus on specific measures to restore financial stability and sustainable growth [2013] OJ L141/32 �� 28.106

Council Decision 2013/323/EU amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal [2013] OJ L175/47 ��19.120, 19.127 Council Decision (EU) 2013/312 establishing the composition of the European Parliament [2013] OJ L181/57 �� 17.13 Council Decision 2013/373/EU approving the update of the macroeconomic adjustment programme of Ireland [2013] OJ L191/10 �� 32.22 Council Decision 2013/372/EU approving the update of the macroeconomic adjustment programme of Ireland [2013] OJ L191/9�� 32.22 Council Decision 2013/387/EU on the adoption by Latvia of the euro on 1 January 2014 [2013] OJ L195/24��8.21 Council Decision 2013/531/EU providing precautionary Union medium-term financial assistance for Romania [2013] OJ L286/1��34.2, 41.55 Council Decision 2014/234/EU amending Implementing Decision 2011/344/EU on granting Union fiscal assistance to Portugal [2014] OJ L125/75 �� 19.127 Council Decision 2014/509/EU on the adoption by Lithuania of the euro on 1 January 2015 [2014] OJ L228/29��8.21 Council Decision (EU) 2015/1181 on granting short-term Union financial assistance to Greece [2015] OJ L192/15�� 40.306 Commission Decision (EU) 2015/ 1937 establishing an independent advisory European Fiscal Board [2015] OJ L282/37 �� 18.22, 27.24 Council Decision (EU) 2015/1289 imposing a fine on Spain for the manipulation of deficit data in the Autonomous Community of Valencia [2015] OJ L498/19 �� 28.94 Council Decision (EU) 2016/1316 amending Decision 2009/908/ EU, laying down measures for the implementation of the European Council Decision on the exercise of the Presidency of the Council, and on the chairmanship of preparatory bodies of the Council [2016] OJ L208/42 �� 16.42

lxx Table of Legislation Council Decision (EU) 2017/985 giving notice to Portugal to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit [2017] OJ L148/42 ��29.74 Commission Decision 2017/125/EU on amending the Annex to the Monetary Agreement between the European Union and the Republic of San Marino [2017] OJ L19/71��7.31 Council Decision (EU) 2017/2350 on imposing a fine on Portugal for failure to take effective action to address an excessive deficit [2017] OJ L336/24 �� 28.87 Council Decision (EU) 2017/2351 on imposing a fine on Spain for failure to take effective action to address an excessive deficit [2017] OJ L336/27 �� 28.87 Council Decision (EU) 2018/818 imposing a fine on Austria for the manipulation of debt data in Land Salzburg [2018] OJ L137/23 �� 28.95 Council Decision (EU) 2018/937 establishing the composition of the European Parliament [2018] OJ L165I/1��17.9 Council Decision (EU) 2018/1215 on guidelines for the employment policies of the Member States [2018] OJ L224/8�� 17.54 Commission Decision (EU) 2018/1192 on the activation of enhanced surveillance for Greece [2018] OJ L211/1��40.313 Council Decision (EU) 2019/1181 on guidelines for the employment policies of the Member States [2019] OJ L185/44 �� 17.54 European Council Decision (EU) 2019/476 taken in agreement with the United Kingdom extending the period under Article 50(3)TEU [2019] OJ LI80/1 �� 8.30 European Council Decision (EU) 2020/135 on the conclusion of the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community [2020] OJ L29/1��8.28, 8.30 3. TABLES OF PROPOSALS OF EU/E C LEGISLATION Proposal for a Council Regulation on the introduction of the euro, COM (1996) 499 final�� 21.26

Proposal for a Council Decision on the Representation and Position Taking of the Community at International Level in the context of the Economic and Monetary Union, COM (1998) 637 final��6.5 Commission Recommendation for a Council Decision on the position to be taken by the Community regarding an agreement concerning the monetary relations with the Principality of Monaco, COM (1998) 789 final��7.19 Commission Communication on the need and the means to upgrade the quality of budgetary statistics, COM (2002) 670 final�� 28.75 Proposal for a Directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing, COM (2004) 448 final�� 21.49 Proposal for a Council Regulation establishing a European Financial Stabilisation Mechanism, COM (2010) 2010 final�� 32.18 Proposal for a Council Regulation amending Regulation (EC) 1467/ 97 on speeding up and clarifying the implementation of excessive deficit procedure, COM (2010) 522 final �� 40.110 Proposal for a European Parliament and Council Regulation on the prevention and correction of macroeconomic imbalances, COM (2010) 527 final�� 40.110 Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law, COM (2011) 635 final�� 21.42 Proposal for a European Parliament and Council Directive establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/ EC, 2007/36/EC and 2011/35/EC and Regulation (EU) 1093/2010, COM (2012) 280 final �� 40.226 Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, COM (2012) 511 final �� 18.41, 40.262

Table of Legislation lxxi Proposal for a Directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, COM (2013) 45 final �� 21.50 Proposal for a European Parliament and Council Regulation establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) 1093/2010 of the European Parliament and of the Council, COM (2013) 520 final��40.269 Commission Communication on ‘Making the best use of the Flexibility within the existing Rules of the Stability and Growth Pact’, COM (2015) 12 final �� 10.32, 18.28, 28.5, 28.29 Proposal for a Regulation of the European Parliament and of the Council amending Regulation 806/2014 in order to establish a European Deposit Insurance Scheme, COM (2015) 586 final�� 9.118 Proposal for a Council Decision laying down measures in view of progressively establishing unified representation of the euro area in the International Monetary Fund, COM (2015) 603 final�� 6.10, 6.44 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC, COM (2016) 450 final�� 24.53 Proposal for a directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU, COM (2016) 723 final�� 9.122, 42.86 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 806/2014 as regards loss-absorbing

and Recapitalisation Capacity for credit institutions and investment firms, COM (2016) 851/2 final�� 38.15 Proposal for a Directive of the European Parliament and the Council amending Directive 2014/59/EU on loss-absorbing and recapitalisation capacity of credit institutions and investment firms and amending Directive 98/26/EC, Directive 2002/ 47/EC, Directive 2012/30/EU, Directive 2011/35/EU, Directive 2005/56/EC, Directive 2004/25/EC and Directive 2007/36/EC, COM (2016) 852/2 final��9.155, 18.37, 35.16, 36.8, 42.85 Proposal for a Directive of the European Parliament and of the Council on amending Directive 2014/59/EU of the European Parliament and of the Council as regards the ranking of unsecured debt instruments in insolvency hierarchy, COM (2016) 853 final�� 38.14 Proposal for a Regulation of the European Parliament and of the Council amending Regulation EU 1093/2010 establishing a European Supervisory Authority (European Banking Authority); Regulation (EU) 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority); Regulation (EU) 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority); Regulation (EU) 345/2013 on European venture capital funds; Regulation (EU) 346/2013 on European social entrepreneurship funds; Regulation (EU) 600/2014 on markets in financial instruments; Regulation (EU) 2015/760 on European long- term investment funds; Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; and Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, COM (2017) 536 final�� 20.9, 20.12, 20.23, 20.24, 20.37, 36.34, 36.36

lxxii Table of Legislation Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2017/825 to increase the financial envelope of the Structural Reform Support Programme and adapt its general objective, COM (2017) 825 final�� 42.47, 42.48 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 1303/ 2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) 1083/2006 as regards support to structural reforms in Member States, COM (2017) 826 final�� 29.105, 42.43, 42.45, 42.46 Proposal for a Regulation of the European Parliament and of the Council on the establishment of the Reform Support Programme, COM (2018) 391 final��17.88, 27.59, 29.95, 29.99–29.103, 42.52, 42.53 Commission Communication ‘Annual Sustainable Growth Strategy 2020’, COM (2019) 650 final �� 13.24 Proposal for a Directive of the European Parliament and of the Council on Markets in Financial Instruments (Recast), COM (2011) 656 final�� 36.63 Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures, COM (2016) 854 final �� 36.32 Proposal for a Regulation of the European Parliament and of the Council on the prudential requirements of investment firms

and amending Regulation (EU) 575/ 2013 (EU) 600/2014 and (EU) 1093/ 2010, COM (2017) 790 final�� 36.31, 36.95 Proposal for a Council directive laying down provisions for strengthening fiscal responsibility and the medium-term budgetary orientation in the Member States, COM (2017) 824 final��12.71, 17.34, 28.102, 42.25 Proposal for a Council Regulation on the establishment of a European Monetary Fund, COM (2017) 827 final �� 20.59, 41.784 4. TABLES OF EU/E C NOTICES, GUIDELINES AND RECOMMENDATIONS A. Table of Recommendations Commission Recommendation 2010/191/EU on the scope and effects of legal tender of euro banknotes and coins [2010] OJ L83/70��21.2, 21.4, 21.21, 21.23 Council Recommendation on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro [2011] OJ C217/15�� 29.22 Council Recommendation on the National Reform Programme 2014 of Belgium and delivering a Council opinion on the Stability Programme of Belgium 2014 [2014] OJ C247/5��13.29 Council Recommendation on the National Reform Programme 2015 of Belgium and delivering a Council opinion on the Stability Programme of Belgium 2015 [2015] OJ C272/27 ��13.29 Council Recommendation (EU) 2015/ 1184 on broad guidelines for the economic policies of the Member States and of the European Union [2015] OJ L192/27 �� 9.46, 17.54 Council Recommendation on the 2016 National Reform Programme of Italy and delivering a Council opinion on the 2016 Stability Programme of Italy [2016] OJ C299/1�� 29.12 Council Recommendation on the 2016 National Reform Programme of Poland and delivering a Council opinion on the 2016 Convergence Programme of Poland [2016] OJ C299/15�� 29.13

Table of Legislation lxxiii Council Recommendation on the 2016 National Reform Programme of Finland and delivering a Council opinion on the 2016 Stability Programme of Finland [2016] OJ C299/79�� 29.12 Council Recommendation on the 2016 National Reform Programme of Denmark and delivering a Council opinion on the 2016 Convergence Programme of Denmark [2016] OJ C299/87�� 29.12 Council Recommendation on the 2016 National Reform Programme of Slovenia and delivering a Council opinion on the 2016 Stability Programme of Slovenia [2016] OJ C299/90�� 29.15 Council Recommendation on the 2016 National Reform Programme of Croatia and delivering a Council opinion on the 2016 Convergence Programme of Croatia [2016] OJ C299/96�� 29.15 Council Recommendation on the establishment of National Productivity Boards [2016] OJ C349/1��18.22, 29.108 Council Recommendation on the 2017 National Reform Programme of Ireland and delivering a Council opinion on the 2017 Stability Programme of Ireland [2017] OJ C261/30�� 13.54 Council Recommendation on the 2017 National Reform Programme of Spain and delivering a Council opinion on the 2017 Stability Programme of Spain [2017] OJ C261/35�� 13.54 Council Recommendation on the 2017 National Reform Programme of France and delivering a Council opinion on the 2017 Stability Programme of France [2017] OJ C261/39�� 13.26 Council Recommendation on the 2017 National Reform Programme of Belgium and delivering a Council opinion on the 2017 Stability Programme of Belgium [2017] OJ C261/6 �� 13.54 Council Recommendation on the 2017 National Reform Programme of Poland and delivering a Council opinion on the 2017 Convergence Programme of Poland [2017] OJ C261/88�� 29.17

Council Recommendation on the 2017 National Reform Programme of Portugal and delivering a Council opinion on the 2017 Stability Programme of Portugal [2017] OJ C261/97�� 13.29 Council Recommendation on the economic policy of the euro area [2017] OJ C92/1 �� 29.22, 29.24 Council Recommendations with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Hungary [2018] OJ C223/1�� 28.40 Council Recommendation with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania [2018] OJ C223/3 �� 28.40 Council Recommendation on the 2018 National Reform Programme of Hungary and delivering a Council opinion on the 2018 Convergence Programme of Hungary [2018] OJ C261/72�� 29.18 Council Recommendation on the 2018 National Reform Programme of Bulgaria and delivering a Council opinion on the 2018 Convergence Programme of Bulgaria [2018] OJ C320/7 �� 29.48 Council Recommendation on the economic policy of the euro area [2018] OJ C179/1 �� 9.46, 29.24 B. Other Informal Texts Commission communication to the Member States -Application of Articles 92 and 93 of the EEC Treaty and of Article 5 ofCommission Directive 80/723/EEC to public undertakings in the manufacturing sector [1993] OJ C307/3 �� 39.225 Commission Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty [1994] OJ C368/12 ��39.35, 39.38, 39.39 European Council Resolution on the Stability and Growth Pact [1997] OJ C236/1 ��9.40, 13.17, 28.7, 40.20 European Council Resolution on the establishment of an exchange-rate mechanism in the third stage of the economic and monetary union [1997] OJ C236/5 �� 23.10

lxxiv Table of Legislation European Council Resolution on economic policy coordination in stage 3 of EMU and on Treaty Articles 109 and 109b of the EC Treaty [1998] OJ C35/1 ��23.17 Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees [2000] OJ C71/14��39.226, 39.227 Commission Communication on Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty [2004] OJ C244/2 �� 39.4, 39.31, 39.36–39.44, 39.46, 39.48–39.50 Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees [2008] OJ C155/10��39.226, 39.227 Commission Communication on The Application of State Aid Rules to Measures Taken in Relation to Financial Institutions in the Context of the Current Global Financial Crisis [2008] OJ C270/8�� 39.70, 39.75, 39.115, 39.139, 39.171, 39.181, 40.40 Commission Communication on Recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition [2009] OJ C10/2�� 39.78, 39.168–39.171 Commission Communication on The Return to Viability and the Assessment of Restructuring Measures in the Financial Sector in the Current Crisis Under the State Aid Rules (Communication) [2009] OJ C195/9 �� 39.82, 39.154, 39.159239.161, 39.163, 39.165, 39.174, 39.175, 40.40 Commission Communication on The Application, from 1 January 2011, of State Aid Rules to Support Measures in Favour of Financial Institutions in the Context of the Financial Crisis [2010] OJ C329/7 �� 39.84, 40.40 Commission Communication on The Application, from 1 January 2012, of State aid rules to support measures in favour of financial institutions in the context of the financial crisis (Communication) [2011] OJ C356/7��39.87, 39.140, 39.168, 39.170, 40.40

Commission Communication on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis [2013] OJ C216/1 ��15.79, 19.105, 26.63, 38.60, 39.4, 39.11, 39.90, 39.91, 39.105, 39.109, 39.115, 19.117–39.120, 39.136, 39.138, 39.140, 39.146, 39.154, 39.156, 39.158, 39.163–39.167, 39.173, 39.175, 39.177–39.179, 39.182, 39.185, 39.199, 39.214, 40.40 Commission in Guidelines on State aid for rescuing and restructuring non- financial undertakings difficulty [2014] OJ C249/1 �� 39.39, 39.53 Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union [2016] OJ C262/1 ��12.37, 39.9–39.18, 39.105, 39.111, 39.112, 39.132, 39.150, 39.194, 39.2425 5. TABLES OF ACTS OF THE EUROPEAN CENTRAL BANK A. Table of Agreements of the European Central Bank Agreement between The European Central Bank and The International Criminal Police Organization [2004] OJ C134/6�� 7.8 Agreement between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union [2006] OJ C73/21�� 8.46, 23.10, 25.16, 25.31 Agreement on emergency liquidity assistance��15.78, 15.80, 26.103, 39.106, 40.218 B. Table of Regulations of the European Central Bank Regulation (EC) 1745/2003 on the application of minimum reserves (ECB/2003/9) [2003] OJ L250/10 �� 22.36, 22.37 Regulation (EC) 1053/2008 on temporary changes to the rules relating to eligibility of collateral (ECB/2008/11) [2008] OJ L282/17 �� 22.88

Table of Legislation lxxv Regulation (EU) 468/2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM Framework Regulation) (ECB/2014/17) [2014] OJ L141/1�� 9.113, 14.8, 14.14, 37.28, 37.31, 37.56, 37.65, 37.67, 37.69–37.72, 37.95, 37.100, 37.104, 40.268 Regulation (EU) 795/2014 on oversight requirements for systemically important payment systems (ECB/ 2014/28) [2014] OJ L217/16�� 24.39 Regulation (EU) 1333/2014 concerning statistics on the money markets (ECB/2014/48) [2014] OJ L359/97��15.21 C. Table of Decisions of the European Central Bank Decision 2001/913/EC on the issue of euro banknotes (ECB/2001/15) [2001] OJ L337/52 �� 21.20 Decision 2004/526/EC adopting the Rules of procedure of the General Council of the European Central Bank (ECB/2004/12) [2004] OJ L230/61�� 14.24, 14.33 Decision 2004/257/EC adopting the Rules of Procedure of the ECB [2004] OJ L80/33 ��14.23, 14.33, 14.34, 14.57, 14.63, 37.81 Decision 2004/258/EC on public access to European Central Bank documents (ECB/2004/3) [2004] OJ L80/42��14.64 Decision (2009/522/EC) on the implementation of the covered bond purchase programme (ECB/2009/16) [2009] OJ L175/18 �� 22.92, 40.54 Decision 2009/5/EC to postpone the start of the rotation system in the Governing Council of the European Central Bank (ECB/2008/29) [2009] OJ L3/4 ��15.9 Decision (2010/268/EU) on temporary measures relating to the eligibility of marketable debt instruments issued or guaranteed by the Greek Government (ECB/2010/3) [2010] OJ L117/102 ��22.115, 40.214 Decision 2010/281/EU establishing a securities markets programme (ECB/2010/5) [2010] OJ L124/8�� 12.18, 14.46, 22.117, 22.119, 37.6, 40.216

Decision 2011/20/EU on the increase of the European Central Bank’s capital (ECB/2010/26) [2011] OJ L11/53�� 15.33, 40.222 Decision 2011/21/EU on the paying-up of the increase of the ECB’s capital by the national central banks of Member States whose currency is the euro (ECB/2010/27) [2011] OJ L11/54�� 15.33 Decision 2011/22/EU on the paying-up of the European Central Bank’s capital by the non-euro area national central banks (ECB/2010/28) [2011] OJ L11/56�� 15.34 Decision 2011/744/EU on the implementation of the second covered bond purchase programme (ECB/2011/17) [2011] OJ L297/70 ��40.223 Decision 2011/67/EU on the issue of euro banknotes (recast) (ECB/2010/29) [2011] OJ L35/26 �� 15.17 Decision 2012/153/EU on the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic in the context of the Hellenic Republic’s debt exchange offer [2012] OJ L 77/19�� 19.95 Decision (EU) 2015/5 on the implementation of the asset-backed securities purchase programme (ECB/2014/45) [2014] OJ L1/4�� 40.326 Decision 2014/337/EU on the remuneration of deposits, balances and holdings of excess reserves (ECB/2014/23) [2014] OJ L168/115��22.34 Decision 2014/427/EU on the appointment of representatives of the European Central Bank to the Supervisory Board (ECB/2014/4) [2014] OJ L196/38 �� 14.58 Decision 2014/434/EU on the close cooperation with the national competent authorities of participating Member States whose currency is not the euro (ECB/2014/5) [2014] OJ L198/7��37.64 Decision 2014/541/EU on measures relating to targeted longer-term refinancing operations (ECB/2014/34) [2014] OJ L258/11��22.34 Decision 2014/723/EU on the implementation of separation between the monetary policy and supervision functions of the European Central Bank (ECB/2014/39) [2014] OJ L300/57��37.84

lxxvi Table of Legislation Decision 2014/828/EU on the implementation of the third covered bond purchase programme (ECB/ 2014/40) [2014] OJ L335/22�� 40.362 Decision (EU) 2015/774 on a secondary markets public sector asset purchase programme (ECB/2015/10) [2015] OJ L121/20 �� 9.98, 14.46, 22.180, 22.183, 22.184, 22.185, 22.187, 22.189, 22.197, 22.204, 40.327 Decision (EU) 2015/509 repealing Decision ECB/2013/6 on the rules concerning the use as collateral for Eurosystem monetary policy operations of own-use uncovered government-guaranteed bank bonds, Decision ECB/2013/35 on additional measures relating to Eurosystem refinancing operations and eligibility of collateral and Articles 1, 3 and 4 of Decision ECB/2014/23 on the remuneration of deposits, balances and holdings of excess reserves (ECB/2015/9) [2015] OJ L91/1��22.34 Decision (EU) 2016/810 on a second series of targeted longer-term refinancing operations (ECB/2016/10) [2016] OJ L132/107��22.48 Decision (EU) 2016/948 on the implementation of the corporate sector purchase programme (ECB/ 2016/16) [2016] OJ L157/28�� 40.332 Decision (EU) 2016/245 laying down the rules on procurement (ECB/2016/2) [2016] OJ L45/15 �� 14.56 Decision (EU) 2017/933 on a general framework for delegating decision- making powers for legal instruments related to supervisory tasks (ECB/ 2016/40) [2017] OJ L141/14�� 37.82 Decision (EU) 2017/934 on the delegation of decisions on the significance of supervised entities (ECB/2016/41) [2017] OJ L141/18�� 37.82 Decision (EU) 2017/935 on delegation of the power to adopt fit and proper decisions and the assessment of fit and proper requirements (ECB/ 2016/42) [2017] OJ L141/21�� 37.82 Decision (EU) 2017/936 nominating heads of work units to adopt delegated fit and proper decisions (ECB/2017/16) [2017] OJ L141/26�� 37.82 Decision (EU) 2017/937 nominating heads of work units to adopt delegated decisions on the

significance of supervised entities (ECB/2017/17) [2017] OJ L141/28�� 37.82 Decision (EU) 2017/100 amending Decision (EU) 2015/774 on a secondary markets public sector asset purchase programme (ECB/ 2017/1) [2017] OJ L16/51�� 14.46 Decision (EU) 2019/48 on the paying-up of the ECB’s capital by the non-euro area national central banks and repealing Decision ECB/2013/31 (ECB/2018/32) [2019] OJ L9/196��8.25 D. Table of Guidelines and Recommendations of the European Central Bank Guideline as amended by the Guideline of 16 November 2000 on the composition, valuation and modalities for the initial transfer of foreign-reserve assets, and the denomination and remuneration of equivalent claims (ECB/2000/15) [2000] OJ L336/114 �� 15.37 Recommendation, under Article 10.6 of the Statute of the European System of Central Banks and of the ECB, for a Council Decision on an amendment to Article 10.2 of the Statute of the European System of Central Banks and of the ECB (ECB/2003/1) [2003] OJ C29/6��15.9 Guideline for participating Member States’ transactions with their foreign exchange working balances pursuant to Article 31.3 of the Statute of the European System of Central Banks and of the European Central Bank (ECB/2003/12) [2003] OJ L283/81 �� 15.40 Guideline on the Eurosystem’s provision of reserve management services in euro to central banks and countries located outside the euro area and to international organisations (ECB/2006/4) [2006] OJ L107/54��23.5 Guideline on the management of the foreign reserve assets of the European Central Bank by the national central banks and the legal documentation for operations involving such assets (recast) (ECB/ 2008/5) [2008] OJ L192/63�� 15.39 Recommendation on the organisation of preparatory measures for the collection of granular credit data by the European System of Central

Table of Legislation lxxvii Banks (ECB/2014/7) [2014] OJ C103/1�� 14.78 Recommendation for a Decision of the European Parliament and of the Council amending Article 22 of the Statute of the European System of Central Banks and of the European Central Bank (ECB/2017/18) [2014] OJ C212/14�� 14.78 Guideline (EU) 2015/510 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) [2015] OJ L91/3��9.32, 14.80, 15.19, 22.34 E. Table of Opinions of the European Central Bank Opinion at the request of the Council under Article 109l(4) of the Treaty establishing the European Community on a proposal for a Council Decision concerning the monetary arrangements in the French territorial communities of Saint-Pierre-et-Miquelon and Mayotte [1999] OJ C127/5��7.25 Opinion at the request of the Council of the European Union on the draft Treaty establishing a Constitution for Europe (CON/2003/20) [2003] OJ C229/7 �� 14.10 Opinion on measures affecting Suomen Pankki’s financial position and provisions relating to its power to issue norms (CON/2004/1)�� 15.67 Opinion on monetary policy decision- making (CON/2004/35) �� 15.66 Opinion on the rules for payment of the Banco de España’s profits to the Treasury (CON/2005/30)�� 15.67 Opinion on changes to the Banca d’Italia’s structure and internal governance resulting from a law on the protection of savings (CON/2005/34)��15.26 Opinion on changes to the state treasury system (CON/2005/55)�� 15.66 Opinion on the integration of banking, capital markets, insurance and pension funds supervision (CON/2006/15) �� 15.75 Opinion on amendments to the statutes of the Banque de France (CON/2006/32) �� 15.66 Opinion on a general revision of the statutes of Banca d’Italia (CON/2006/44) �� 15.66

Opinion on an amendment to the Deutsche Bundesbank’s statutes relating to the number and nomination of the members of its Executive Board (CON/2007/6)�� 15.66 Opinion on amendments to the Statute of Banca Naţională a României (CON/2008/31) �� 15.59 Opinion on the payment of Banco de España’s profits to the Treasury (CON/2008/82) �� 15.67 Opinion on amendments to the rules governing the distribution of the income of the Nationale Bank van België/Banque Nationale de Belgique and the allocation of its profits to the Belgian State (CON/2009/4)��15.67 Opinion on amendment to the rules on the distribution of the profits of Lietuvos bankas in the context of financial turmoil (CON/2009/26) �� 15.70 Opinion on the distribution of Latvijas Banka’s profits (CON/2009/53) �� 15.67, 15.70 Opinion on an amended draft legislative provision on the taxation of the Banca d’Italia’s gold reserves (CON/2009/63) �� 15.70 Opinion on the taxation of the Banca d’Italia’s gold reserves (CON/2009/59)��15.70 Opinion on Národná banka Slovenska’s independence (CON/2009/85)�� 15.70 Opinion on the distribution of Lietuvos bankas’s profits (CON/2009/83)��15.67, 15.70 Opinion on conditions and procedures for the application of the measures to strengthen financial stability (CON/2009/93) �� 15.58 Opinion on recovery measures that apply to undertakings in the banking and financial sector, on the supervision of the financial sector and financial services and on the statutes of the Nationale Bank van België/Banque Nationale de Belgique (CON/2010/7)�� 15.67 Opinion on the amendment to the Law on credit institutions and financial undertakings introducing further financial market stabilisation measures (CON/2010/31)�� 15.58 Opinion on the legal status of Lietuvos bankas’s assets, terms of office and remuneration of Board members, immunity of foreign reserves of foreign central banks and annual financial statements of Lietuvos bankas (CON/2010/42) �� 15.71

lxxviii Table of Legislation Opinion on amendments to the Law on the Magyar Nemzeti Bank introducing salary reductions (CON/2010/56) �� 15.71 Opinion on the remuneration of the staff of Banca Naţională a României (CON/2010/51) �� 15.71 Opinion on further measures for the restoration of budgetary balance (CON/2010/69) �� 15.71 Opinion on the Banco de Portugal’s staff remuneration and the budget (CON/2010/80) �� 15.71 Opinion on the Hungarian Financial Supervisory Authority and on its President’s legislative powers (CON/2010/94) �� 15.58 Opinion on amendments to the Polish Constitution concerning adoption of the euro (CON/2011/9)�� 15.67, 15.69, 15.70 Opinion on amendments to the Statute of the Bank of Greece (CON/2011/36) �� 15.71 Opinion on the Hungarian State Audit Office in relation to its audit of the Magyar Nemzeti Bank (CON/2011/53) �� 15.69 Opinion on the amendments to Lietuvos bankas’ profit distribution rules (CON/2011/91) �� 15.67, 15.70 Opinion on the Magyar Nemzeti Bank (CON/2011/104) ��15.45, 15.57, 15.71 Opinion on the Magyar Nemzeti Bank’s independence (CON/2011/106)�� 15.71 Opinion on the salaries of civil servants (CON/2012/1) �� 15.71 Opinion on a guarantee scheme for the liabilities of Italian banks and on the exchange of lira banknotes (CON/2012/4) �� 15.79 Opinion on pension reforms in the public sector (CON/2012/6)�� 15.71 Opinion on a capital increase of the Banque centrale du Luxembourg (CON/2012/69) �� 15.67 Opinion on the Banco de Portugal’s staff remuneration and the budget (CON/2012/86) �� 15.71 Opinion on euro banknotes and coins and amendments to the Banco de España’s Statute (CON/2012/89) �� 15.62, 15.71 Opinion on a proposal for a Council regulation conferring specific tasks on the European Central Bank concerning policies relating

to the prudential supervision of credit institutions and a proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) 1093/ 2010 establishing a European Supervisory Authority (European Banking Authority) (CON/2012/96) [2013] OJ C30/6 ��37.18 Opinion on a proposal for a directive establishing a framework for recovery and resolution of credit institutions and investment firms (CON/2012/99) [2013] OJ C39/1�� 37.20 Opinion on the profit distribution of the Bank of Greece (CON/2013/15)�� 15.70 Opinion on pay and pension reforms (CON/2013/46) �� 15.71 Opinion on a capital increase of the Banca d’Italia (CON/2013/96)�� 15.67 Opinion on remuneration for public servants during periods of sick leave (CON/2014/7) �� 15.71 Opinion on the independence of Banka Slovenije (CON/2014/25)�� 14.55, 15.59, 15.63 Opinion on pension restrictions (CON/2014/35) �� 15.71 Opinion on the remuneration of staff and members of decision-making bodies of the Banca d’Italia and taxation of its revalued shares (CON/2014/38) ��15.71 Opinion on a systemic risk committee (CON/2014/46) �� 15.67 Opinion on recovery and resolution in the financial market (CON/2015/22) �� 15.75 Opinion on the designation of Lietuvos bankas as a resolution authority (CON/2015/33) �� 15.75 Opinion on recovery and resolution of credit institutions and investment firms (CON/2015/35) �� 15.75 Opinion on the central register of bank accounts (CON/2015/36)�� 15.75 Opinion on the deposit guarantee scheme (CON/2015/40) �� 15.75 Opinion on a register of bank accounts (CON/2015/46) �� 15.75 Opinion CON/2014/25, para 3; ECB Opinion on certain amendments to Banka Slovenije’s institutional framework (CON/2015/57) �� 14.55, 15.59 Opinion on a proposal for a Council Decision laying down measures in view of progressively establishing unified representation of the euro area in the International Monetary

Table of Legislation lxxix Fund (CON/2016/22) [2016] OJ C216/1 �� 6.44, 6.70, 6.95 Opinion on a draft law abolishing the State guarantee provided in connection with emergency liquidity assistance (CON/2016/55)��10.35 Opinion on a proposal for a regulation on the establishment of the European Monetary Fund (CON/2018/20) [2018] OJ C220/2 �� 12.58, 30.191 6. TABLES OF OTHER INTERNAL DOCUMENTS OF EUROPEAN INSTITUTIONS AND BODIES A. Table of Internal Documents of the European Parliament Decision on setting up a special committee on tax rulings and other measures similar in nature or effect, its powers, numerical strength and term of office [2015] OJ C310/42�� 17.85 Decision on setting up a special committee on tax rulings and other measures similar in nature or effect (TAXE 2), its powers, numerical strength and term of office [2015] OJ C399/201�� 17.85 Decision (EU) 2016/1021 on setting up a Committee of Inquiry to investigate alleged contraventions and maladministration in the application of Union law in relation to money laundering, tax avoidance and tax evasion, its powers, numerical strength and term of office [2016] OJ L166/10 ��17.84 Decision on setting up a special committee on financial crimes, tax evasion and tax avoidance (TAX3), and defining its responsibilities, numerical strength and term of office [2019] OJ C129/65�� 17.85 Rules of Procedure of the European Parliament (9th parliamentary term) ��17.15–17.17, 17.22, 17.48, 17.82, 17.83 B. Table of Internal Documents of the European Council European Council Decision 2009/882/ EU adopting its Rules of Procedure [2009] OJ L315/51 �� 16.116

C. Table of Internal Documents of the Council Council Decision 2009/937/EU adopting the Council’s Rules of Procedure [2009] OJ L325/35 �� 16.5, 16.10, 16.13 D. Table of Internal Documents of the European Systemic Risk Board Decision on the procedures and requirements for the selection, appointment and replacement of the members of the Advisory Scientific Committee of the European Systemic Risk Board (ESRB/2011/2) [2011] OJ C39/10�� 26.74 Decision on the provision and collection of information for the macro- prudential oversight of the financial syste,m within the Union (ESRB/ 2011/6) [2011] OJ C302/3�� 26.67 Decision on a coordination framework regarding the notification of national macro-prudential policy measures by competent or designated authorities and the provision of opinions and the issuing of recommendations by the ESRB (ESRB/2014/2) [2014] OJ C98/3�� 26.68 E. Table of Internal Documents of the European Stability Mechanism Resolution of the Board of Governors establishing the instrument for the direct recapitalisation of institutions European Stability Mechanism (ESM) SG/BoG/2014/05/04�� 40.271 Guideline on financial assistance for the direct recapitalisation of institutions European Stability Mechanism (ESM)�� 30.74, 40.271 7. TABLE OF NATIONAL LEGISLATION Germany: Gesetz zur finanziellen Beteiligung am Europäischen Stabilitätsmechanismus (ESMFinG), Bundesgesetzblatt I (2012) 1918�� 17.105 Ireland: Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009, SI No 490/2009�� 40.143

1

INTRODUCTION Fabian Amtenbrink and Christoph Herrmann

I. Aim, Scope, and Approach II. Foundations III. Constitutional Dimension IV. Institutional Dimension V. Substantive Dimension

1.5 1.10 1.17 1.21 1.25

VI. Crisis Management VII. Financial Market Regulation and Supervision VIII. Outlook

1.29 1.31 1.32

In its more than seven decades of history European integration has gone through many stages of development. Some of them were incremental, but many more rather sudden, triggered or at least profoundly influenced by legal predicaments and political impasses, following the proverbial advice to ‘never let a good crisis go to waste’. The policy areas that are broadly abridged under the term Economic and Monetary Union (EMU) form no exception in this regard. EMU is deeply rooted in and following the inherent logic of political integration through gradual economic integration proclaimed in the well-known Schuman Declaration and thereafter given shape through the Treaty establishing the Coal and Steel Community (ECSC) and the subsequent Treaty establishing the European Economic Community. Yet, it was the Treaty on European Union (Maastricht Treaty/TEU), which was meant to put an end to the at times fiercely led (academic) debates on the future direction of European integration and its democratic credentials, that finally provided the necessary legal impetus for the establishment of an economic and monetary union and the creation of a supranational, single European currency.

1.1

While being as much a legal project as it is an economic or political one, in the first decade of its existence economic and monetary union lived a relatively shadowy existence in legal scholarly treatise and, for that matter, law school curricula. The highly abstract and technical non-legal character often attributed to (macro-)economic and monetary policy, paired with the relatively small body of law and the seeming absence of justiciable rules and corresponding case law have contributed to the sparsity of EMU-related legal research when compared to other main European Union (EU) policy areas. In this regard the events triggered by the financial and sovereign debt crisis have been a wake-up call for many students of EU law that all of a sudden have come to realize that EMU is first and foremost a legal construct. As Georg Friedrich Knapp put it in his seminal work on The State Theory of Money: ‘Money is a creature of law’.1 For the Euro, a fiat currency of a supranational organization of sovereign States, this is all the more true.

1.2

1 Author’s own translation. Georg Friedrich Knapp, Staatliche Theorie des Geldes (4th edn, Duncker & Humblot 1923) 1: ‘Geld ist ein Geschöpf der Rechtsordnung’. Fabian Amtenbrink and Christoph Herrmann, 1 Introduction In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0001

2 INTRODUCTION 1.3

Hence, there has been a notable increase in the number of researchers and academic treatises in recent years, addressing the many legal issues linked to EMU, some of which can be traced back to its original design in the Maastricht Treaty, while others have emerged from the numerous Union and extra-Union instruments and measures that have been taken in response to the crisis. The establishment of the European System of Financial Supervision and, thereafter, of two of the three pillars of the European banking union, which in more than just an institutional way has close ties with EMU, has added an additional layer of (legal) complexity.

1.4

Both in terms of the volume of legal instruments and the practical problems associated with their application, EMU has thus developed into a major field of EU law, the likes of which can be compared to, for example, EU internal market law. Whereas chapters in textbooks can provide a general overview of a particular area of law, article-by-article commentaries can offer a better understanding of specific provisions, and monographs and most edited volumes zoom-in on specific aspects, a systematic, comprehensive, and contextual study of the legal framework of a given area of law as a whole, calls for a handbook approach.

I. Aim, Scope, and Approach 1.5

The aim of this volume is to provide this systematic, comprehensive, and at the same time contextual study of the legal framework pertaining to EMU, the principle scope of which is by-and-large defined by Title VIII of the Treaty on the Functioning of the European Union (TFEU).

1.6

This does not imply that this handbook only offers an analysis of the provisions of a specific part of the TFEU, the TFEU as such, or EU law for that matter. Extra-Union instruments and measures linked to EMU, such as the Treaty on Stability, Coordination and Governance in the European Union (TSCG) and the Treaty establishing the European Stability Mechanism (ESM Treaty), but also the international legal framework and even relevant soft law instruments are covered as well. As part of this broader approach to what constitutes the relevant legal framework for EMU, financial market integration and the banking union have been included, albeit not as the main focus of the volume. In doing so the interconnectedness between economic, monetary, and financial market integration is recognized.

1.7

While a description and critical analysis of the main legal features is at the core of the handbook, the study of the EMU legal framework is not limited to this internal perspective. In fact, the handbook commences with an overview of what is referred to as the interdisciplinary foundations of EMU, offering not only a historical perspective, but also a view from economics and political science. The academic backgrounds and professional affiliations of the individual authors of the forty-one chapters included in this handbook reflect this contextual approach.

1.8

The delineation of topics to be covered by separate chapters and the order in which they appear has been guided by the ambition to ensure the usability of the volume as a reference guide for those seeking relevant information on distinct elements of EMU as they are by-and-large divided by the EU legal framework itself. At the same time any partition of an integrated legal framework into different parts and chapters that address the constitutional,

Foundations 3 institutional, and substantive aspects of a given legal framework inherently bears the probability of some overlap and the recurrence of specific traits. Not in all instances is it possible to avoid such overlaps and reiterations without at the same time missing necessary context. Moreover, reoccurring themes in chapters focusing on different aspects of a given legal framework are also a sign of the interconnections and interdependencies of different parts of a legal system. This is, as will also become clear from the next section of this introduction, certainly the case for EMU. An observant reader will notice that the legal jargon used throughout the different chapters of this handbook is not necessarily identical. This is actually not very surprising, given that EU law itself and moreover also the Union institutions and bodies are not always using terminology consistently. The editors have decided not to smoothen out these linguistic differences between authors, while at the same time—hopefully—ensuring that any confusion on parts of the readership is avoided.

1.9

II. Foundations The handbook paints a detailed picture of all major aspects of European Economic and Monetary Union as it stood by the end of 2019, while also providing an overview of the related fields of financial market regulation and European banking union. In principle each chapter of this handbook is designed as a stand-alone source of information on a particular aspect of EMU. Having said so, by choosing to introduce thematic parts and by presenting different aspects of EMU in a particular order, and—most importantly—by pointing out cross-cutting issues throughout all chapters, the handbook does follow narrative lines that are informed by more than just the structure of the legal framework on EMU.

1.10

The first of such narrative lines presented in the handbook stresses that the legal and regulatory constitutional framework for the Economic and Monetary Union and its single currency is the result of a complex interplay of different economic, political, and historic interdependencies and contingencies. They may be referred to as the interdisciplinary foundations of European economic and monetary union and form the main focus of the first substantive part of the handbook. This approach reveals that the creation of EMU is as much the result of political choices and economic beliefs, as it is the result of path dependencies.

1.11

Indeed, the establishment of an economic and monetary union has been on and off the political agenda since the late 1960s. In some instances, it has been hampered by international developments, whereas in other instances such developments would prompt new steps towards the further integration of economic and monetary policies of the Member States. Exemplary in this regard are the break-down of the Bretton Woods System and the plans for the establishment of a European economic and monetary union by 1980, the development of the US dollar as an anchor currency and the creation of the European Monetary System, as well as the push for the completion of the single market, the collapse of the Soviet Union, German reunification, and the call for addressing the democratic deficit at the European level, in the run-up to the TEU that finally introduced the legal framework on EMU. The influence of external events on the path of European integration in the field of monetary

1.12

4 INTRODUCTION relations can be largely attributed to the reliance of the original European economic integration project on the international monetary system existing at the time, and namely the International Monetary Fund’s (IMF) gold standard as an external monetary anchor of the common market and customs union project. It was only when that international system broke down that the need for a European answer to the most relevant questions of cross-border monetary relations became sufficiently pressing to trigger the developments sketched above. 1.13

Appreciating the dynamics that have shaped EMU, but maybe even more importantly, the role that EMU as a project has played in the European integration process also requires an understanding of the politics of EMU. EMU has undergone a number of metamorphoses. It has evolved from what at the time of the adoption of the Werner Plan was quintessentially considered a necessary integration step towards the creation of a common or internal market, to thereafter being perceived as a motor of the European integration process as such at the time of the drafting of the Maastricht Treaty, to most recently being perceived as an existential threat to the future of the EU as a result of the events surrounding the European financial and sovereign debt crisis. Throughout this process, different political preferences of the key players had to be settled. Monetary integration has profoundly different economic effects on countries depending on their budgetary position, trade surplus or deficit, ordinary inflation path and the like. As was the case at the time of the establishment of the IMF, the ‘stronger’ economic position of the Member State(s) with a trade surplus won the argument, putting the asymmetrically greater burden to adapt to the changing economic environment on the weaker deficit countries. The European sovereign debt crisis has not only been a consequence of that original design, but—to a large degree—has also been dealt with in the same manner. Whereas deficit countries had to implement massive structural adjustment programmes, the surplus countries were only made subject to future surveillance—and in theory sanctioning—of their external imbalances.

1.14

The political choices that have been made in deciding on the institutional setup and main objectives of the EMU legal framework have been driven by macroeconomic preferences and expertise. Indeed, economic and mainly political economy rationale has had a decisive impact on the institutional design of the European Central Bank (ECB) and namely its degree of autonomy from political institutions, as the model of the independent conservative central banker that focuses on the aversion of inflation became embedded in the constitutional basis of the EU.

1.15

Next to the economic preconditions of a single currency area and the optimal institutional design, mainly the costs and benefits of a single European currency have been part of the economic discourse from the very start and have received renewed attention in the wake of the European financial and sovereign debt crisis. Membership in the single currency does not only bear benefits, as the absence of exchange rate adjustments and monetary policy as tools to counter (asymmetric) macroeconomic shocks can result in monetary stabilization losses. While the medium to long-run benefits of a fixed exchange rate and the delegation of monetary policy to an independent supranational monetary policy authority have become visible (for most) in the euro area, so have the macroeconomic imbalances existing in certain euro area Member States. In the past they have neither been sufficiently dealt with by the respective Member States nor been adequately addressed by the European economic

Constitutional Dimension 5 policy surveillance framework. For the traditional surplus countries, they did not seem to be a risk in the first place, whereas the deficit countries—or those who had to expect to become so—may not have been aware of their position and its economic implications. Overall, it is the complex interplay of these historic, political and economic interdependencies and contingencies that has led to a legal and regulatory constitutional framework for the Euro, which has possibly no comparison in the world. It is more detailed in substance, more institutionalized and more difficult to amend than any other monetary constitution. Many political assumptions, objectives and policy instruments that would normally be subject to regular and ongoing political debate in a country and hence possibly subject to occasional change, are ‘set in stone’ in the law of EMU. This is due to the inclusion of large parts of the institutional and substantive legal framework in primary Union law and the almost unsurmountable constitutional hurdle that Article 48 TFEU sets in a Union of twenty-seven Member States for fundamental changes of the primary Union law framework, ie an amendment of the founding Treaties. As a consequence, the Euro, to a large degree, functions for euro area Member States in a way akin to a foreign currency. They do not have autonomous control of its supply nor of its constitutional framework. A fundamental assumption for ‘ordinary’ currencies hence did not seem to apply for the euro to the same extent, namely that a country cannot default in its own currency. In fact, the European sovereign debt crisis has demonstrated impressively that this notion does not equally apply for the supranational currency. Hence, many of the changes that have been made to EMU over the past ten years can be better understood having this original conceptual misapprehension in mind.

1.16

III. Constitutional Dimension The body of norms that makes up for legal framework of EMU addresses several issues of monetary, budgetary and financial law, and it consists of more than just one layer of rules. Externally, EMU operates in a given framework of international legal rules, standards, and institutions and informal standard-setting bodies, which are not always ideally prepared to deal with a fully-fledged and supranational monetary union. Yet, recognition of an international rule of law is as deeply written into the EU’s constitutional DNA as is its support for multilateralism. The international dimension of EMU is hence colourful and complex, be it its participation in the IMF, it’s representation in the international realm or its use of international legal instruments to expand the territorial application of the Euro’s legal tender status. At the same time, the external representation of EMU and the euro is also a reflection of the distribution of competences in the EU, both between the national and supranational level and at the supranational level between different Union institutions, as becomes clear from the parallel participation in some international fora of different Union institutions, such as the European Commission and the ECB, next to representatives of EU Member States. This may not only result in co-ordination problems, but also raises concerns about the adequate levels of accountability for the EU’s actions at the international level.

1.17

Internally, EMU is based on a number of features that determine its constitutional character. This relates to its territorial scope and asymmetric integration and to its specific objectives enshrined in the Treaties. Furthermore, euro area Member States share certain legal

1.18

6 INTRODUCTION obligations which are indispensable for the functioning of the euro as a supranational currency of nineteen sovereign States. 1.19

With regard to the first two features mentioned above, from the outset EMU has been deliberately designed as a differentiated integration not only with regard to membership, but also with regard to the two main policy fields which EMU combines. Membership in the single European currency does not come automatically with membership in the EU, as it is subject to a separate decision-making process and—in principle—the fulfilment of specific economic and legal convergence criteria. Put differently, the territorial scope of the EMU legal framework does not coincide with that of the EU. Still, with the well-known exceptions of Denmark and—until its withdrawal from the EU—the United Kingdom, primary Union law does not only open EMU for the participation of all EU Member States, but actually takes as a starting point that all Member States have to adhere to the objective of economic and monetary union. This approach also finds its expression in the reference to Member States that have not yet adopted the common currency as ‘Member States with a derogation’, thus emphasising the exceptional and provisional position in Treaty terms of these countries. What also differentiates EMU from the general approach to enhanced co-operation in primary Union law is the fact that the Member States outside the single currency are already subject to parts of the enhanced policy framework, namely key elements of economic policy coordination. To be sure, in particular the reform of this framework in response to the European sovereign debt crisis has increased the regulatory gap between the euro area and non-euro area Member States in this regard.

1.20

More generally, a regulatory gap in primary Union law can be observed for economic and monetary policy, often referred to as the asymmetric integration in EMU. The absence of an economic policy integration that matched that of monetary policy in the euro area, a deliberate political choice at the time of the drafting of the Maastricht Treaty, and the absence of a European fiscal (stabilization) capacity have been identified as a main shortcomings of the EMU legal framework, which, if not triggering the crisis, have at least contributed to its deepening.

IV. Institutional Dimension 1.21

The complexity of the institutional structure of the EU is frustrating for many students of EU law, as it is sometimes for scholars and practitioners likewise. Yet, in the field of EMU, the complexity is even larger than in most other fields of European integration. The institutional framework consists of more and very diverse players; many of them, such as the Eurogroup, the ECB, and the ESM, are occupied with EMU matters exclusively. In addition to that, the role of the institutions at the constitutional core of the Union, that is the European Parliament, the European Commission, and the European Council, are in many respects different from the responsibilities they otherwise have. The Parliament has less of a say in EMU decision-making, and the Commission does not avail itself of the infringement procedure with regard to budgetary surveillance, nor does it have the administrative competencies it possesses, eg in competition law. Correspondingly, the role of the Council is stronger than in other fields of EU law, but its decisions are often predetermined by other configurations such as the Eurogroup or the Euro Summit.

Substantive Dimension 7 The complexity of the institutional structure also results from the role that national Parliaments and Courts are playing a role in the institutional concert pertaining to EMU. This is for example highlighted by the several intergovernmental instruments ratified by national parliaments outside the Treaty framework and the various challenges of different parts of the EMU legal framework and measures based thereon before national highest (constitutional) courts, with the first two ever references for a preliminary ruling submitted to the Court of Justice of the European Union (CJEU) by the German Federal Constitutional Court arguably being two most prominent examples. The introduction of the first two pillars of the European banking union and namely the composite administration at the core of the Single Supervisory Mechanism introduce an additional level of legal complexity both regarding the applicable law and effective legal protection before national and European courts.

1.22

The institutional focus on the Council (peer review), the relative weak position of the European Commission both in preventing the emergence and the dealing with existing excessive government deficits in the Member States, paired with the absence of a political determination, namely in the first decade of the single currency, to exhaust all legal remedies to deal with government deficits and debts in the euro area, all have contributed to the ineffectiveness of the pre-crisis rules, namely in the context of the excessive deficit procedure. Following the crisis, the strengthening of the role of the European Commission through the introduction of reversed qualified majority voting in different parts of the multilateral surveillance, excessive deficit, and macroeconomic balances procedure, as well as the broadening of the sanctioning regime, may be considered key features of a reinforced governance structure. Yet, ultimately none of the reform measures have addressed the vulnerability of economic policy coordination decision-making to political considerations that are out of tune with the Treaty objectives on EMU.

1.23

If anything, throughout the crisis the CJEU has proven to be a stabilising factor. In its several decisions pertaining to the delineation of monetary and economic policy as foreseen in primary Union law and the scope of the monetary policy mandate of the ECB it has made clear—to the extent that this was ever in doubt—that EMU and namely the conduct of monetary policy in the euro area is subject to the rule of law.

1.24

V. Substantive Dimension As hinted towards above, in terms of substance, EMU is first and foremost an example of the creation of a supranational monetary union, rather than of economic or fiscal unification. Whereas the ‘coronation theory’ stuck to the view that monetary union should (and could only) be the crown on a successful process of economic integration and alignment in the EU, the successful opposing view saw monetary union as an engine to propel further economic integration. A monetary union has some specific and distinctive features: a number of countries sharing a currency as their legal tender, subject to a uniform monetary policy based on common strategy and the centrally monopolized supply of money. These features bring about some additional necessary elements: a uniform exchange-rate policy as well as the organization of payment systems, internally as well as vis-à-vis other currencies, which for the euro includes the currencies of non-participating EU Member States.

1.25

8 INTRODUCTION 1.26

In contrast to the supranational and centralized decision-making in monetary policy, the economic pillar of EMU is rather intergovernmental and decentralized by nature. The Treaty approach to achieving convergence and coherence inside and outside of the euro area is to rely on a series of economic principles and assumptions and—at the level of Treaty law—divided into two pillars: the co-ordination of the economic policies of the Member States in general and the observance of budgetary discipline in particular. The latter was the clear focus of the multilateral surveillance framework introduced by primary and secondary Union law, namely in the shape of the two Council Regulations under the 1997 Stability and Growth Pact. In substantive terms, this framework has suffered namely from a lack of focus on the development of public debt levels, while at the same time mitigating developments in the non-budgetary economic policy sphere that drive internal and external macroeconomic imbalances, such as financial and asset market developments, and the current account position of Member States.

1.27

The reinforcement of both pillars has been at the heart of the reforms brought about mainly by the secondary Union law measures included in the ‘six-pack’ and ‘two-pack’, as well as the TSCG. Next to placing more emphasis on the surveillance of government debt levels, including in the sanctioning regime of the excessive deficit procedure, the main novelty is the strengthening of the non-budgetary economic policy surveillance through the monitoring of various macroeconomic and macrofinancial indicators in the Member States as part of the newly introduced (excessive) macroeconomic imbalances procedure and the accompanying enforcement regime. Still, the many suggestions and concrete proposals to reinforce the European fiscal stabilization function, such as by means of a European unemployment benefits reinsurance scheme or the creation of a meaningful euro area budget, have not resulted in any concrete measures (yet).

1.28

What is more, the reform of the legal framework in response to the European sovereign debt crisis has further added to its complexity. In fact, fully understanding the current set of applicable rules requires intimate knowledge of numerous, partially complementary and partially overlapping legal instruments under Union law but also public international law. It is thus little surprising that already for some time ideas are floated to consolidate and simplify the overtly complex regulatory structure of EMU.

VI. Crisis Management 1.29

The European financial and sovereign debt crisis has been a rather unpleasant and—some would add—expensive wake-up call for the EU and its Member States not only with regard to the shortcomings of the Maastricht economic policy coordination framework to prevent euro area Member States from entering a scenario in which a sovereign default is no longer only a theoretical possibility, but also in realising the absence of a regulatory toolbox in Union law that would have allowed for a resolute and adequate crisis response. A prime example in this regard is the legal obscurity surrounding the scope of Article 122(2) TFEU as a legal basis for financial assistance measures and the limits that Article 125 TFEU sets in this regard at the beginning of the crisis. This is actually not very surprising given that in principle EMU was meant to be (legally) designed to prevent such need to arise in the first place by means of supervision of budgetary discipline accompanied by market surveillance

Financial Market Regulation and Supervision 9 based on what has possibly somewhat misleadingly been referred to as a bail-out prohibition. Yet, for whatever reasons financial markets turned out to exercise even more lenient supervision than the political institutions in the process of budgetary surveillance. When markets finally realized the possibility of a default of a euro area Member State, the reaction quickly turned into a self-fulfilling prophecy. With the Lehman Brothers experience in mind, and with the imminent risk of contagion throughout the euro area and its financial markets, the euro area initially reacted with ad hoc measures, thereafter introducing a temporary legal framework and finally introducing a permanent institutional framework outside the EU to provide financing for Member States with no access to financial markets. In stark contrast to the rather fragile economic policy coordination in general, starting with the bilateral loans to Greece in 2010, the at first ad hoc and thereafter structural policy conditionality attached to financial assistance through the available instruments has been rather strict. It exploits the Member State in need’s dependence on financial means being made available, and quick. Where economic policy co-ordination in some instance has failed to provide sufficient incentives for euro area Member States to undertake urgently required structural economic reforms, the country-specific macroeconomic adjustment programmes and namely the underlying (non-)technical memoranda of understanding that spell out in detail concrete policy action and quantitative targets have left programme countries with little room to avoid painful economic reforms. To be sure, financial assistance to euro area Member States has been anything but uncontroversial, and it has been marked down both by proponents and opponents of such rescue operations. Thus, some commentators have criticized the severe socio-economic impact on the programme countries and—in the light thereof—the prominent role of the European Commission, ECB, and the IMF in the drafting and monitoring of conditionality. Others have taken the position that the financial assistance schemes are incompatible, if not with the wording then at least with the spirit of primary Union law and the individual budgetary responsibilities which it foresees for Member States. Moreover, the potential economic and political consequences of widespread risk sharing in the euro area have been stressed.

1.30

VII. Financial Market Regulation and Supervision Twenty years of EMU—with the second-half of those mostly in crisis mode—have made crystal clear that financial market integration cannot merely be based on free movement of capital, some harmonization of capital markets rules based on a rather cumbersome regulatory process, and fragmented financial market supervision in the internal market. What is needed is a robust framework for supervision and resolution of financial institutions, based on a single rulebook for financial services, as well as some common backstop for the re-financing where Member States’ own capabilities are too limited. In other words, a true banking union as the fourth stage (or third pillar) of EMU. Contemporary currencies and monetary policy as well as State financing are not conceivable without well-functioning financial markets—and vice versa. Institutionally the deep connectedness between financial stability and the stability of the European currency currently finds its expression in the post-crisis dual role of the ECB as a guardian of monetary and financial stability, which arguably makes this EU institution in some regards the most important guardian of the

1.31

10 INTRODUCTION future success of European economic integration. However, this also raises questions about the (in-)compatibility of these two roles combined in one institution and, more broadly, the sufficient degree of democratic legitimacy that this arrangement calls for. Overall, while the State-Bank-Nexus remains to exist, the EU has made significant progress towards loosening it substantially.

VIII. Outlook 1.32

History never comes to an end, and this is of course also true for EMU. Almost seven decades of European integration have demonstrated a constant need for reform and refinement. Examining EMU, broadly speaking three phases can be differentiated, each roughly covering a period of twenty years so far: an initial phase where monetary matters were not featuring prominent on the integration agenda; another twenty years in which the E(E)C/EU was struggling with setting up EMU; and the last twenty years devoted to expansion and—in particular since 2010—crisis response and a substantive reform of the Maastricht framework, albeit by-and-large leaving the primary Union law framework intact. Throughout these phases and most of all since the beginning of the sovereign debt crisis the EMU project has been reputed to dead on many occasions. While in this context the authors of this introduction feel reminded of one of Mark Twain’s more famous quotes, they presently confine themselves to expressing their conviction that EMU is here to stay for quite some time, making a thorough study of this subject matter a good investment for any student of EU law.

2

HISTORY OF AN INCOMPLETE EMU Emmanuel Mourlon-Druol*

I. Introduction II. Economic and Monetary Cooperation in Europe Before the Treaty of Rome, 1945–1957 A. The establishment of the Bretton Woods system B. The European Payments Union

III. An Economic Union Before a Monetary Union? The Early EEC, 1958–1968

A. The Treaty of Rome and economic and monetary cooperation in Europe B. Europeans tensions within the Bretton Woods system C. Economic union in the 1960s

IV. The First Attempt at Economic and Monetary Union: The Werner Report, 1969–1972

2.1

2.4 2.5 2.10

2.12 2.13 2.16 2.19

2.25

V. European Exchange Rates Coordination in a Globalizing World, 1975–1978

A. Navigating international and European currency instability B. Economic union in an impasse

VI. The Advent of a Lopsided Union: The Delors Report and the Maastricht Treaty, 1979–1992

A. The working of the European Monetary System, 1979–87 B. The Basle-Nyborg agreement (1987) C. The Delors Committee and the Delors Report, 1988–89 D. German reunification, the Intergovernmental Conference (IGC), and the Treaty of Maastricht, 1989–91 E. The ERM crises: September 1992–August 1993

VII. Conclusions

2.32 2.33 2.41

2.47 2.47 2.49 2.50 2.54 2.58 2.62

I. Introduction The Economic and Monetary Union (EMU) created in 1992 by the Maastricht Treaty was famously incomplete. The decision to create a European single currency was taken without agreeing at the same time on the introduction of traditional accompanying features of some other monetary unions, namely: substantial financial transfers from richer to less developed regions, a credible framework for macroeconomic policy coordination, and European-wide provisions for banking regulation and supervision, to name but a few. The 1992 Maastricht Treaty set out an unfinished, or ‘lopsided union’, with the predominance of monetary union over economic union. The titles of the multiple reports published since 1992, such as the Van Rompuy report of 2012, ‘Towards a Genuine Economic and Monetary Union’, the Five Presidents’ Report of 2015, ‘Completing Europe’s Economic and Monetary Union’, and the * This chapter is based on the project ‘The Making of a Lopsided Union: Economic Integration in the European Economic Community, 1957–1992 (EURECON)’ that has received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (Grant Agreement No 716849). Emmanuel Mourlon-Druol, 2 History of an Incomplete EMU In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0003

2.1

14 HISTORY OF AN UNCOMPLETE EMU Commission’s ‘Reflection Paper on the Deepening of the Economic and Monetary Union’ of 2017 highlight this lopsidedness very well.1 2.2

The incomplete nature of the Maastricht construct makes it very fashionable to claim that EMU has been carelessly devised. Many commentators and academics assert that European policy-makers ignored some fundamental well-known aspects aimed at supporting monetary unions.2 European policy-makers would have been culprit of a mix of incompetence, hubris, and panic at the prospect of a reunified German hegemony over Europe after the fall of the Berlin Wall. Nothing could be further away from the historic record. There is a fundamental difference between stating that European policy-makers were intentionally careless in the design of EMU, and their inability to have concluded a comprehensive and well- balanced agreement that would have included all necessary features of a smoothly functioning EMU. The first is simply inaccurate; the second is the story of the following pages.

2.3

This chapter draws a comprehensive historical reconstruction of the creation of this incomplete EMU. This chapter covers both the reasons leading to the creation of a monetary union, and the reasons for the limited progress on an economic union. ‘Economic union’ is here broadly conceived, as indeed most European policy-makers until 1992 understood it, and includes the following policy areas: banking regulation and supervision, financial transfers of resources, capital market integration, and macroeconomic policy coordination. The chapter provides an analysis divided into five chronological sections. First, the chapter covers the pre-history of European monetary cooperation and integration before the Treaty of Rome, including the development of the Bretton Woods system and of the European Payments Union (EPU). Second, it deals with the period of implementation of the Treaty of Rome, from the inception of the EEC in 1958 until the establishment of the European customs union. Third, it analyses the period witnessing the first concrete proposal about the establishment of an EMU in the EEC, namely the Werner Report. Fourth, it looks into the EEC’s attempt at managing exchange rates in a globalizing world, in particular with the creation of the European Monetary System (EMS). Finally, it scrutinizes the move towards EMU looking in particular at the Delors Report, the Maastricht Treaty, and the adoption of the Stability and Growth Pact (SGP).

II. Economic and Monetary Cooperation in Europe Before the Treaty of Rome, 1945–1957 2.4

The rigidities of the interwar Gold Standard and the ravages of the Great Depression made plain that a new international economic and financial framework should be designed after the end of the Second World War. This new system would support post-war reconstruction, international trade, and international economic cooperation. 1 Emphasis added. Herman Van Rompuy, ‘Towards a Genuine Economic and Monetary Union’ (Brussels, 5 December 2012); Jean-Claude Juncker and others, ‘The Five President’s Report: Completing Europe’s Economic and Monetary Union’ (Brussels, 22 June 2015); Commission, ‘Reflection Paper on the Deepening of the Economic and Monetary Union’ COM (2017) 291 final. 2 See eg Martin Feldstein, ‘The Failure of the Euro: The Little Currency That Couldn’t’ (2012) 91(1) Foreign Affairs 105; Niall Ferguson and Laurence Kotlikoff, ‘The Degeneration of EMU’ (2000) 79(2) Foreign Affairs 110.

ECONOMIC COOPERATION PRE-TREATY OF ROME 15

A. The establishment of the Bretton Woods system The delegates of forty-four allied nations met in Bretton Woods, New Hampshire, in July 1944, to create a new international monetary system that would avoid the weaknesses identified in the interwar period.3 To these ends, the delegates agreed to create a set of new rules and institutions known as the Bretton Woods system. The major feature was that members agreed on a system of fixed but adjustable exchange rates, in which currencies were pegged to the dollar, and only the dollar was convertible into gold. Currencies could fluctuate within a 1 per cent band, and the value of the dollar was fixed at 35 US dollars per ounce of gold. The United States was responsible for keeping this price fixed. The system was adjustable in that in case of economic hardship, a country could ask the IMF for authorization to devalue their currencies by 10 per cent.

2.5

To make this system work, two new institutions were created: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).4 The IMF, created in 1945 and headquartered in Washington D.C., is responsible for monitoring the functioning of the new system, and, more generally, encouraging global monetary cooperation, and ensuring international financial stability. The IBRD, now part of the World Bank Group, established in 1945, provides financial assistance for the reconstruction after the Second World War, and for less developed countries.

2.6

The Bretton Woods system was agreed upon in 1944, but it only really became functional in 1958, when currencies became fully convertible. Until 1958, many participants maintained exchange controls, and as a consequence, the free convertibility of one currency into another at the pegged exchange rate expected in the Bretton Woods system was not implemented.

2.7

The Bretton Woods system encountered an essential flaw, that Belgian economist Robert Triffin identified in 1960 in his book Gold and the Dollar Crisis.5 The so-called ‘Triffin Dilemma’ relates to the problems linked to the role of the US dollar in the overall system. The dilemma that Triffin identified was the following: In the Bretton Woods system, the US government was running important balance of payments deficits. If the US government decided to stop running such deficits, then the international community would be deprived of reserves. This shortage of liquidity would in turn contract the world’s economy, leading to financial instability. But if the US government continued running balance of payments deficits, then the confidence in the value of the dollar would erode. The Bretton Woods system in theory constrained the US government to keep the dollar’s value at 35 US dollars per ounce of gold. If the US government continued ‘flooding’ the world with dollars, investors and policy-makers would be less confident that these

2.8

3 On post- 1945 international financial relations, see Eric Helleiner, Forgotten Foundations of Bretton Woods: International Development and the Making of the Postwar Order (Cornell UP 2014); Harold James, International Monetary Co-operation since Bretton Woods (IMF/OUP 1996); Benn Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton UP 2013); Catherine R Schenk, International Economic Relations since 1945 (Routledge 2011); Barry Eichengreen, Globalizing Capital: A History of the International Monetary System (Princeton UP 1996). 4 See Chapters 5 and 6. 5 Robert Triffin, Gold and the Dollar Crisis: The Future of Convertibility (Yale UP 1960).

16 HISTORY OF AN UNCOMPLETE EMU dollars could be exchanged into gold. The dollar would then no longer be accepted as a reserve currency, and the fixed exchange rate system would break down, leading to instability. 2.9

The 1960s witnessed the Triffin dilemma’s fulfilment. The US balance of payment deficit expanded, following an increase in domestic spending due to president Lyndon B Johnson’s ‘Great Society’ programme, and then to John F Kennedy’s rise in military spending for the Vietnam War. Both decisions contributed to weakened confidence in the dollar, until President Richard Nixon decided to ‘close the gold window’. On 15 August 1971, Nixon unexpectedly, and unilaterally—that is, with no prior consultation of the other participants in the Bretton Woods system—decided that foreign governments could no longer exchange their dollars into gold, and allowed the dollar to float against other currencies. Further to this, the US President decided to impose a temporary restriction on wages and prices in order to control inflation, and an import surcharge of 10 per cent to protect US products from fluctuating exchange rates. Nixon’s decision marked de facto the end of the Bretton Woods system, although further unsuccessful discussions took place afterwards to try and find an alternative arrangement to preserve the existence of a fixed exchange rates system. The Bretton Woods system formally ended with the signature of the Jamaica agreements in January 1976, which approved the dollar’s floating, and effectively opened the era of the international monetary ‘non-system’ that is still in place today.

B. The European Payments Union 2.10

In Western Europe, the question of currency convertibility dominated policy debates in the immediate post-war period. In 1945, trade between European countries was pursued only through bilateral arrangements. Any deficit had to be offset by a surplus; trade was guided by outstanding debts, and based on US dollars, which European countries lacked.

2.11

In July 1950, the Organization for European Economic Cooperation (OEEC, inherited from the Marshall Plan), agreed to create the European Payments Union (EPU).6 The EPU created a multilateral system of payments replacing the bilateral payment agreements. Only a multilateral system would be able to relaunch the European economy. Each country accumulated its deficits and surpluses with all other countries into one central account with EPU, which was debited or credited by the combined net result of all intra-European transactions. This system allowed countries not to be concerned about a deficit with some countries, since this deficit could be offset by a surplus with some other countries into the overall EPU account on a monthly basis. EPU thus removed bilateral bargaining, reduced transaction costs, and restored multilateral trade in Europe. EPU functioned from July 1950 until December 1958.

6 Barry Eichengreen, Reconstructing Europe’s Trade and Payments: The European Payments Union (Manchester UP 1993); Barry Eichengreen, Europe’s Postwar Recovery (Cambridge UP 1995).

THE EARLY EEC 17

III. An Economic Union Before a Monetary Union? The Early EEC, 1958–1968 In 1957, six States signed the Treaty of Rome creating the European Economic Community (EEC).7 The EEC set out to implement a customs union, a common/single market (that is, the abolition of barriers to the free movement of goods, people, capital, and services among its members), and the establishment of a number of common economic policies. The Treaty contained, however, no explicit reference to future monetary integration. This section looks at the early implementation of the provisions contained in the Treaty of Rome, and in particular at the economic integration/monetary integration conundrum.

2.12

A. The Treaty of Rome and economic and monetary cooperation in Europe The EEC’s first decade was primarily focused on the establishment of a customs union, and the development of some common policies, including most importantly the Common Agricultural Policy (CAP).8 The Treaty of Rome envisaged a so-called ‘transitional period’ of twelve years (Article 8) during which all quantitative restrictions to the movement of goods between EEC Members should gradually be abolished, and a common external tariff be set up. Customs union was completed nearly two years ahead of schedule, on 1 July 1968.

2.13

Monetary cooperation was present in the Treaty of Rome insofar as it regarded general economic policy-making and trade issues. No provision anticipated the creation of a future exchange rate system, let alone a monetary union. Articles 103–109 (‘Conjunctural Policy’, ‘Balance of Payments’) called for economic and monetary cooperation, in particular to avoid a disequilibrium in the balance of payments, in order to preserve the functioning of the common market. Monetary issues were thus seen from a common market perspective, rather than in their own right.

2.14

A fundamental prerequisite of monetary union is the free movement of capital. The Treaty 2.15 of Rome provided for the removal of barriers to the free movement of capital (Articles 67– 73), but in a more restrictive fashion than for the other three freedoms (goods, people, and services).9 The Treaty indeed enshrined the liberalization of capital movements but only ‘to the extent necessary to ensure the proper functioning of the common market’ (Article 67). Such a phrasing leaving some interpretative leeway to the EEC Members States represented the result of a compromise reached during the Treaty of Rome negotiations. While Germany generally supported the idea of the free movement of capital, other Member States (especially France, but also the Netherlands) considered international capital movements as potentially destabilizing the domestic economy. Consequently, full capital market

7 Alan S Milward, The European Rescue of the Nation-State (Routledge 1992). 8 Ann-Christina L Knudsen, Farmers on Welfare: The Making of Europe’s Common Agricultural Policy (Cornell UP 2009) (hereafter Knudsen, Farmers on Welfare). 9 For more details, see Age Bakker, The Liberalization of Capital Movements in Europe: The Monetary Committee and Financial Integration, 1958–1994 (Kluwer 1996); John A Usher, The Law of Money and Financial Services in the EC (OUP 2000).

18 HISTORY OF AN UNCOMPLETE EMU integration remained unpalatable to many European policy-makers at the time, until it regained more prominence in the 1980s.

B. Europeans tensions within the Bretton Woods system 2.16

The 1960s witnessed many tensed debates about economic adjustment in Europe against the backdrop of international instability.10 Three periods of adjustment stand out: the German revaluation of 1961, the Italian balance of payments crisis of 1964, and the monetary crises in France in 1968. The 1961 revaluations of the Deutsche Mark and the Dutch Guilder highlighted the weaknesses of cooperation on monetary matters within the EEC. The discussions of March 1961 indeed took place within the IMF, rather than between EEC members. In spite of agriculture prices being discussed in Brussels in the framework of the nascent CAP with its EEC partners, the German government prioritized instead negotiations in Washington. In 1964, Italy faced a balance of payments crisis following a speculative attack in March. Like the German government three years earlier, the Italian government looked for a solution outside the European framework. The Italian government sought help from the IMF and the World Bank, rather than using the existing EEC financial support mechanisms. US-based institutions showed more understanding to the Italian circumstances than Italy’s EEC counterparts, in the form of swap arrangements, credits, and repurchase of Italian government bonds.

2.17

What was the EEC’s reaction to these first two crises? The German and Italian governments’ quest for Atlantic, rather than European solutions, made plain the lack of coordination among EEC central bankers. The European Commission’s Action Programme for the Second Phase of the Community, published in October 1962, thus suggested the creation of a committee of central bank governors so as to address this lapse in EEC coordination. A Council Decision of 8 May 1964 created the Committee of Governors of the Central Banks of the EEC. More generally, the Action Programme also drew a very clear link between monetary issues, and economic union broadly speaking, making explicit the logical link between the two. The EEC commissioner for economic and financial affairs, Robert Marjolin, who largely drafted this paper, had been a constant advocate of this since 1958. Marjolin called for the further development of macroeconomic policy coordination within the EEC. This line of thinking would largely continue with his successor, the French economist Raymond Barre.11

2.18

The third crisis that stands out relates to the French franc. After the ‘events’ of 1968 in France, and the wage increases that followed, the French currency came under attack. In July 1968, central bank governors agreed to activate the EEC mutual assistance mechanism. The French government, wary of the political implications of calling for IMF assistance, 10 See Harold James, Making the European Monetary Union: The Role of the Committee of Central Bank Governors and the Origins of the European Central Bank (Harvard UP 2012) 36–88 (hereafter James, Making the European Monetary Union); Horst Ungerer, A Concise History of European Monetary Integration: From EPU to EMU (Quorum Books 1997) 57–66 (hereafter Ungerer, A Concise History of European Monetary Integration). 11 See Laurent Warlouzet, Le choix de la CEE par la France: l’Europe économique en débat de Mendès France à de Gaulle, 1955–1969 (Comité pour l’histoire économique et financière de la France 2011); and Katja Seidel ‘Robert Marjolin: Securing the Common Market Through Economic and Monetary Union’ in Kenneth Dyson and Ivo Maes (eds), Architects of the Euro: Intellectuals in the Making of European Monetary Union (OUP 2016) 51–73.

THE EARLY EEC 19 privileged an action within the European setting. This raised the question as to what kind of response could the EEC offer beyond this? After the proposals set out by Marjolin, the European Commission had maintained its activism in the monetary field. In February 1968, the Commission had presented a brief memorandum on monetary affairs in the EEC to the finance council in Rome. More importantly, the Commission published a ‘Memorandum on the co- ordination of economic policies and monetary co- operation within the Community’, known as the ‘first Barre Plan’, in February 1969. The recommendations were threefold: improve the convergence of medium-term economic policies, co-ordinate short- term economic policies, and develop a Community mechanism of monetary cooperation. Barre reiterated the core of this plan in a communication to the finance council on 4 March 1970, often referred to as the ‘second Barre Plan’. In addition, this second plan outlined the realization of economic and monetary union over a ten-year period.

C. Economic union in the 1960s 1. The coordination of national economic policies The proposals of Marjolin, and then Barre initiated decade-long discussions about the need to coordinate economic policies in a possible European currency area.12 The EEC created several committees to discuss the coordination of economic policies at the EEC level, and to try to improve their coordination. In 1960, the Council set up a Short-Term Economic Policy Committee. Following on the 1962 Commission’s Action Programme, the Council established in 1964 a Medium-Term Economic Policy Committee, and a Budgetary Committee. The aim of these committees was to improve consultation among national policy-makers at the European level. Their concrete achievements were scarce—national economic policies continued to be at times uncoordinated, contradictory, and/or potentially harmful to their neighbours’—but it fulfilled one fundamental purpose, that is, to allow policy-makers to meet. Such committees favoured the socialization of national policy-makers and allowed them to get acquainted with each other’s aims and priorities.

2.19

2. The coordination of banking legislations The regulation and supervision the European banking sector was the logical corollary to 2.20 the establishment of a fully integrated European capital market, and the specific object of one of the chapters of the so-called ‘Segré Report’. With a view to identifying obstacles to the creation of a genuine European capital market, the European Commission tasked a group of experts chaired by Claudio Segré, Director for Studies in the Commission’s Directorate- General for Economic and Financial Affairs, to study ‘the problems confronting the capital markets of the Community as a result of implementation of the Rome Treaty.’ The final report was published in 1966.13 Differences in regulation and supervision across EEC Member 12 For more details on these debates, see Alexander Nützenadel, ‘Die Bundesrepublik Deutschland, Frankreich und die Debatte über eine europäische Wirtschaftspolitik 1957–1965’ (2003) 30 Francia 71; Silvia Pochini, ‘Economic Programming in the European Community Countries (1962–1967): Elements for a Comparison’ (2008) 16 History of Economic Ideas 186; Hugo Canihac, ‘Un marché sans économistes? La planification et l’impossible émergence d’une science économique européenne (1957–1967)’ (2019) 69 Revue française de science politique 95; Clemens Kaupa, The Pluralist Character of the European Economic Constitution (Hart Publishing 2016). 13 Claudio Segré, The Development of a European Capital Market (Publication Services of the European Communities 1966).

20 HISTORY OF AN UNCOMPLETE EMU States could indeed constitute a barrier to the development of cross-border financial activities. The Segré Report stressed the need to further develop the coordination between these different systems, and thus provided the theoretical foundations to the discussions related to banking regulation and supervision in the EEC. 2.21

Following the Segré Report, several working groups and committees were created in order to improve the coordination of financial regulation and supervision at the EEC level, as well as to start the ground work for an eventual harmonization of banking legislations.14 In 1969, a group named ‘Co-ordination of Banking Legislations’ was created for that purpose. The European Commission, which took the lead of the whole enterprise, displayed great ambitions. The European Commission originally aimed at harmonizing all EEC Member States’ regulatory frameworks in one single directive. To that end, Wilhelm Haferkamp, the European Commissioner in charge of the discussions, presented a draft directive on the coordination of legislative, regulatory and administrative dispositions concerning the access to non-stipendiary activities of credit institutions and their exercise in July 1972. The Commission’s ideas concerned several issues relating to banking regulation and supervision, including authorization procedures (Section II, Articles 2–6), creation of branches (Section III, Articles 7–9), ratios (solvency, liquidity, profitability—Section IV, Articles 14– 17), deposit insurance (Article 18), activities of foreign banks in the EEC and of EEC banks abroad, credit information exchange/‘centrale des risques’ (that is, mutual information about large loans, Article 20), and winding-up procedures and withdrawal of authorization (Section VIII, Articles 24–27).

2.22

With the benefit of hindsight, the first attempts at co-ordinating European banking regulation and supervision from the late 1960s seem far-sighted. If the European Commission fell short of proposing the creation of a European supranational supervisor—such as what the ECB would become in 2014 with the introduction of the Single Supervisory Mechanism (SSM)—it did outline the other elements of today’s banking union. The Commission’s desire to harmonize banking regulations across the EEC corresponds, mutatis mutandis, to the Single Rulebook; the Commission aired the idea of a common deposit guarantee scheme; and the winding-up procedures discussed at the time correlate with the question of the resolution of failing/failed banks debated today.

2.23

Yet the situation of the 1960s and 1970s was very different from the conditions in which the Banking Union has developed in the 2010s. Capital movements in Europe in the 1960s were not fully liberalized, sovereign debt was not really an issue, and very obviously, the EEC Member States did not share a single currency. But on several occasions, members of the European Commission drew a clear link between monetary integration and banking regulation/supervision, in such a way that looks prescient of what happened in the 2010s.

2.24

3. The development of limited financial transfers of resources across the EEC Finally, the development of a modest EEC budget and the establishment of common EEC policies were part and parcel of wider debates about the role of financial transfers in a future possible Economic and Monetary Union. The budget of the EEC in the 1960s was very 14 See Emmanuel Mourlon-Druol, ‘Banking Union in Historical Perspective: The Initiative of the European Commission in the 1960s–1970s’ (2016) 54 Journal of Common Market Studies 913; Larisa Dragomir, European Prudential Banking Regulation and Supervision: The Legal Dimension (Routledge 2010).

THE FIRST ATTEMPT AT EMU: THE WERNER REPORT 21 modest, less than 0.5 per cent of the EEC’s GNI, and was exclusively based on Member States’ contributions. This system of financing limited the EEC’s autonomy, but Article 201 of the Treaty included an option to move to a system of ‘own resources’. In spite of the weakness of the EEC budget, a number of instruments were developed from 1957. The Treaty of Rome included the creation of a European Social Fund (ESF, Article 123), and of a European Investment Bank (EIB, Article 129). The ESF, the oldest of the so-called structural funds, aims at developing social cohesion by facilitating the retraining of workers. The EIB funds projects that support the EEC’s objectives by borrowing money on financial markets and lending it. The EIB therefore does not depend on the EEC budget. Finally, the Common Agricultural Policy (CAP), established in 1962, was not set out in detail in the Treaty of Rome, but was the first fully integrated EEC common policy.15 The CAP would soon take over the largest share of the EEC’s budget from 1962, peaking at 73 per cent in 1985. The logic of these different programmes was redistributive, often moving money from richer areas of the EEC to less developed ones. The amounts involved were however very small on the scale of the European economies. Increasing these amounts—in particular in order to support a possible future monetary union—was a recurrent theme of discussion but proved politically sensitive.

IV. The First Attempt at Economic and Monetary Union: The Werner Report, 1969–1974 In spite of some previous talks about the possible creation of a European economic and monetary union, the first comprehensive efforts at currency integration in the EEC were set out in the late 1960s, and did not really leave the EEC agenda until the creation of the euro.

2.25

Until the late 1960s, European policy-makers and academic economists discussed the possibility of creating an EMU in Europe, but these discussions took little concrete form. The theoretical context, and the challenges associated to sharing a single currency in Europe were increasingly clearly set out, but the political move was not yet made. The Hague summit of EEC heads of State and government that took place in 1969 placed EMU as an official objective of the EEC. After the completion of the customs union ahead of schedule in 1968, EEC leaders were in search of a new flagship project. EMU was part of the famous triptych of completion, enlargement, and deepening. EEC leaders agreed to set up an ad hoc expert group, under the chairmanship of Luxembourg’s Prime Minister Pierre Werner to draw up a plan in stages for the creation of an EMU (see Table 2.1). The Werner Committee met fourteen times between March and October 1970. Members were appointed for their roles in the various EEC institutions, but also reflected the concerns of their respective governments.16

2.26

The first concrete discussions about how to reach economic and monetary union in the EEC witnessed the emergence of two different and hotly debated strategies, known as

2.27

15 Knudsen, Farmers on Welfare (n 8). 16 Elena Danescu and Susana Muñoz, Pierre Werner et l’Europe: pensée, action, enseignements/Pierre Werner and Europe: His Approach, Action, and Legacy (Peter Lang 2015); Elena Danescu, Pierre Werner and Europe: The Family Archives Behind the Werner Report (Palgrave 2018).

22 HISTORY OF AN UNCOMPLETE EMU Table 2.1 Members of the Werner Committee1 Name

Capacity

Hubert Ansiaux

Chairman of the Committee of Governors, and Governor of the National Bank of Belgium

Gerard Brouwers

Chairman of the Conjunctural Policy Committee, and State Secretary in the Dutch Ministry of the Economy

Bernard Clappier

Chairman of the Monetary Committee, and Deputy Governor of the Banque de France

Georges Morelli

Co-ordinator of the Group’s secretariat, and Commission official

Ugo Mosca

Director-General for Economic Affairs, DG II, European Commission

Johann Baptist Schollhorn

Chairman of the Medium-Term Economic Policy Committee, and State Secretary in the Federal Ministry of the Economy

Gaetano Stammati

Chairman of the Budgetary Committee, and Treasurer-General in the Italian Ministry of the Treasury Chairman of the Group. Prime minister, and finance minister of Luxembourg

Pierre Werner 1

The final report also lists the ‘adjoints’ to the members, respectively: J Mertens de Wilmar, A Looijen, and J-M Bloch-Lainé, none for G Morelli, J-C Morel, H Tietmeyer, S Palumbo, and J Schmitz. Source: Report to the Council and the Commission on the realization by stages of Economic and Monetary Union in the Community, 1970, available at

the ‘economists’ versus ‘monetarists’ debate.17 The so-called ‘economists’ claimed that full monetary integration including the eventual creation of a single currency could only happen in the EEC once the economies of the would-be currency bloc would have fully converged. The ‘economist’ viewpoint was also dubbed the ‘coronation theory’, in that it was only after a long period of preparation that a king or a queen could be crowned. The so-called ‘monetarists’ held the opposite viewpoint. Monetarists—not to be confused with Milton Friedman’s brand of monetarism—argued that the introduction of a single currency in the EEC would force the economies of its Member States to converge, and hence make the currency area viable. The monetarist viewpoint was also nicknamed the ‘Nike approach’, in that the best way to implement monetary union was to ‘just do it’. West Germany, the Netherlands, and Denmark are often portrayed as economists; France, Italy, and the European Commission are often described as monetarists. Yet, positions were most of the time blurred in policy-making debates, as both economists and monetarists generally held valid arguments. There was little point in making a monetary union function properly if the economies of its members were not similar enough; and there was little hope that these economies would naturally converge without some form of constraining mechanism. Since the 1960s/1970s however, the discussions about the creation of EMU revolved around these two poles

17 On this famous controversy, see for instance Ivo Maes, ‘On the Origins of the Franco-German EMU Controversies’ (2004) 17 European Journal of Law and Economics 21.

THE FIRST ATTEMPT AT EMU: THE WERNER REPORT 23 of economic thinking. The improvement of EMU since 1999 has also arguably followed the same path, under different guises.18 The final report of the Werner committee was made public on 8 October 1970.19 The report set out an EMU to be implemented in three stages by 1980, and adopted a so-called parallelist approach, aimed at combining and reconciling some of the features dear to the ‘economists’, and some of the features dear to the ‘monetarists’. The report however provided a detailed roadmap for the first stage only, and did not make detailed proposals regarding the political institutional architecture. One striking difference with the later Delors Report—to which the Werner Plan is often compared—is the emphasis on economic union. The Werner report advocated the development of common EEC policies, the improvement of greater coordination among national budgets, and some degree of tax harmonization. On 22 March 1971, after intense discussions, the Council and the representatives of the EEC Member States eventually adopted a ‘resolution on the achievement by stages of EMU’.20 This set in motion a process towards the implementation of an EMU.

2.28

The collapse of the Bretton Woods system examined above however severely impacted the implementation of the original plan. Just as international economic and monetary instability surged, the original strong diverging interpretations about how to approach the making of EMU among EEC Member States resurfaced. European currency relations had lost their international monetary cocoon. The end of the Bretton Woods system made the implementation of the Werner Plan both more difficult, and more pressing. The Werner Plan had not been devised to be implemented in a world of fluctuating currencies, and most European policy-makers did not foresee that state of affairs. But the fluctuation of EEC currencies, and the tensions that arose in the European adjustment process, invited European policy-makers to reflect on ways to reintroduce currency stability in the EEC.

2.29

Three concrete realizations came out of the Werner Plan. On 21 March 1972, the Council decided to reduce the fluctuation margins between EEC currencies to 2.25 per cent. This currency arrangement came to be nicknamed as the ‘snake’. The long-term idea remained to eliminate fluctuation margins. The European Monetary Cooperation Fund (EMCF) was created on 3 April 1973. The EMCF mostly served for accounting purposes in the operation of the EEC’s exchange rate system, rather than a substantive policy role, that remained in the remit of the Committee of Governors. Finally, the further development of macroeconomic policy coordination from 1974 was a direct part of the implementation of the Werner Plan. It is true that these efforts were consciously building on, and reforming, the framework set out by the European Commission under Marjolin, and then Barre, but economic policy coordination was now explicitly part and parcel of achieving the goal of EMU. In February 1974, the Council took a decision on ‘the attainment of a high degree of convergence of the economic policies of the Member States of the EEC’. The Council explained: ‘[T]‌here can

2.30

18 Emmanuel Mourlon-Druol, ‘Don’t Blame the Euro: Historical Reflections on the Roots of the Eurozone Crisis’ (2014) 37 West European Politics 1282 (hereafter Mourlon-Druol, ‘Don’t Blame the Euro’). 19 Pierre Werner and others, ‘Rapport au Conseil et à la Commission concernant la réalisation par étapes de l’union économique et monétaire dans la Communauté (Rapport Werner)’ Luxembourg, 8 October 1970; accessed 5 February 2020. 20 Council and Representatives of the Governments of the Member States, ‘Resolution of 22 March 1971 on the attainment by stages of economic and monetary union in the Community’ [1971] OJ C28/1.

24 HISTORY OF AN UNCOMPLETE EMU be no gradual attainment of Economic and Monetary Union unless the economic policies pursued by the Member States henceforth converge and unless a high degree of convergence is maintained.’21 With this decision, the Council created an Economic Policy Committee (EPC). The EPC replaced the three pre-existing committees (Short-Term Economic Policy Committee, Medium-Term Economic Policy, and Budgetary Policy Committee) focusing on the matter. The EPC consisted of four representatives of the Commission and four representatives of each Member State, and the Commission provided the EPC secretariat. The very different economic policy courses followed by the EEC Member States amply show that the 1974 Council Decision was not properly implemented. As Marjolin fatalistically noted in his study on EMU published in 1975: ‘The coordination of national policies is a pious wish which is hardly ever achieved in practice.’22 2.31

Financial transfers of resources in the EEC remained limited to the mechanisms already in place, namely the CAP, the ESF, and the EIB. An important development occurred however, with the creation of the system of so-called ‘own resources’ in 1970. Instead of being based on Member State contributions, the EEC budget would be derived from three types of resources that the EEC was generating, namely, customs duties, agricultural levies, and a share from each Member State based on the Value Added Tax (VAT).23 If realizations did not match the ambitions, there was no shortage of thinking. In 1974, two important studies were commissioned—the Marjolin, Tindemans and the MacDougall Reports, detailed below—highlighting that European policy-makers kept thinking about the development of EEC economic integration in the perspective of the making of a monetary union.

V. European Exchange Rates Coordination in a Globalizing World, 1975–1978 2.32

In early 1974, EEC Member States unofficially abandoned the implementation of the Werner Plan, and with it the ambitious idea to build an EMU by 1980. Instead, European policy-makers focused on mere exchange rate coordination, first through the snake, and then through the creation and development of the European Monetary System. Behind the scenes, intense debates carried on as to whether economic and monetary union was an appropriate objective for the EEC, and if so how it should be pursued.

A. Navigating international and European currency instability 2.33

The perturbations of the international monetary regime heightened tensions among EEC Member States, and revived the disagreements about how to reach EMU. But the Werner Plan’s child—the snake—remained at centre stage in European economic and monetary

21 Council Decision 74/120/EEC of 18 February 1974 on the attainment of a high degree of convergence of the economic policies of the Member States of the European Economic Community [1974] OJ L63/16. 22 Commission, ‘Report of the Study Group “Economic and Monetary Union 1980” ’ (Brussels, March 1975); accessed 5 February 2020. 23 Brigid Laffan, The Finances of the European Union (Macmillan 1997).

EUROPEAN EXCHANGE RATES COORDINATION 25 policy debates. Until the creation of the European Monetary System (EMS), European policy-makers indeed questioned the need to maintain, improve, or change the snake’s functioning. Whatever the outcome of European policy-makers’ discussions, the snake remained the attractive point of the EEC’s economic and monetary policy-making. It became however gradually clear in the first-half of 1974 that the implementation of the Werner Plan halted. The Council decision on economic convergence adopted as part of the Werner initiative in February 1974 was the swan song. The French franc had already left the snake— the Werner Plan’s tool for currency integration—a month earlier, in January 1974. Prospects of a real implementation of the report looked therefore slim. The plan was unofficially discarded, but remained a mantra in policy debates. For example, during its inaugural meeting the Delors Committee used the Werner Report as the starting point for its discussions as this report was the last official blueprint produced for EMU.

1. The impossible improvement of the snake The period between the abandonment of the implementation of the Werner Plan and the creation of the EMS witnessed the multiplication of proposals aimed at improving the ‘snake’, or introducing a single currency in Europe altogether.24 Reforming the functioning of the snake was the goal of many EEC countries—predictably most of the non-snake members, but not only. The problems in the functioning of the snake arose from the fact that the burden of adjustment always fell on the weaker currency countries. These countries—France, Italy, the UK—considered that keeping their currency inside the margins of fluctuation of the snake could prove too difficult because of the appreciation of the leading currency, the Deutsche Mark. They argued that this burden should be more equally spread among the Member States participating in the snake.

2.34

First to propose a reform of the snake was the French government, in 1974. The so-called ‘Fourcade Memorandum’, presented by the French Finance Minister Jean-Pierre Fourcade, proposed to organize the EEC exchange rate system around a reformed European Unit of Account, that would be made of a basket of EEC currencies. This new organization was meant to remedy the weaknesses of the snake as it worked until then, namely, to impose the burden of adjustment on weaker currency countries. The Fourcade Memorandum held that if exchange rates were determined with respect to an EUA-basket, the burden of adjustment would be spread more fairly as it would take into account the respective depreciation and appreciation of all currencies. If the West German government—and more generally the snake members—staunchly opposed the Fourcade memorandum, the French proposal however foreshadowed a key feature of the EMS negotiations that would take place four years later.

2.35

A wealth of other proposals for EEC monetary reform from many different EEC Member States and institutions reflected the centrality, and sensitivity, of the question of the burden of adjustment in the EEC exchange rate system. Such proposals put forward in the course of the second half of the 1970s included the proposals of the Dutch Finance Minister (and later first president of the ECB) Wim Duisenberg in 1976 and 1977 on target zones, the initiative

2.36

24 For a detailed analysis of each of these proposals, see Emmanuel Mourlon-Druol, A Europe Made of Money: The Emergence of the European Monetary System (Cornell UP 2012) chs 2–4 (hereafter Mourlon-Druol, A Europe Made of Money).

26 HISTORY OF AN UNCOMPLETE EMU of Belgian Finance Minister Gaston Geens in 1977 to increase monetary support, and the plan of the Belgian Chairman of the Monetary Committee Jacques Van Ypersele in 1978 to improve European monetary cooperation. Finally, President of the European Commission Roy Jenkins delivered a speech calling for monetary union in Florence on 27 October 1977.25 Jenkins’ lecture allowed re-opening the debate, and setting in motion public discussion about the benefits and drawbacks of monetary union in Europe.

2.37

2. The creation of the EMS The worsening of the international context led the West German government to become more open towards the finding of a European monetary counter-reaction.26 From 1977, the fall of the dollar started worrying Bonn.27 The West German government was concerned that the Deutsche Mark would start appearing as a refuge value, and as a consequence, that it would harm its exports. West German Chancellor Helmut Schmidt however realized that West Germany, alone, would not be able to provide a reaction on the international monetary stage. A co-ordinated reaction at EEC level was needed, in order to counteract more effectively US macroeconomic policy.

2.38

In the meantime, the French government had become more amenable to running a consistent stability-oriented economic policy. The appointment of former economics professor and European Commissioner Raymond Barre as French Prime Minister in 1976 considerably reassured the West German government. Barre decided to implement a time-consistent strategy aimed at fighting inflation. Barre and Giscard rather unexpectedly won the general elections in 1978, which opened the door to a continued stable working relationship with the West German government.

2.39

Schmidt took the lead in proposing a new European monetary arrangement. Schmidt’s initiative was later reframed and embedded within a Franco-German context. In early 1978, the West German Chancellor started displaying his willingness to move on the European currency front. In a meeting with British Prime Minister James Callaghan in March, Schmidt first aired his plan, namely, ‘to create another European snake, but of a different kind’.28 Once Giscard and Schmidt agreed to move on the matter, they tasked a group of three experts to work out the details of the new exchange rate system. The group was composed of the governor of the Banque de France, Bernard Clappier, a close advisor to Schmidt, Horst Schulmann, and the second Permanent Secretary of the Treasury, Ken Couzens. Couzens eventually dropped out of the group, as it became increasingly clear that the British government was not keen to join the system, although it lost an opportunity to shape its creation. The text produced by the group became the basis of discussion in the next European Council held in Bremen in July 1978, and of what would be later known as the so-called ‘Bremen Annex’, that is, the draft of the new EEC exchange rate system that was under discussion in the second half of 1978. After intense negotiations, the European Council agreed

25 Roy Jenkins, ‘Europe’s Present Challenge and Future Opportunity’ (Lecture at European University Institute in Florence, 27 October 1977) accessed 5 February 2020. See also N Piers Ludlow, Roy Jenkins and the European Commission presidency, 1976–1980: at the heart of Europe (Palgrave 2016). 26 Mourlon-Druol, A Europe Made of Money (n 24) chs 5–8; Peter Ludlow, The Making of the European Monetary System (Butterworths 1982). 27 Dimitri Grygowski, Les États-Unis et l’unification monétaire de l’Europe (Peter Lang 2009). 28 Quoted in Mourlon-Druol, A Europe Made of Money (n 24) 164–65.

EUROPEAN EXCHANGE RATES COORDINATION 27 to set up the EMS, initially among only six EEC members (Belgium, Denmark, France, Germany, Luxembourg, and the Netherlands), later followed by Ireland, and Italy, but not by the UK which declined to join. The EMS agreed upon in 1978, and entering into force in 1979, bore a striking resemblance with the snake. The fluctuation margin remained identical at 2.25 per cent, and central rates could be adjusted after consultations. The EMS also allowed for wider fluctuation margins at 6 per cent, which Italy adopted. A divergence indicator was introduced, that was able to pinpoint at the currency that was diverging, that is, reaching 75 per cent of its maximum spread. But the identification of the diverging currency could only lead to consultations among central banks, and no automatic action as suggested during the negotiations, which rendered the measure largely meaningless. The creation of a European Monetary Fund was envisaged within two years of the creation of the EMS, in spite of strong scepticism, but would eventually not be realized.

2.40

B. Economic union in an impasse Discussions about the improvement of European economic integration to cope with the consequences of exchange rate coordination, and even the possible creation of a single currency, remained on the EEC agenda throughout the 1970s.

2.41

1. The difficult strengthening of macroeconomic coordination Tentative economic policy coordination remained however confined to the Franco- 2.42 German bilateral level. The EPC created in 1974 was only a consultative committee. Orientations of economic policy were intensely discussed in the European Council, also created in 1974, and were indeed one of the primary functions of the new EEC leaders’ regular meetings. But these discussions gave birth to little concrete co-ordinated economic action.29 EEC heads of State and government often disagreed on the root causes of current problems, or simply did not understand them, and disagreed on the actions to be implemented. The situation momentarily changed in the course of the second-half of the 1970s, when French Prime Minister Barre implemented a time-consistent stability- oriented economic policy, which lasted until the end of Giscard’s presidential mandate in 1981. The German government—and Schmidt in particular—placed considerable trust in Barre and his government’s economic policy. This renewed trust between France and Germany led to a clear rapprochement of both countries, and facilitated the agreement on the creation of the EMS. This renewed Franco-German entente also gave birth to an attempt at improving the economic and financial cooperation between the two countries. In 1977, both governments agreed to further intensify their economic cooperation in the framework of the Élysée Treaty. Nothing concrete came out of these meetings, but they signalled that economic policy coordination was being bilateralized rather than communautarized.

29 Emmanuel Mourlon-Druol, ‘Steering Europe: Explaining the Rise of the European Council, 1975–1986’ (2016) 25 Contemporary European History 409.

28 HISTORY OF AN UNCOMPLETE EMU 2.43

2.44

2.45

2. Banking regulation/harmonization at a standstill In the field of banking regulation and supervision, the Council adopted a directive in 1977 on the ‘coordination of laws, regulations and administrative provisions relating to taking up and pursuit of the business of credit institutions’.30 The banking directive was a modest development in comparison to the ambitions of the late 1960s. The 1977 Directive fell short of actual banking harmonization, but provided an important step introducing some ideas, and importantly creating the Banking Advisory Committee (BAC). This committee could not agree on harmonizing regulations on its own, but represented an important forum for regulators and supervisors to meet on a regular basis within an explicit EEC framework. Until then, the points of reference were the more informal Groupe de Contact, created in 1972 with a European scope, and the Basel Committee on Banking Supervision, hosted at the Bank for International Settlements, created in 1975 with a global reach.31 3. Financial transfers and the creation of the regional fund The issue of financial transfers of resources from richer to less developed areas of the EEC came through two channels, namely, policy realizations, and expert reports. In addition to the ESF, a new fund was created in 1975, the European Regional Development Fund (ERDF). The establishment of the ERDF was partly a consequence of EEC enlargement, as not only Italy but also Ireland and the UK pushed for developing mechanisms aimed at reducing economic disparities in the EEC. A few years later, in 1978, the EMS negotiations revived debates about financial transfers. The EMS negotiations were effectively split into two parts. The first and most famous one focused on the new exchange rate system to be set in place. The second one, dubbed the ‘concurrent studies’, centred on the ways in which the participation of weaker currency countries in the new system could be supported through transfer of resources from richer Member States. The Irish, Italian, and UK governments supported the development of such transfers, and explained that their participation in the EMS—an exchange rate system dominated by a strong currency, the Deutsche Mark—would be very difficult for them without economic support. The debates during the concurrent studies were revealing, but their outcome minimal. Instead of a comprehensive EEC framework, or more simply an increase of the existing funds, the only policy results were bilateral agreements, and interest-free EIB loans. Academic and expert thinking about financial transfers remained however very vivid. Three important reports were published in the course of the second half of the 1970s, and related to this issue: the Tindemans, Marjolin, and MacDougall Reports. In December 1974, the EEC leaders meeting at the Paris summit commissioned the Belgian Prime Minister Leo Tindemans to write up a report defining ‘what was meant by the term “European Union” ’.32 Tindemans called for reviving EMU discussions, and for accepting a two-speed Europe in which some members would proceed to faster and deeper integration, while others would not. In dealing with EMU, Tindemans called for greater economic integration in support 30 First Council Directive 77/780/EEC of 12 December 1977 on the coordination of the laws, regulations, and administrative provisions relating to the taking up and pursuit of the business of credit institutions [1977] OJ L322/30. 31 Catherine R Schenk and Emmanuel Mourlon-Druol, ‘Bank Regulation and Supervision’ in Youssef Cassis, Richard S Grossman, and Catherine R Schenk (eds), The Oxford Handbook of Banking and Financial History (OUP 2016) 395–419. 32 Leo Tindemans, ‘European Union Report to the European Council’ (Bulletin of the EC, Supplement 1/76).

THE DELORS REPORT AND THE MAASTRICHT TREATY 29 of monetary integration. In 1975, the Marjolin Report mentioned above called for the development of a sizeable EEC budget, and in particular for the creation of a Community unemployment insurance. In order to explore more specifically the role of public finance in European integration, the Commission asked a group of economists chaired by Donald MacDougall to study the issue. The expert group published its findings in the so-called ‘MacDougall Report’ in 1977.33 This report remained famous for advocating a substantial increase in the EU budget. Noting that the EEC budget represented 0.7 per cent of the EEC GDP in 1977, the report called for its increase in order for public finance to sustain the monetary union. The report mentioned that at a federal stage, the budget could reach up to 20–25 per cent of GDP as in other federations. The different studies, if most often headed to the filling cabinet, reflected a concern about the economic conditions necessary to sustain participation in the EEC exchange rate system, and, a fortiori, in a possible monetary union. They foreshadowed many of the debates of the 1980s and 1990s on the creation of the single currency.

2.46

VI. The Advent of a Lopsided Union: The Delors Report and the Maastricht Treaty, 1979–1992 A. The working of the European Monetary System, 1979–87 From a political standpoint, the EMS provided a stronger commitment from which departing would be difficult. From an economic point of view, the EMS constituted a framework for closer and more frequent consultations among policy-makers.34 From 1981, French domestic political economy decisions strongly affected the functioning of the EMS. Francois Mitterrand, elected French president in May 1980, had promised an expansionary economic policy. In hindsight, the 1981 economic stimulus would however only be half the stimulus that the Chirac government triggered in 1975. But politically the 1981 programme was more symbolic, lasted longer, and was part of a broader debate within the French left that would leave its mark on French political life until the present day. In March 1983, after weeks of intense debate, Mitterrand chose to prioritize a stability-oriented economic policy, and continued membership of the EMS.35 This reinforced the French commitment to economic and political cooperation within the EEC.

2.47

The objective to establish a single market in the EEC by 1992, enshrined in the 1986 Single European Act (SEA), posed a challenge to monetary policy-making. Free movement of capital was part of the 1992 programme. As a consequence, all capital controls within the EEC were gradually removed between 1986 and 1990.36 Could the single market with unrestricted capital movements function without a common monetary policy? This was the

2.48

33 Commission, ‘Report of the Study Group on the Role of Public Finance in European Integration’ (Brussels, April 1977). 34 Ungerer, A Concise History of European Monetary Integration (n 10) 169–98; Laurent Warlouzet, Governing Europe in a Globalising World: Neoliberalism and its Alternatives following the 1973 Oil Crisis (Routledge 2017) ch 7. 35 Vincent Duchaussoy, La Banque de France et l’Etat, de Giscard a Mitterrand: enjeux de pouvoir ou resurgence du mur d’argent? 1978–1984 (L’Harmattan 2011). 36 Rawi Abdelal, Capital Rules: The Construction of Global Finance (Harvard UP 2007).

30 HISTORY OF AN UNCOMPLETE EMU difficult question at the heart of many EEC policy debates from the early 1980s until the Treaty of Maastricht.37 Some argued for a ‘hardening’ of the EMS: exchange rates could be stable in a single market if there was a high degree of convergence. Some argued that free trade, full capital mobility, fixed or managed exchange rates, and monetary policy autonomy could not co-exist, and that one had to give. This was the view put forward by the Italian economist Tommaso Padoa-Schioppa in his famous ‘inconsistent quartet’. A monetary union would need to complement the single market. The debate was not settled, although the fear of speculative attacks against the EMS—as the 1992–93 crises would later show—tended to highlight the vulnerability of the EMS in a world of free capital movements.

B. The Basle-Nyborg agreement (1987) 2.49

After nearly ten years of experience in the functioning of the EMS, EEC finance ministers and central bankers were looking for ways to strengthen the EEC’s exchange rate system. In 1987, the Committee of Governors set out some elements for discussion, many of which had been discussed since the creation of the EMS, but never formalized. The Committee of Governors, meeting in Basle, produced a report on 8 September 1987; and the Council of finance ministers endorsed it on 12 September at a meeting in Nyborg. This came to be known as the Basle-Nyborg Agreement, and it contained two main elements related to surveillance, and intra-marginal interventions.38 Under the Basle-Nyborg Agreement, the Monetary Committee and the Committee of Governors, on the basis of their indicators and projections, would intensify surveillance in order to underscore possible policy inconsistencies among EMS countries. Intra-marginal interventions were not explicitly included in the original EMS agreement. Such interventions allowed to try and anticipate a currency reaching its fluctuation limit, and contribute to prevent speculation. Some further measures were adopted, including encouragement for less frequent and smaller realignments, and an extension of the basic time limit of the Very Short Term Financing (VSTF).

C. The Delors Committee and the Delors Report, 1988–89 2.50

The Hannover European Council on 27–28 June 1988 agreed to appoint a Committee chaired by president of the Commission Jacques Delors to reflect on how a monetary union could be achieved in the EEC.39 The Delors Committee, known formally as the Committee for the Study of Economic and Monetary Union, met seven times between September 1988 and April 1989, and was composed of nineteen members, including all EEC central bankers 37 James, Making the European Monetary Union (n 10) ch 6; Tommaso Padoa-Schioppa, The Road to Monetary Union in Europe: The Emperor, the Kings, and the Genies (OUP 2000). 38 James, Making the European Monetary Union (n 10) 222–28. 39 Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union (OUP 1999) (hereafter Dyson and Featherstone, The Road to Maastricht); James, Making the European Monetary Union (n 10).

THE DELORS REPORT AND THE MAASTRICHT TREATY 31 Table 2.2 Members of the Delors Committee Name

Capacity

Frans Andriessen

Commissioner in charge of agriculture

Miguel Boyer

Independent expert, former Spanish finance minister

Demetrios J. Chalikias

Governor of the Bank of Greece

Carlo Azeglio Ciampi

Governor of the Bank of Italy

Maurice F. Doyle

Governor of the Central Bank of Ireland

Willem F. Duisenberg

President of the Central Bank of the Netherlands

Jean Godeaux

Governor of National Bank of Belgium

Erik Hoffmeyer

Governor of the Central Bank of Denmark

Pierre Jaans

Governor of the Monetary Institute of Luxembourg

Alexandre Lamfalussy

General Manager of the Bank for International Settlements

Jacques de Larosière

Governor of the Bank of France

Robert Leigh-Pemberton

Governor of the Bank of England

Karl Otto Pöhl

President of the Bundesbank

Mariano Rubio

Governor of the Central Bank of Spain

José Alberto Tavares Moreira

Governor of the Central Bank of Portugal

Niels Thygesen

Danish economics professor

Gunter Baer Tommaso Padoa-Schioppa

Rapporteur Rapporteur

Source: Report on economic and monetary union in the Community, 1989, available at

(see Table 2.2).40 This was an important departure from similar earlier groups, which often involved finance ministers and other monetary experts, who were assumed to be more easily in favour of European monetary integration. Central bankers were supposed to be more conservative and critical of monetary union, and the eventual outcome of the discussions looked grim, with the German President of the Bundesbank Karl-Otto Pöhl and the Governor of the Bank of England Robert Leigh-Pemberton aboard. Delors’ innovation was to bind them into the process of discussion, rather than side-lining them as was the case until then. The Delors Committee produced a detailed plan to achieve EMU in three stages, unanimously endorsed by the members of the group, and which inspired the Maastricht Treaty (see Table 2.3). The first stage involved the strengthening of economic and monetary cooperation. Stage two focused on introducing the new European System of Central Banks that would take over the EMCF and the Committee of Governors. Stage three entailed the

40 James, Making the European Monetary Union (n 10) 210–323.

2.51

32 HISTORY OF AN UNCOMPLETE EMU Table 2.3 The three stages for the completion of Economic and Monetary Union in the Maastricht Treaty Stage 1 1 July 1990–31 December 1993

Improvement of economic convergence Cooperation among EEC central banks increased Free movement of capital completed Free use of the ECU

Stage 2 1 January 1994–31 December 1998

Creation of the European Monetary Institute Independence of national central banks to be achieved during this stage Member State’s efforts towards convergence further increased

Stage 3 1 January 1999

Transition to this stage granted if Treaty of Maastricht’s criteria fulfilled Introduction of the euro bills and coins Creation of a European System of Central Banks and of the European Central Bank to conduct a single monetary policy Entry into force of the Stability and Growth Pact Exchange rates fixed irrevocably

Source: ECB, available at

irrevocable fixing of parities. The Delors committee however refrained from establishing a timetable for completion, as well as from setting out detailed conditions for economic convergence between Member States, as it considered that this was a political decision that went beyond the committee’s remit. 2.52

The members of the Delors Committee did tackle issues related to ‘economic union’ broadly speaking in their discussions—in particular economic policy coordination and banking supervision—but the final Delors Report focused essentially on the monetary integration dimension. This was again mostly due to the fact that the central bank governors considered that economic issues were beyond their competence remit.

2.53

The Delors and Werner Reports, being the two most famous blueprints for EMU, call for a comparison. The nature of membership is the first obvious difference. The Werner committee was made up of the presidents of the EEC institutions and committees involved in economic and monetary policy-making, while the Delors Committee was composed by central bankers only, reflecting Delors’ ambition to bind them in to the process through their participation to the committee and the agreement on the final report. The second oft- quoted difference relates to the weight given to the ‘E’ in ‘EMU’. The Delors Report mentioned economic coordination in more detail than what would eventually make its way to the Maastricht Treaty. But this was in no way comparable to the substance of the Werner Report, which contemplated a greater centralization of economic policy coordination in the EEC. In addition, the Werner Report clearly envisaged the consultation of social partners in EMU.

THE DELORS REPORT AND THE MAASTRICHT TREATY 33 Table 2.4 Convergence criteria for joining the euro1 Price stability

For a period of one year before the examination, inflation rate (consumer price index) should not exceed 1.5 per cent above that of the three lowest rates of euro area members.

Government finances

Deficit should not exceed 3 per cent of GDP and debt should not exceed 60 per cent of GDP.

Exchange rate stability

Respect the normal fluctuation margins of the ERM without severe tensions for at least two years before the examination. Candidate should not have devalued within that period. Average nominal long-term interest rate (long-term government bonds or comparable securities) should not exceed by more than 2 per cent points the rate of the three best performing Member State in terms of price stability during one year before the examination.

Convergence of interest rates

1 Protocol No 13 on the Convergence Criteria [2008] OJ C115/282.

D. German reunification, the Intergovernmental Conference (IGC), and the Treaty of Maastricht, 1989–91 At the time when EEC leaders agreed to revive discussions about monetary integration in Europe, and appointed the Delors Committee, no one could anticipate German reunification and the end of the cold war. Even in April 1989, when the group finalized and agreed on its report, the fall of the Berlin Wall was not envisaged, and even less the unification of West and East Germany. Once this process was set in motion, the French government in particular pressed for firm dates to convene an intergovernmental conference on EMU, and bind a reunified Germany into the EEC.

2.54

The move to an EMU indeed required treaty change, and treaty change required the convening of an intergovernment conference (IGC).41 The European Council in Strasbourg in December 1989 decided to convene an IGC. The IGC began in December 1990, the Maastricht Treaty was eventually signed on 7 February 1992, and the Treaty entered into force on 1 November 1993. Two IGCs operated in parallel: one on EMU, the other on political union. The IGC on EMU started its discussions on a solid basis, that of the Delors Report. The Maastricht Treaty essentially incorporated the substance of the Delors Report.42

2.55

The Treaty of Maastricht set out four criteria for joining the euro, known as the ‘convergence criteria’ (see Table 2.4). These four criteria related to price stability, government finances, exchange rate stability, and convergence of interest rates.

2.56

While the Treaty of Maastricht outlined well-defined criteria for joining EMU, it was however not clear how these criteria would be upheld once a Member State would join the single currency. The Stability and Growth Pact (SGP) agreed upon in 1997 was meant to

2.57

41 Lorenzo Bini-Smaghi, Tommaso Padoa-Schioppa, and Francesco Papadia, ‘The Transition to EMU in the Maastricht Treaty’ (1994) Essays in International Finance No 194. 42 Dyson and Featherstone, The Road to Maastricht (n 39) ch 16. See the annex of James, Making the European Monetary Union (n 10) for a detailed comparison of the two texts.

34 HISTORY OF AN UNCOMPLETE EMU address this concern.43 The SGP sought to stress economic stability—a chiefly North European concern—by introducing a coordination and surveillance procedure of national budgets, while it promised to do so without damaging growth prospects—a predominantly Southern European concern. If the SGP rules were not respected, Member States would face sanctions.

E. The ERM crises: September 1992–August 1993 2.58

Just as European currency relations seemed to have stabilized very well since the Basle- Nyborg Agreement, the whole European arrangement appeared to fall apart. Between 1987 and September 1992, no realignment occurred within the Exchange Rate Mechanism (ERM).44 The crises of 1992 and 1993 in the ERM thus called into questions some assumptions that were held in Europe at the time, related in particular to what European monetary cooperation achieved, and what its future would be.45

2.59

The Danish rejection of the Maastricht Treaty triggered the crisis (see Table 2.5 for a timeline of the crisis). The Danish voters’ unexpected negative vote on 2 June 1992 in the referendum cast doubt on the eventual entry into force of monetary union. On 3 June 1992, Mitterrand announces the holding of a referendum on the Maastricht Treaty in France. Polls were initially very favourable to a ‘yes’ win, but they became ‘too close to call’ over the summer. Further to this bleak context, the economic consequences of German reunification were proving problematic for other European countries. The Bundesbank was maintaining high interest rates to counter inflation, which in turn impacted the policies of the other EEC Member States, and mounted the pressures for realignments within the ERM.

2.60

This political and economic context provided a propitious backdrop for currency speculation to flourish. The rapid integration of international financial markets facilitated its unfolding. In the summer of 1992, the UK Pound Sterling and the Italian Lira came under pressure of speculative attacks, while the Bundesbank faced significant financial inflows partly due to the weakening of the US dollar. There was considerable debate as to whether the pound had joined the ERM at an appropriate level in October 1990. On the so-called Black Wednesday, 16 September 1992, the pound sterling came under heavy speculative attacks (betting that the pound was overvalued), in particular from Quantum Fund, owned by George Soros, and registered in the Cayman Islands. In spite of its interventions, the Bank of England could not counter the speculation, given the sheer financial volumes involved. The pound left the ERM, and Soros won the nickname of ‘the man who broke the Bank of England’.

43 Martin Heipertz and Amy Verdun, Ruling Europe: The Politics of the Stability and Growth Pact (Cambridge UP 2010). 44 One partial exception is when the Italian lira joined in 1990 the narrower band of fluctuation. 45 Olivier Feiertag, ‘Les banques centrales et les États dans la crise de change de 1992-1993: le baptême de la monnaie unique’ in Olivier Feiertag and Michel Margairaz (eds), Les banques centrales et l’État-nation/The central banks and the Nation-State (Les Presses de Sciences Po 2016) 617–44; James, Making the European Monetary Union (n 10) 324–81; David Marsh, The Euro: The Politics of the New Global Currency (Yale UP 2009).

Conclusions 35 Table 2.5 Timeline of the ERM crises: 1992–93 8 October 1990

British pound sterling joins the ERM

7 February 1992

Signature of the Maastricht Treaty

2 June 1992

Danish voters reject the Treaty of Maastricht (50.7 per cent against, 49.3 per cent in favour)

18 June 1992

Irish voters approved the Treaty of Maastricht (69 per cent in favour, 31 per cent against)

12–13 September 1992

devaluation of the lira and interest rate cuts in Germany, Belgium, and the Netherlands

14 September 1992

Italian government decides to devalue the lira by 7 per cent

16 September 1992

‘Black Wednesday: heavy speculation against the pound

17 September 1992

Pound and lira leaving the ERM. After speculative attacks, devaluation of the Spanish peseta.

20 September 1992

French voters approve the Treaty of Maastricht (51 per cent in favour, 49 per cent against)

29–30 July 1993

Severe pressure on the French franc and several other ERM currencies. Situation increasingly untenable. Crisis meeting of the Monetary Committee in Brussels. Agreement to wider bands of 15 per cent

31 July–1 August 1993 Source: Author.

International financial markets seemed to have calmed down in early 1993, until pressure mounted again, this time against the French Franc. Poor unemployment figures raised speculation about the future of French monetary policy. The French Franc came under severe pressure in late July, but the crisis was in fact wider and involved the Belgian Franc, the Danish Krone, the Spanish Peseta, the Portuguese Escudo, and the Deutsche Mark. A crisis meeting of the Monetary Committee took place in Brussels on 31 July to 1 August 1993. After tensed exchanges, the participants agreed to widen the EMS margins to 15 per cent, with a view to effectively sterilize speculation.

2.61

VII. Conclusions The so-called crisis of the euro area that started in 2008–09 made plain the weaknesses of the EMU construct as set out in the 1992 Maastricht treaty, and witnessed throughout the history of European economic and monetary cooperation since the 1957 Treaty of Rome. It is true that European policy-makers did not anticipate a sovereign debt crisis in the preparations for the European single currency. But they did discuss most of the other issues currently at stake, including financial transfers, banking regulation and supervision, and macroeconomic cooperation. Policy proposals such as the introduction of a European unemployment benefit and the creation of a European-wide deposit insurance, debated in the 2010s and after, were already aired in the 1970s. Debates about EMU since the 1950s witnessed frequent, regular, and lucid contributions, in spite of incomplete and sometimes inadequate policy decisions.

2.62

36 HISTORY OF AN UNCOMPLETE EMU 2.63

The monetary side of EMU was also arguably not fully developed by the Maastricht Treaty. The role of the ECB was not yet fully comparable with that of other important central banks in the world, mostly due to the fact that the ECB could not act as a lender of last resort for the euro area. The different operations that the ECB undertook since 2010 (Securities Market Programme, Long-Term Refinancing Operations, Outright Monetary Transactions, and more recently quantitative easing) show that its operating model has moved closer to traditional central banking functions.

2.64

More broadly, EMU debates witness very striking similarities throughout time.46 The question of the role of dollar in the international system and its impact on the EEC constitutes a first perennial feature of policy debates between 1957 and 1992. A more sophisticated version of this debate relates to how the development of a European regionalism could contribute to the reform of the international monetary system.

2.65

The debate about the institutional setting that would allow the development of an economic union is a second regular feature of European debates. Should the institutional set-up be more intergovernmental or more supranational? Should the EEC move to a full political union before introducing a single currency? With the Treaty of Maastricht, European policy-makers did not just ignore the economic theories related to the Optimum Currency Area discussions. European policy-makers also disregarded the idea according to which money was to be issued by a State. Georg Friedrich Knapp, in the nineteenth century, famously developed that theory, which has been taken on by contemporary economists.47 The development of the European Union in response to the euro area crisis of the 2010s suggests that Europeans are developing their own form of Union, which still falls short of being a State, and remains instead in-between a federal and an intergovernmental polity.

46 Mourlon-Druol, ‘Don’t Blame the Euro’ (n 18). 47 Georg Friedrich Knapp, The State Theory of Money (Macmillan and Co 1924); Paul de Grauwe, ‘Design Failures in the Eurozone: Can They Be Fixed?’ (2013) LEQS Paper No 57.

3

THE ECONOMICS OF EUROPEAN MONETARY INTEGRATION The Pros and Cons of EMU Membership Donato Masciandaro and Davide Romelli

I. Introduction II. The Economics of European Monetary Integration

3.1 3.5

III. The Political Economy of European Monetary Integration IV. Conclusion

3.18 3.31

I. Introduction The recent global crisis challenged the stability of the European monetary integration process. That process, which is closely linked to the evolution of the European Monetary Union (EMU), has gone through two stages: the Common Market era, which ran from 1958 until 1993, and the Monetary Union era, which started in 1994 and gained new impetus after the global crisis with the publication of the Four Presidents’ Report in December 2012. The aim of the EMU has been to exchange rates, inflation and interest rates in order to boost capital mobility and trade, thereby promoting the growth of member countries. Thus far, the data shows that there has been nominal convergence of inflation and interest rates, while real convergence of per capita income has not occurred among the original euro area participants.1

3.1

The creation of a currency union implies that its member countries can no longer use exchange rates and national monetary policies as tools for dealing with real and financial shocks. These limitations need to be balanced against the medium to long-run benefits of a fixed exchange rate and the delegation of monetary policy to an independent, supranational central bank—the European Central Bank (ECB). In this context, the advantaged and disadvantages of a currency union need to be evaluated.

3.2

The present approach assumes that the relevant decisions are adopted on the basis of a political cost-benefit analysis that weighs the expected economic gains and losses through the lens of the electorate and/or certain ideologies. Such an approach revisits the standard

3.3

1 Jeffrey R Franks and others, ‘Economic Convergence in the Euro Area: Coming Together or Drifting Apart?’ (2018) IMF Working Paper Series No 10. Donato Masciandaro and Davide Romelli, 3 The Economics of European Monetary Integration In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0004

38 THE ECONOMICS OF MONETARY INTEGRATION approach of optimal currency areas, zooming in on the political actors that shape each country’s decision, where the above-mentioned traditional theory ‘ignores the “political economy” factors that made currency areas coincident with countries in the first place . . . If the USSR were an optimal currency area before its break-up it should have presumably remained so afterwards’.2 The political economy approach, which expresses monetary union as a transfer of sovereignty, seems to be more consistent with a realistic theory of optimal currency areas.3 3.4

The aim of this chapter is to review the economic and the political economy of the European Monetary Union. Section II introduces the traditional theory of Optimal Currency Areas (OCA theory) as a starting point for evaluating the expected costs and benefits of a currency union. Section III discusses a more recent political-economy approach that enriches OCA theory and highlights the crucial role played by national policy-makers in designing and implementing the overall process of adopting a single currency. In this context, the economic and political economy approaches are complementary, rather than alternative, tools. In this section, we also discuss the incentives for a country to join a single currency area. Section IV concludes with a discussion of the pivotal role played by public and political perceptions in determining the net benefits of the EMU. These elements, which are endogenous and might change over time, could trigger mechanisms that either strengthen or destabilize the currency union.

II. The Economics of European Monetary Integration 3.5

All else equal, the success of the European monetary integration process depends on its effectiveness in allowing its member countries to maintain constant and stable growth rates. Importantly, a decision to establish a monetary union involves a complete and irreversible separation of countries’ monetary powers in terms of both exchange-rate determination and monetary policy autonomy.

3.6

In fact, when countries join the EMU, they fix their exchange rates and delegate their monetary policies to the European Central Bank (ECB), which implements these policies at the supranational level. This has economic costs and benefits. In terms of evaluating the economic advantages and disadvantages of currency unions, OCA theory remains the traditional workhorse. This theory can also be used as a starting point for further elaborations that take the costs and benefits of the political actors involved in the process into account, as we discuss in Section III.

3.7

The literature on OCA first emerged in the 1960s.4 Over the last three decades, it has become the theoretical basis for evaluating the viability and desirability of the 2 Charles A E Goodhart, ‘The Two Concepts of Money: Implications for the Analysis of Optimal Currency Areas’ (1998) 14 European Journal of Political Economy 407 (hereafter Goodhart, ‘The Two Concepts of Money’). 3 Patrick Bolton and Haizhou Huang, ‘Optimal Payment Areas or Optimal Currency Areas?’ (2018) 108 AEA Papers and Proceedings 505. 4 Robert A Mundell, ‘A theory of optimum currency areas’ (1961) 51 American Economic Review 657; Ronald I McKinnon, ‘Optimum Currency Areas’ (1963) 53 American Economic Review 717; Peter B Kenen, ‘The Theory of Optimum Currency areas: an eclectic view’ in Robert A Mundell and Alexander K Swoboda (eds), Monetary Problems of the International Economy (University of Chicago Press 1969).

The Economics of European Monetary Integration 39 EMU.5 Today, the OCA approach is used to evaluate whether regional areas—such as the European Union (EU) or the United States (US)—can be considered as optimal currency areas.6 In Europe, this debate started after the launch of the European Monetary System in 1979, when the majority of the countries in the European Community fixed their exchange rates around a central parity known as the European Currency Unit (ECU). It became even more vivid with the introduction of a single European currency—the euro—as an accounting currency on 1 January 1999. The euro was put into circulation on 1 January 2002. In a nutshell, the OCA approach has certain merits because it highlights the conditions that might favour the development of an international agreement aimed at fixing the exchange rate and delegating monetary policy to an independent central bank. The OCA theory’s rationale for the EMU can be summarized as follows. Consider how the citizens of an individual European country j may address the decision to join the single currency. A relevant benefit of fixed exchange rates is that they provided a more predictable basis for trade decisions than floating rates. In other words, the monetary transaction costs are likely to be lower. The monetary transaction gains will be higher the more country j trades with other members of the single currency, which would also favour the mobility and flexibility of the factors of production (labour and capital). Therefore, the gains from joining the single currency are positively related not only to the degree of economic integration in the markets for inputs and outputs, but also to the efficiency of those markets.7

5 Willem H Buiter, ‘Central Banks: Powerful, Political and Unaccountable?’ (2014) CEPR Discussion Paper Series No 10223 (hereafter Buiter, ‘Central Banks’); Lars Jonung and Eoin Drea, ‘It can’t happen, it’s a bad idea, it won’t last: US economists on the EMU and the Euro, 1989–2002’ (2010) 7 Econ Journal Watch 4; Paul R Krugman, ‘Revenge of the optimum currency area’ (2012) 27 NBER Macroeconomic Annual 439. See also Goodhart, ‘The Two Concepts of Money’ (n 2); Michael D Bordo and Lars Jonung, ‘The future of EMU: What does the history of monetary unions tell us?’ (1999) NBER Working Paper Series No 7365; Francesco Paolo Mongelli, ‘ “New” views on the optimum currency areas theory—What is EMU telling us?’ (2002) ECB Working Paper Series No 138 (hereafter Mongelli, ‘ “New” views on the optimum currency areas theory’) describes the evolution of OCA theory as occurring in four phases: pioneering (from the early 1960s to the early 1970s), reconciliation (during the 1970s), reassessment (in the 1980s and early 1990s), and empirical (from the mid-1990s). 6 Tamim Bayoumi and Barry Eichengreen, ‘Aftershocks of Monetary Unification: Hysteresis with a Financial Twist’ (2017) IMF Working Paper Series No 55. 7 On the degree of mobility and efficiency in the EU markets, see Tamim Bayoumi and Barry Eichengreen, ‘Ever closer to heaven? An optimum currency area index for European countries’ (1996) 41 European Economic Review 761; OECD, EMU: Facts, challenges and policies (OECD 1999); Andrew K Rose and Eric van Wincoop, ‘National money as a barrier to trade: the real case for currency union’ (2001) 91 American Economic Review 386; Jarko Fidrmuc, ‘The endogeneity of optimum currency area criteria, intra-industry trade and EMU enlargement’ (2001) Bank of Finland Discussion Paper Series No 8; Maurice J G Bun and Franc Klaassen, ‘Has the Euro increased trade?’ (2002) Tinbergen Institute Discussion Paper Series No 108; Bernhard Mahlberg and Ralf Kronberger, ‘Eastern Enlargement of the European Monetary Union: an OCA theory view’ in Fritz Breuss, Gerhard Fink, and Stefan Griller (eds), Institutional, Legal and Economic Aspects of the EMU (Springer 2002); Mongelli, ‘ “New” views on the optimum currency areas theory’ (n 5); Commission, ‘EMU after 5 years’ (2004) European Economy Special Report No 1/2004; Paul de Grauwe and Francesco Paolo Mongelli, ‘Endogeneities of optimum currency areas—What brings countries sharing a single currency closer together?’ (2005) ECB Working Paper Series No 468; Harris Dellas and George Tavlas, ‘Wage rigidity and monetary union’ (2005) 115 Economic Journal 907; Javier Andrés, Eva Ortega, and Javier Vallés, ‘Competition and inflation differentials in EMU’ (2008) 32 Journal of Economic Dynamics and Control 848; Herbert S Buscher and Hubert Gabrisch, ‘Is the European Monetary Union an endogenous currency area? The example of the labour markets’ (2009) Halle Institute for Economic Research Discussion Papers No 7/2009; Victor Chukwuemeka, ‘Are optimum currency area theory criteria endogenous to regime change? The case of the EMU before and after 1999’ (Thesis, Department of International Business and Economics, University of Greenwich 2011). On the effects of specific EMU membership cases, see Célestin Monga, ‘Latvia’s macroeconomic options in the medium term. Fiscal and monetary challenges of EU membership’ (2004) World Bank Policy Research Working Papers No 3307; Pau Rabanal, ‘Inflation differentials between Spain and the EMU: A DSGE perspective’ (2009) 41 Journal of Money, Credit and Banking 1141; Timo Baas, ‘Estonia and the European Monetary Union—Are the benefits from a “late” accession?’ (2014) RUHR Economic Papers No 489.

3.8

40 THE ECONOMICS OF MONETARY INTEGRATION Table 3.1 Advantages and Disadvantages of Joining a Monetary Union EXPECTED PROS Medium-to Long-term Horizon

EXPECTED CONS Short-term Horizon

(1) Exchange-rate stability (2) Monetary stability

(1) National policy-makers cannot use monetary policy to address macroeconomic unbalances

3.9

The OCA theory’s rationale for delegating monetary policy to an independent central bank is to further insulate monetary actions from political biases. At the same time, the OCA approach stresses that the medium to long-term advantages of currency union membership have to be balances against the costs of losing the ability to use national monetary tools to address short-term macroeconomic imbalances (Table 3.1).

3.10

Notably, in the traditional OCA approach, the role of political incentives has progressively emerged through the focus on the relationships among citizens’ preferences, political biases, monetary policy and central-bank governance. Until the late-1980s, economic theory did not attribute much importance to the concept of central bank governance. However, these institutional arrangements came into focus during the New Classical Revolution when economic theory started stressing their influence on macroeconomic outcomes. The role of central-bank design has been reaffirmed by the New Keynesian analysis of monetary policy.8

3.11

The theoretical bottom line can be summarized as follows. Policy makers tend to adopt a short-sighted perspective when using monetary tools and they often rely on money creation to smooth different kinds of macroeconomic shocks—real, fiscal, banking, and external.9 Unfortunately, money creation comes at a cost: printing money today implies a greater risk of monetary and/or financial instability tomorrow. Therefore, policy-makers

8 For excellent reviews, see Alex Cukierman, ‘The economics of central banking’ in Wolf Holger (ed), Macroeconomic Policy and Financial Systems (Macmillan Press 1996); Jakob de Haan and Sylvester C W Eijffinger, ‘The political economy of central-bank independence’ (1996) Princeton Special Papers in International Economics No 19, 1 (hereafter de Haan and Eijffinger, ‘The political economy of central-bank independence’); Alex Cukierman, ‘Central bank independence and monetary policymaking institutions—past, present and future’ (2008) 24 European Journal of Political Economy 722 (hereafter Cukierman, ‘Central bank independence’); Carl E Walsh, ‘Central bank independence’ in Steven N Durlauf and Lawrence E Blume (eds), The New Palgrave Dictionary of Economics (2nd edn, Palgrave Macmillan 2008). The inefficient use of the inflation tax by the government seems to be a common feature of the different theoretical explanations of central bank independence (CBI) effectiveness. De Haan and Eijffinger, ‘The political economy of central-bank independence’ (n 8) discuss three strands of literature—the public-choice view, the fiscal view, and the time-inconsistency view. While the first two focus on why governments may like accommodative monetary policies, the third explains their ineffectiveness using the rational expectations hypothesis. Jörg Bibow, ‘A post Keynesian perspective on the rise of central bank independence: A dubious success story in monetary economics’ (2010) Levy Economics Institute of Bard College Working Paper No 625 illustrates the views of Friedman and Keynes on CBI, while Marvin Goodfriend, ‘The elusive promise of independent central banking’ (2012) IMES Discussion Paper Series 12-E-09 (hereafter Goodfriend, ‘The elusive promise of independent central banking’) reviews CBI as it emerged first under the gold standard and later with fiat money. 9 On the relationship between fiscal deficits and CBI, see Richard C K Burdekin and Leroy O Laney, ‘Fiscal Policymaking and the Central Bank Institutional Constraint Una Vez Más: New Latin American Evidence’ (2016) 167 Public Choice 277. On the economics and empirics of inflationary bias in consolidated monetary and banking powers, see Diana Lima, Ioannis Lazopoulos, and Vasco J Gabriel, ‘The Effect of Financial Regulation Mandate on Inflation Bias: A Dynamic Panel Approach’ (2016) University of Surrey Discussion Papers No 6. On the interconnections between banking and fiscal shocks, see Michael D Bordo and Christopher M Meissner, ‘Fiscal and Financial Crises’ (2016) NBER Working Paper Series No 22059.

The Economics of European Monetary Integration 41 attempt to exploit the trade-off between present real gains and future instability risks.10 In other words, the stabilization policies are implemented through the assumption of future instability costs. However, the more efficient markets are, the greater the risk that short- sighted monetary policies will only produce instability. In fact, rational private agents fully anticipate the political incentives to use a monetary tool and fully adjust the nominal variables, so that such tools have no real effect.11 In this framework, the Friedman-Lucas proposition on monetary-policy neutrality holds: money creation does not produce any real gain, only nominal (monetary and/or financial) distortions.12 Furthermore, the political money-creation bias can dynamically generate greater uncertainty and negative externalities (such as moral-hazard risk). As a result, monetary policy is inefficiently used in a systematic way, so that it has the potential of becoming volatile and only producing macroeconomic distortions.

3.12

The inefficient use of monetary policy tools has been empirically examined using ‘optimal taxation theory’, but this theory does not find any support in the data.13 Optimal taxation theory claims that the benevolent policy-maker chooses the rate of taxation—including the rate of money-supply creation producing inflation—to the present value of the social cost. Consequently, inflation and tax rates are positively related. However, if optimal taxation theory fails empirically, it is natural to conclude that the government is not benevolent and that it is affected by monetary-policy biases.14

3.13

Given these considerations, banning the use of the monetary policy for short-term political purposes became the social goal. This institutional setting gained momentum in the economic literature and in the policy debate in the 1980s, and the relationship between the policy-maker who designs the overall economic policy and the central bank that is responsible for setting monetary policy came to the fore as crucial for avoiding the inflation bias.15 Furthermore, the greater the consensus that markets were rational, the more the rules of the game between policy-makers and central bankers gained momentum.16 Thus,

3.14

10 See on the benefits of relying on a long-sighted independent central banker instead of short-sighted politicians Ben S Bernanke, ‘Celebrating 20 Years of the Bank of Mexico’s Independence’ (Central Bank Independence— Progress and Challenges, Mexico City, 14 October 2013). 11 On ageing and CBI, see Etienne Farvaque, Jérôme Héricourt, and Gaël Lagadec, ‘Central Bank Independence and Ageing’ (2008) MPRA Paper 13076. On social trust and CBI, see Niclas Berggren, Sven-Olov Daunfeldt, and Jörgen Hellström, ‘Does Social Trust Speed Up Reforms? The Case of Central-Bank Independence’ (2015) IFN Working Paper Series No 1053. 12 See Milton Friedman, ‘The role of monetary policy’ (1968) 58 American Economic Review 1; Robert E Lucas Jr, ‘Some international evidence on output-inflation trade-offs’ (1973) 63 American Economic Review 326. 13 For a survey, see Roberto Delhy Nolivos and Guillermo Vuletin, ‘The role of central bank independence on optimal taxation and seignorage’ (2014) 34 European Journal of Political Economy 440 (hereafter Nolivos and Vuletin, ‘The role of central bank independence on optimal taxation and seignorage’). 14 Nolivos and Vuletin, ‘The role of central bank independence on optimal taxation and seignorage’ (n 13) reach a different conclusion. They endogenize optimal taxation using the degree of CBI and conclude that higher CBI results in a lower level of optimal taxation. However, the article does not explain why the CBI level is exogenous (ie why the social planner does not simultaneously define the optimal taxation and the degree of CBI). 15 See Roland Strausz, ‘The Political Economy of Regulatory Risk’ (2010) CESifo Working Paper Series 2953; John M de Figueiredo and Edward H Stiglitz, ‘Democratic Rulemaking’ (2015) NBER Working Paper Series No 21765, who treat central bank independence (CBI) as a special case of the general relationship between agency delegation and democracy. 16 Robert J Barro and David B Gordon, ‘Rules, discretion and reputation in a model of monetary policy’ (1983) 12 Journal of Monetary Economics 101; David Backus and Edward Driffill, ‘Inflation and reputation’ (1985) 75 American Economic Review 530; Kenneth Rogoff, ‘The optimal degree of commitment to an intermediate monetary target’ (1985) 100 Quarterly Journal of Economics 1169; Susanne Lohmann, ‘Partisan control of the money supply and decentralized appointment powers’ (1997) 13 European Journal of Political Economy 225 (hereafter

42 THE ECONOMICS OF MONETARY INTEGRATION the economic mainstream claimed that optimal central bank governance must essentially be a two-sided medal. 3.15

On the one hand, the central bank has to be independent. In other words, it must enjoy the ability to implement non-distortionary monetary policies without any external (political) interference. As such, the central banker becomes a player who can veto distortive monetary policies. On the other hand, the central banker has to be conservative, where conservativeness refers to the importance that the central banker assigns to price stability with respect to other macroeconomic objectives.17 Conservativeness is necessary to ensure that the central banker himself/herself does not become a source of money-creation bias.

3.16

Independence and conservativeness are therefore conditions for the implementation of credible monetary policies.18 Independence can be viewed as a device for implementing conservative monetary policies and, more generally, monetary policy rules.19 However, private agents will trust the central banker only if effective rules on accountability and transparency hold. In other words, a conservative central bank is credible if it works in an institutional setting that guarantees independence and accountability, acts in a transparent way, and implements an effective communication policy.20

3.17

The relationship between central bank independence (CBI) and accountability lies at the core of the central bank governance literature.21 Central bank governance has become the Lohmann, ‘Partisan control of the money supply’) explore the rules of the game in determining the outcomes of the overall macroeconomic policy, while Thomas J Sargent and Neil Wallace, ‘Some unpleasant monetarist arithmetic’ (1981) 5(3) Federal Reserve Bank of Minneapolis Quarterly Review 1; Stefan Niemann, Paul Pichler, and Gerhard Sorger, ‘Central bank independence and the monetary instrument problem’ (2013) 54 International Economic Review 1031; Fernando M Martin, ‘Debt, inflation and central bank independence’ (2013) Federal Reserve Bank of Saint Louis Working Paper No 2013-017D, focus on fiscal policy. 17 On CBI and conservativeness, see Michael Berlemann and Kai Hielscher, ‘Measuring Effective Monetary Policy Conservatism of Central Banks: A Dynamic Approach’ (2016) 17 Annals of Economics and Finance 105. 18 On the relationship between CBI and central-bank conservativeness, see also Sylvester C W Eijffinger and Marco Hoeberichts, ‘The trade-off between central bank independence and conservativeness’ (1998) 50 Oxford Economic Papers 397 (hereafter Eijffinger and Hoeberichts, ‘The trade-off between central bank independence and conservativeness’); Bennet T McCallum, ‘Two fallacies concerning central-bank independence’ (1995) 85 American Economic Review 207; Stanley Fisher, ‘Central Bank Independence’ (2015 Herbert Stein Memorial Lecture, National Economists Club, Washington DC) (hereafter Fisher, ‘Central Bank Independence’). On monetary conservativeness and fiscal policy, see Stefan Nieman, ‘Dynamic monetary-fiscal interactions and the role of monetary conservatism’ (2011) 58 Journal of Monetary Economics 234. 19 Eijffinger and Hoeberichts, ‘The trade-off between central bank independence and conservativeness’ (n 18); Sylvester C W Eijffinger and Marco Hoeberichts, ‘The trade-off between central bank independence and conservatism in a new Keynesian framework’ (2008) 24 European Journal of Political Economy 742, shed light on the trade-off between conservativeness and independence: reducing central-bank independence can increase central bankers’ conservativeness. The first article used the neoclassic framework while the second applied a new Keynesian model to obtain the same result. On the relationship between CBI and the Taylor rule, see Aleksandra Maslowska, ‘Does Central Bank Independence Matter? An Examination using the Taylor Rule’ (2011) 27 Homo Oeconomicus 419. 20 On transparency, see Sylvester C W Eijffinger and Petra M Geraats, ‘How transparent are central banks?’ (2006) 22 European Journal of Political Economy 1; Andrew J Hughes Hallett and Jan Libich, ‘Central bank independence, accountability and transparency: Complements or strategic substitutes?’ (2006) CEPR Discussion Papers Series No 5470. On communication, see Alex Cukierman and Allan H Meltzer, ‘A theory of ambiguity, credibility, and inflation under discretion and asymmetric information’ (1986) 54 Econometrica 1099; Marvin Goodfriend, ‘Monetary mystique: Secrecy and central banking’ (1986) 17 Journal of Monetary Economics 63; Otmar Issing, ‘Communication, transparency, accountability: monetary policy in the twenty-first century’ (2005) 87 Federal Reserve Bank of St Louis Review 65; Alan S Blinder and others, ‘Central bank communication and monetary policy: A survey of theory and evidence’ (2008) 46 Journal of Economic Literature 910. 21 Clive Briault, Andrew Haldane, and Mervyn King, ‘Central bank independence and accountability: theory and evidence’ (1996) 36(1) Bank of England Quarterly Bulletin 63; Joanne Morris and Tonny Lybek, ‘Central bank

The Political Economy 43 institutional setting for implementing day-to-day monetary policies: given the long-run goal of avoiding the risk of monetary instability, modern central bankers can smooth real business cycles using monetary policy rules.22 Monetary policy then becomes the final outcome of the complex interactions among three main components: monetary institutions, central banker preferences, and policy rules.

III. The Political Economy of European Monetary Integration As insights into the economic advantages and disadvantages of being a member of a currency union emerged, the role of central-bank governance in shaping the monetary regime’s success took centre stage. In this regard, the academic literature can be described as evolving in a two-step process.23

3.18

Initially, the scholars involved in the field worked on verifying the theoretical conjectures through comparative, institutional and empirical analyses. After constructing indices of CBI and proposing historical alternative models of independent and dependent monetary authorities, researchers attempted to determine whether the degree of independence was a driver of the most important macroeconomic phenomena, such as inflation, public debt, interest rates, income, and growth.24 The aim was to verify whether the existence of

3.19

governance: A survey of boards and management’ (2004) IMF Working Papers No 04/226; Lars Frisell, Kasper Roszbach, and Giancarlo Spagnolo, ‘Governing the governors: A clinical study of central banks’ (2008) Sveriges Riksbank Working Paper Series No 221; Christopher W Crowe and Ellen E Meade, ‘Central bank independence and transparency: Evolution and effectiveness’ (2008) 24 European Journal of Political Economy 763 (hereafter Crowe and Meade, ‘Central bank independence and transparency’). 22 See Ben S Bernanke and Mark Gertler, ‘Inside the black box: The credit channel of monetary policy transmission’ (1995) 9(4) Journal of Economic Perspectives 27; Marc Gertler, Jordi Galí, and Richard Clarida, ‘The science of monetary policy: A new Keynesian perspective’ (1999) 37 Journal of Economic Literature 1661; Michael Woodford, ‘Optimal interest-rate smoothing’ (2003) 70 The Review of Economic Studies 861; Jordi Galí and Tommaso Monacelli, ‘Monetary policy and exchange rate volatility in a small open economy’ (2005) 72 The Review of Economic Studies 707; John B Taylor, ‘Discretion versus policy rules in practice’ (1993) 39 Carnegie-Rochester Conference Series on Public Policy 195; Dale W Henderson and Warwick J McKibbin, ‘A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence’ (1993) 39 Carnegie-Rochester Conference Series on Public Policy 221; Torsten Persson and Guido Tabellini, ‘Designing institutions for monetary stability’ (1993) 39 Carnegie-Rochester Conference Series on Public Policy 53; Carl E Walsh, ‘Optimal contracts for central bankers’ (1995) 85 American Economic Review 150; Lars E O Svensson, ‘Optimal Inflation Targets, “Conservative” Central Banks, and Linear Inflation Contracts’ (1997) 87 American Economic Review 98. Recently, John B Taylor, ‘The Effectiveness of Central Bank Independence vs Policy Rules’ (2013) 48 Business Economics 155 (hereafter Taylor, ‘Central Bank Independence vs Policy Rules’, cast doubt on the role of CBI in generating rule-based monetary policies. 23 Guillermo Vuletin and Ling Zhu, ‘Replacing a disobedient central bank governor with a docile one: A novel measure of central bank independence and its effect on inflation’ (2011) 43 Journal of Money, Credit and Banking 1185 (hereafter Vuletin and Zhu, ‘Replacing a disobedient central bank governor with a docile one’) claimed that around 9,000 articles had been devoted to the role of CBI in inflation by 2011. 24 The seminal CBI indices proposed by Robin Bade and Michael Parkin, ‘Central bank law and monetary policy’ (1982) Technical report, Department of Economics University of Western Ontario; Vittorio Grilli, Donato Masciandaro, and Guido Tabellini, ‘Political and monetary institutions and public financial policies in the industrial countries’ (1991) 6 Economic Policy 341 (hereafter Grilli, Masciandaro, and Tabellini, ‘Political and monetary institutions’), were revised by Donato Masciandaro and Franco Spinelli, ‘Central banks’ independence: Institutional determinants, rankings and central bankers’ views’ (1994) 41 Scottish Journal of Political Economy 434, and followed by the indices of Alex Cukierman, Central Bank Strategy, Credibility, and Independence: Theory and Evidence (MIT Press 1992) (hereafter Cukierman, Central Bank Strategy, Credibility, and Independence: Theory and Evidence). Since then, many different indicators have been proposed (see for a discussion Helge Berger, Jakob de Haan, and Sylvester Eijffinger, ‘Central bank independence: An update of theory and evidence’ (2001) 15 Journal of Economic Surveys 3 (hereafter Berger, de Haan, and Eijffinger, ‘Central bank independence’). Cukierman, Central Bank Strategy, Credibility, and Independence: Theory and

Evidence (n 24) was the first to distinguish legal and de facto indicators of independence. Updates of this index were proposed by Alex Cukierman, Bilin Neyapti, and Steven B Webb, ‘Measuring the independence of central banks and its effect on policy outcomes’ (1992) 6 The World Bank Economic Review 353 (hereafter Cukierman, Neyapti, and Webb, ‘Measuring the independence of central banks’); Alex Cukierman, Geoffrey P Miller, and Bilin Neyapti, ‘Central bank reform, liberalization and inflation in transition economies—an international perspective’ (2002) 49 Journal of Monetary Economics 237; Luis Ignacio Jácome and Francisco F Vazquez, ‘Is there any link between legal central bank independence and inflation? Evidence from Latin America and the Caribbean’ (2008) 24 European Journal of Political Economy 788 (hereafter Jácome and Vazquez, ‘Is there any link between legal central bank independence and inflation?’). Updates for the Grilli, Masciandaro, and Tabellini index (1991) were proposed by Marco Arnone and Davide Romelli, ‘Dynamic central bank independence indices and inflation rate: A new empirical exploration’ (2013) 9 Journal of Financial Stability 385 (hereafter Arnone and Romelli, ‘Dynamic central bank independence indices and inflation rate’), while Davide Romelli, ‘The political economy of reforms in central bank design: evidence from a new dataset’ (2018) BAFFI CAREFIN Centre Research Paper No 2018-87 (hereafter Romelli, ‘The political economy of reforms in central bank design’), updated these two classical indices and proposed an extended index of CBI. Crowe and Meade, ‘Central bank independence and transparency’ (n 21) developed measures of CBI and transparency. Vuletin and Zhu, ‘Replacing a disobedient central bank governor with a docile one’ (n 23) proposed a new de facto index of independence and identified two mechanisms embedded in the measure of the turnover rate of central bank governors. Adrian Lupusor, Monetary policy or monetary politics? Assessing the impact of electoral cycles on central banks’ decisions in advanced and developing economies (LAP LAMBERT Academic Publishing 2012) showed empirically that legal independence cannot be considered a sufficient condition for avoiding political pressures on the monetary policy stance. On the historical alternative models of independent and dependent monetary authorities, see Fausto Vicarelli and others, Central banks’ independence in historical perspective (Walter de Gruyter 1988); John Wood, ‘The meanings and historical background of central bank independence’ (2008) Paolo Baffi Centre Research Paper No 2008-05 (hereafter Wood, ‘The meanings and historical background of central bank independence’). On the Federal Reserve, see Christopher J Waller, ‘Independence + accountability: Why the fed is a well-designed central bank’ (2011) 93 Federal Reserve Bank of St Louis Review; Ben S Bernanke, ‘A century of US central banking: Goals, frameworks, accountability’ (2013) 27(4) Journal of Economic Perspectives 3. On the Federal Reserve and the Bank of England, see Goodfriend, ‘The elusive promise of independent central banking’ (n 8). On the Bundesbank, see Otmar Issing, ‘Why did the Great Inflation not happen in Germany?’ (2005) 87 Federal Reserve Bank of St Louis Review 329; Andreas Beyer and others, ‘Opting out of the great inflation: German monetary policy after the break down of Bretton Woods’ (2008) NBER Working Paper Series No 14596. On the Bank of Italy, see Eugenio Gaiotti and Alessandro Secchi, ‘Monetary policy and fiscal dominance in Italy from the early 1970s to the adoption of the euro: a review’ (2012) Questioni di Economia e Finanza, Bank of Italy— Occasional Papers No 141. Grilli, Masciandaro, and Tabellini, ‘Political and monetary institutions’ (n 24); Alex Cukierman, ‘Central bank independence and monetary control’ (1994) 104 The Economic Journal 1437 (hereafter Cukierman, ‘Central bank independence and monetary control’); Cukierman, Webb, and Neyapti, ‘Measuring the independence of central banks’ (n 24); Alex Cukierman and Steven B Webb, ‘Political influence on the central bank: International evidence’ (1995) 9 The World Bank Economic Review 397 (hereafter Cukierman and Webb, ‘Political influence on the central bank’); Berger, de Haan, and Eijffinger, ‘Central bank independence’ (n 24) investigate the relationship between the inflation rate and CBI. See also Alberto Alesina and Lawrence Summers, ‘Central bank independence and macroeconomic performance: Some comparative evidence’ (1993) 25 Journal of Money, Credit and Banking 151 (hereafter Alesina and Summers, ‘Central bank independence and macroeconomic performance’); Alberto Alesina and Roberta Gatti, ‘Independent central banks: Low inflation at no cost?’ (1995) 85 American Economic Review 196; Eva Gutierrez, ‘Inflation performance and constitutional central bank independence’ (2003) IMF Working Papers No 03/53; Jácome and Vazquez, ‘Is there any link between legal central bank independence and inflation?’ (n 24). Jeroen Klomp and Jakob de Haan, ‘Inflation and central bank independence: a meta-regression analysis’ (2010) 24 Journal of Economic Surveys 593 (hereafter Klomp and de Haan, ‘Meta-regression analysis’) performed a meta-regression analysis of fifty-nine studies to examine the relationship between inflation and CBI. They confirmed the existence of a negative and significant relation between inflation and CBI in OECD countries, although the results were sensitive to the indicator and the estimation period. Legal CBI has been considered a major determinant of macroeconomic performance— see Cukierman, ‘Central bank independence’ (n 8); Jakob de Haan, Donato Masciandaro, and Marc Quintyn, ‘Does central bank independence still matter?’ (2008) 24 European Journal of Political Economy 717; Charles T Carlstrom and Timothy S Fuerst, ‘Central bank independence and inflation: A note’ (2009) 47 Economic Inquiry 182; Sami Alpanda and Adam Honig, ‘The impact of central bank independence on political monetary cycles in advanced and developing nations’ (2009) 41 Journal of Money, Credit and Banking 1365 (hereafter Alpanda and Honig, ‘The impact of central bank independence on political monetary cycles’); Alberto Alesina and Andrea Stella, ‘The politics of monetary policy’ in Benjamin M Friedman and Michael Woodford (eds), Handbook of Monetary Economics (Elsevier 2010) (hereafter Alesina and Stella, ‘The politics of monetary policy’); Jeroen Klomp and Jakob de Haan, ‘Central bank independence and inflation revisited’ (2010) 144 Public Choice 445. More recently, the literature has re-examined the relationships between CBI and the conduct of monetary policy—see Ian Down, ‘Central bank independence, disinflations and monetary policy’ (2009) 10(3) Business and Politics 1; Aleksandra Maslowska, ‘Quest for the best: How to measure central bank independence and show its relationship with inflation’ (2011) 5 Czech Economic Review 132; Alpanda and Honig, ‘The impact of central bank independence on political monetary cycles’ (n 24); between CBI and financial stability—see Martin Čihák, ‘Central bank independence and financial stability’ (2007) IMF Conference: Does Central Bank Independence Still Matter; Jeroen Klomp and Jakob de Haan, ‘Central bank independence and financial instability’ (2009) 5 Journal of Financial Stability 321; and between CBI and inflation—see Klomp and de Haan, ‘Meta-regression analysis’ (n 24); Arnone and Romelli, ‘Dynamic central bank independence indices and inflation rate’ (n 24). On public debt and interest rates, see Grilli, Masciandaro, and Tabellini, ‘Political and monetary institutions’ (n 24); Alesina and Summers, ‘Central bank independence and macroeconomic performance’ (n 24); Cukierman, ‘Central bank independence and monetary control’ (n 24). On income and growth, see Grilli, Masciandaro, and Tabellini, ‘Political and monetary institutions’ (n 24); Alesina and Summers, ‘Central bank independence and macroeconomic performance’ (n 24); Alex Cukierman and others, ‘Central bank independence, growth, investment, and real rates’ (1993) 39 Carnegie- Rochester Conference Series on Public Policy 95; Cukierman, ‘Central bank independence and monetary control’ (n 24); Berger, de Haan, and Eijffinger, ‘Central bank independence’ (n 24).

The Political Economy 45 a monetary veto player reduced the intended and unintended effects of the misuse of the monetary policy tools and produced positive spill overs on other macro variables. In the first wave of studies, CBI was essentially treated as an exogenous (independent) variable that might be useful for explaining macro trends. In the second step, researchers considered the degree of CBI as an endogenous (dependent) variable that could be explained by other elements.25 Their focus in this regard was on the factors that might motivate a country’s decision to maintain or reform its monetary regime, including the degree of CBI. They examined why and how policy-makers may be forced to implement monetary reforms that reduce their powers in terms of money creation. Various interpretative hypotheses have been advanced to explain the genesis of the political process that leads a monetary regime to assume given characteristics. Endogenzing the CBI and its effectiveness have been the subject of analyses in both economics and political science.26

3.20

Some scholars consider the possibility that the level of CBI depends on the degree to which 3.21 constituencies are highly averse to the risks of monetary instability, which drives policy- makers to bolster the status of the central bank (the constituency view).27 Others stress that an aversion to monetary instability risks is structurally embedded in features of the overall legislative and/or political system, which then influences the policy-makers’ decisions regarding an independent central bank (the institutional view).28 A third group 25 See Donato Masciandaro, ‘Designing a central bank: Social player, monetary agent, or banking agent?’ (1995) 6 Open Economies Review 399; Berger, de Haan, and Eijffinger, ‘Central bank independence’ (n 24). Note the difference between institutional-setting endogeneity and inflationary-bias endogeneity. CBI endogeneity is systematically reviewed in Bernd Hayo and Carsten Hefeker, ‘Do we really need central bank independence? A critical re-examination’ (2001) WWZ-Discussion Paper No 01/03; Romelli, ‘The political economy of reforms in central bank design’ (n 24) considers the endogeneity of CBI in a large sample of countries and shows that both the probability of reforming central-bank legislation and the level of CBI can be related to an array of macro-and politico- economic indicators. 26 Excellent reference books on how central banks’ policies and their institutional settings have changed as well as the causes of these changes are Pierre L Siklos, The changing face of central banking: Evolutionary trends since World War II (CUP 2002); Pierre L Siklos, Martin T Bohl, and Mark E Wohar, Challenges in central banking: the current institutional environment and forces affecting monetary policy (CUP 2010). 27 See Sylvia Maxfield, Gatekeepers of Growth. The International Political Economy of Central Banking in Developing Countries (Princeton UP 1997). Adam S Posen, ‘Declarations are not enough: Financial sector sources of central bank independence’ in Ben S Bernanke and Julio J Rotemberg (eds), NBER Macroeconomics Annual 1995 (vol 10, MIT Press 1995), noting that the choices of monetary regimes have distributive consequences, stated that there is no reason to assume that the adoption of CBI is self-enforcing, that choice requires political support and that the financial sector is positioned to provide that support. Jakob de Haan and Gert Jan Van’t Hag, ‘Variation in central bank independence across countries: Some provisional empirical evidence’ (1995) 85 Public Choice 335 (hereafter de Haan and Van’t Hag, ‘Variation in central bank independence across countries’) raised doubts about Posen’s theory. On the relationships among financial-sector preferences, low inflation and CBI, see Geoffrey P Miller, ‘An interest-group theory of central bank independence’ (1998) 27 The Journal of Legal Studies 433, who provides an interest-group theory of CBI. Empirical analyses that address the CBI endogeneity question are supplied by Harold J Brumm, ‘The effect of central bank independence on inflation in developing countries’ (2006) 90 Economics Letters 189; Harold J Brumm, ‘Inflation and central bank independence: Two-way causality?’ (2011) 111 Economics Letters 220. 28 See Peter Moser, ‘Checks and balances, and the supply of central bank independence’ (1999) 43 European Economic Review 1569 (hereafter Moser, ‘Checks and balances’). See also Cukierman, ‘Central bank independence and monetary control’ (n 24), although his predictions are tested and rejected by Cukierman and Webb, ‘Political influence on the central bank’ (n 24); de Haan and Van’t Hag, ‘Variation in central bank independence across countries’ (n 27). Roland Vaubel, ‘The bureaucratic and partisan behaviour of independent central banks: German and international evidence’ (1997) 13 European Journal of Political Economy 201 suggests that central banks, even those that are formally independent, can be captured. Gernot Sieg, ‘A model of partisan central banks and opportunistic political business cycles’ (1997) 13 European Journal of Political Economy 503 proposes a formal model of a captured independent central bank. William Bernhard, ‘A political explanation of variations in central bank independence’ (1998) 92 American Political Science Review 311 claims that information asymmetries in the monetary policy process can create conflicts among government ministers,

46 THE ECONOMICS OF MONETARY INTEGRATION emphasizes the role of culture and a country’s tradition of monetary stability in influencing the policy-maker’s choices (the culture view).29 These three views shape the preferences of the citizens related to the degree of CBI. In the constituency view, present preferences of avoiding monetary instability are relevant, while past preferences influence the policy- maker’s decisions in the institutional and culture views. These three views can be intertwined by studying the economic, institutional and cultural conditions under which CBI reforms do or do not take place. Importantly, these studies acquire greater importance in their backbench legislators and, in multiparty governments, their coalition partners. An independent central bank can help overcome these conflicts. John B Goodman, ‘The politics of central bank independence’ (1991) 23 Comparative Politics 329 argues that a conservative government that is expected to only be in power for a short period of time will adopt an independent central bank to limit the ability of the future government (see also Gian M Milesi-Ferretti, ‘The disadvantage of tying their hands: On the political economy of policy commitments’ (1995) 105 The Economic Journal 1381). Lohmann, ‘Partisan control of the money supply’ (n 16) argues that the federalist nature of a government and the use of coalitions in forming a government could increase the likelihood of CBI. On the relationship between government partisanship and central-bank structure, see Alberto Alesina, ‘Politics and business cycles in industrial democracies’ (1989) 4 Economic Policy 55; Alberto Alesina and Jeffrey Sachs, ‘Political parties and the business cycle in the United States, 1948–1984’ (1988) 20 Journal of Money, Credit and Banking 63. See also Fatholla M Bagheri and Nader Habibi, ‘Political institutions and central bank independence: A cross-country analysis’ (1998) 96 Public Choice 187. De Haan and Van’t Hag, ‘Variation in central bank independence across countries’ (n 27) test the hypothesis that governments planning to incur higher deficits may wish to increase credibility by granting more CBI. However, they find no supporting evidence for this hypothesis. Moser, ‘Checks and balances’ (n 28) analyses the relationship between CBI and the features—checks and balances—of the legislative systems. King Banaian and William A Luksetich, ‘Central bank independence, economic freedom, and inflation rates’ (2001) 39 Economic Inquiry 149 demonstrate the connections between economic and political freedom and CBI attributes. Philip Keefer and David Stasavage, ‘The limits of delegation: Veto players, central bank independence, and the credibility of monetary policy’ (2003) 97 American Political Science Review 407 introduce a theoretical model and empirical evidence on this issue. Wood, ‘The meanings and historical background of central bank independence’ (n 24) uses a historical perspective to discuss how CBI ultimately depends on the government’s needs. Daron Acemoglu and others, ‘When does policy reform work? The case of central bank independence’ (2008) NBER Working Papers No 14033 (hereafter Acemoglu and others, ‘When does policy reform work?’) show the relationships among inflation, CBI and political institutions, where the effectiveness of CBI depends on political distortions. Cristina Bodea and Raymond Hicks, ‘Price stability and central bank independence: Discipline, credibility, and democratic institutions’ (2015) 69 International Organization 35 (hereafter Bodea and Hicks, ‘Price stability and central bank independence’) discuss the relationships among inflation, CBI and democratic institutions. Cristina Bodea, ‘Exchange rate regimes and independent central banks: A correlated choice of imperfectly credible institutions’ (2010) 64 International Organization 411 analyses the simultaneous choice of the level of CBI and the exchange-rate regime. 29 Helge Berger, ‘The Bundesbank’s path to independence: Evidence from the 1950s’ (1997) 93 Public Choice 427; Berger, de Haan, and Eijffinger, ‘Central bank independence’ (n 24). Bernd Hayo, ‘Inflation culture, central bank independence and price stability’ (1998) 14 European Journal of Political Economy 241 claims that people’s preferences with respect to price stability matter in explaining low inflation rate and that CBI is just one aspect of a stability regime with two competing interpretations of the role of institutional design: the preference-instrument interpretation and the historical-feedback interpretation. Robert J Franzese Jr, ‘Partially independent central banks, politically responsive governments, and inflation’ (1999) 43 American Journal of Political Science 681 claims that the effectiveness of CBI depends on every variable in the broader political-economic environment. In Gauti B Eggertsson and Eric Le Borgne, ‘A political agency theory of central bank independence’ (2010) 42 Journal of Money, Credit and Banking 647, society—with all agents having homogeneous preferences—determines the CBI, thereby solving a delegation problem with a trade-off between costs and benefits. Recently, Christopher W Crowe, ‘Goal independent central banks: Why politicians decide to delegate’ (2008) 24 European Journal of Political Economy 748 demonstrated that CBI is more likely to occur in societies where preferences regarding different policy dimensions, including the monetary policy dimension, are heterogeneous. See also Sylvester C W Eijffinger and Patrick Stadhouders, ‘Monetary policy and the rule of law’ (2003) CEPR Discussion Paper Series No 3698; Acemoglu and others, ‘When does policy reform work?’ (n 28); Marc Quintyn and Sophia Gollwitzer, ‘The effectiveness of macroeconomic commitment in weak(er) institutional environments’ (2010) IMF Working Papers No 10/193; Kai Hielscher and Gunther Markwardt, ‘The role of political institutions for the effectiveness of central bank independence’ (2012) 28 European Journal of Political Economy 286; Niclas Berggren, Sven-Olov Daunfeldt, and Jörgen Hellström, ‘Social trust and central-bank independence’ (2014) 34 European Journal of Political Economy 425.

The Political Economy 47 Table 3.2 Currency Area Membership: Relevant Players and Their Preferences CITIZENS

POLITICIANS

(1) Monetary stability (2) A central bank that is free of political biases

(1) Political gains from pleasing citizens (2) Political costs from fewer national economic policy tools to address short-term macroeconomic imbalances

periods—such as the present one—characterized by a tendency to question the design of central bank governance.30 In general, the existing literature on the evolution of CBI has focused on two crucial elements: the preferences of citizens, and the incentives and constraints that shape the behaviour of incumbent policy-makers. The general conclusion on the debate surrounding the drivers of a country’s attitude towards currency area membership is that the outcome depends on the preferences of its players—citizens and incumbent policy-makers (Table 3.2).

3.22

If we apply the general principles to the EMU case and assume that monetary instability risks are proxied by inflation-rate dynamics, then the monetary stability gains should be higher the more the country’s j inflation is higher or more volatile than the EMU’s average inflation. Therefore, the EMU gains are positively correlated with the relative degree of inflation-rate instability in country j. This implies that both monetary transaction gains and monetary stability benefits can motivate a country to join the EMU.

3.23

At the same time, however, EMU membership might be associated with certain risks, especially those related to losing the ability to use exchange-rate and monetary policies to address macroeconomic shocks. In other words, country j may face monetary stabilization losses resulting from its membership in the single currency area. Overall, these losses might reduce the citizens’ interest in joining the currency union. The size of the monetary stabilization losses depends on the same drivers that influence monetary gains (ie, mobility and efficiency in the markets for inputs and outputs). Lower levels of integration and efficiency call for supranational stabilization policies that differ from the monetary policies. When such policies are missing, the monetary stabilization losses will be higher.

3.24

Furthermore, recent literature on optimal currency areas points out that both gains and losses can be endogenous, rather than exogenous, given that they depend on how the currency area is designed and implemented.31 The shape of the transaction costs, the level of integration in the markets for goods, services and human capital, political biases, as well as shocks and their absorbers can be dynamically influenced by the evolution of the currency area’s establishment and implementation. Such endogenous transaction costs can be

3.25

30 See Erlend Walter Nier, ‘Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis’ (2009) IMF Working Paper Series No 70 (hereafter Nier, ‘Financial Stability Frameworks’); Stefan Ingves, ‘Central bank governance and financial stability’ (BIS 2011) (hereafter Ingves, ‘Central bank governance and financial stability’); Ashraf Khan, ‘Central Bank Governance and the Role of Nonfinancial Risk Management’ (2016) IMF Working Paper Series No 34 for an overview of the evolution of central bank governance after the crisis. 31 Jeffrey A Frankel and Andrew K Rose, ‘Is EMU more justifiable ex post than ex ante?’ (1997) 41 European Economic Review 753; Jeffrey A Frankel and Andrew K Rose, ‘The endogeneity of the optimum currency area criteria’ (1998) 108 Economic Journal 1009; Reuven Glick and Andrew K Rose, ‘Does a currency union affect trade? The time-series evidence’ (2002) 46 European Economic Review 1125.

48 THE ECONOMICS OF MONETARY INTEGRATION either decreasing or increasing. Consequently, the integration process can become deeper or weaker over time, and it can differ across countries. 3.26

Almost twenty years after the adoption of the European single currency, it is possible to claim that some of the expected benefits from adopting the euro have been realized. For example, monetary stability has produced less inflation and more trade, leading to more growth. These benefits have been even more evident in the countries in which national policy-makers have implemented policies that increase productivity, such as Germany, Austria, Belgium, Finland, Luxembourg, and the Netherlands.32 At the same time, certain national imbalances still need to be addressed, including financial instability risks, debt, and deficit risks, and the divergence in wages and productivity paths that leads to trade imbalances, as in the case of the peripheral euro area countries (ie Greece, Ireland, Italy, Portugal, and Spain).33

3.27

Thus far, the present analysis of the economic advantages and disadvantages of EMU membership has not provided a final answer on which of the two prevailed. What is arguably needed is a dynamic framework that can shed light on the evolution of the expected gains and losses—both economic and political—of joining or remaining in a currency union. ‘One size does not fit all’ has to be the methodological motto, as every currency union is a unique story. The historical tales should not be treated as benchmarks but rather as useful food for thought.34 This observation is strengthened by looking at the degree of financial integration and at the design of banking regulations, which are substantially more prominent to date than in the 1990s and early 2000s.35

3.28

The endogeneity of EMU membership is even more evident if the analysis of the advantages and disadvantages of having a supranational central bank as the monetary authority is framed in the discussion of the desirability of maintaining an independent central bank. In this context, the possible consequences for CBI in the context of the increasing phenomenon of populism are of particular interest. The rise of populism can dent the consensus that surrounded the support for CBI from the late 1980s until the start of the 2007–08 financial crisis.36 After a first wave of populism that was mostly concentrated in Latin America, a second wave of populism gained ground among both left-wing and right-wing movements in the majority of European countries and the United States.37 Such movements directly or 32 Christian Dustmann and others, ‘From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy’ (2014) 28(1) Journal of Economic Perspectives 167. 33 Christian Thimann, ‘The Microeconomic Dimensions of the Eurozone Crisis and Why European Politics Cannot Solve Them’ (2015) 29(3) Journal of Economic Perspectives 141. 34 As stated by Jacob F Kirkegaard and Adam S Posen, ‘Lessons for EU Integration from US History’ (Peterson Institute for International Economics, Washington DC, January 2018). 35 Joshua Aizenman, ‘Optimal Currency Area: A 20th Century Idea for the 21st Century’ (2016) NBER Working Paper Series No 22097. See also Heinz Handler, ‘The Eurozone: Piecemeal approach to an optimum currency area’ (2013) WIFO Working Paper Series No 446. 36 Buiter, ‘Central Banks’ (n 5); Jakob de Haan and Sylvester C W Eijffinger, ‘Central Bank Independence under Threat?’ (2017) CEPR Policy Insight 87 (hereafter de Haan and Eijffinger, ‘Central Bank Independence under Threat?’); Charles A E Goodhart and Rosa M Lastra, ‘Populism and Central Bank Independence’ (2018) 29 Open Economies Review 49 (hereafter Goodhart and Lastra, ‘Populism and Central Bank Independence’); Raghuram Rajan, ‘Central Banks’ Year of Reckoning’ (Project Syndicate, 21 December 2017) (hereafter Rajan, ‘Central Banks’ Year of Reckoning’); Dani Rodrik, ‘In Defence of Economic Populism’ (Project Syndicate, 8 January 2018) (hereafter Rodrik, ‘In Defence of Economic Populism’). 37 Rüdiger Dornbusch and Sebastian Edwards, The Macroeconomics of Populism in Latin America (University of Chicago Press 1991) (hereafter Dornbusch and Edwards, The Macroeconomics of Populism in Latin America);

The Political Economy 49 indirectly influence the design and implementation of various types of economic policies.38 The populist movements seem to share a demand for short-term protectionism as well as three main properties: a claim that they are on the side of the people against the elites, certain demand conditions and a disregard for future consequences.39 The core of this idea is that populist policies present solutions that are welfare enhancing in the short run for a majority of the population but costly in the long run for the overall population, which seems to be a constant in the literature analysing the economic content of populism.40 Notably, ‘with their PhDs, exclusive jargon, and secretive meetings in far-flung places like Basel and Jackson Hole, central bankers are the quintessential rootless global elite that populist nationalist love to hate’.41 In other words, if the narratives of central bankers seem to sketch them as natural targets for populist policies, then the question that naturally arises is under which conditions can a populist reform dispute the degree of CBI, which is the pillar of central banks’ power. As we stressed above, until the start of the 2007–08 financial crisis, the independence of central banks was the benchmark for evaluating the effectiveness of monetary policy institutions around the world. A broad consensus supported that institutional design.42 CBI has again become a relevant subject in academia (Figure 3.1), as well as in politics and the media. However, critical voices now seem to dominate.43 This is mainly due to the fact that the economic and political importance of central banks in the advanced economies has grown since the beginning of the crisis.44 Supervisory and regulatory functions have been piled on the central banks, thereby increasing the relationships among banking, fiscal, and monetary policies.45 The lines between the central bank’s role as liquidity manager and the Daron Acemoglu, Georgy Egorovm, and Konstantin Sonin, ‘A Political Theory of Populism’ (2013) 128 The Quarterly Journal of Economics 771 (hereafter Acemoglu, Egorovm, and Sonin, ‘A Political Theory of Populism’). 38 Alessandro Dovis, Mikhail Golosov, and Ali Shourideh, ‘Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity’ (2016) NBER Working Paper Series No 21948; Linuz Aggeborn and Lovisa Persson, ‘Public Finance and Right-Wing Populism’ (2017) IFN Working Paper Series No 1182; Dani Rodrik, ‘Populism and the Economics of Globalization’ (2018) 1 Journal of International Business Policy 12. 39 Luigi Guiso and others, ‘Demand and Supply of Populism’ (2017) EIEF Working Papers Series No 1703. 40 Jeffrey D Sachs, ‘Social Conflict and Populist Policies in Latin America’ (1989) NBER Working Paper Series No 2897; Dornbusch and Edwards, The Macroeconomics of Populism in Latin America (n 37); Acemoglu, Egorovm, and Sonin, ‘A Political Theory of Populism’ (n 37); Nicholas Chersterley and Paolo Roberti, ‘Populism and Institutional Capture’ (2016) Department of Economics, University of Bologna Working Paper Series No 1086. 41 Rajan, ‘Central Banks’ Year of Reckoning’ (n 36). 42 Michaël Aklin and Andreas Kern, ‘Is Central Bank Independence Always a Good Thing?’ (APPAM Fall Research Conference The Role of Research in Making Government More Effective, Washington DC, November 2016); Stephen G Cecchetti, ‘Central Bank Independence: A Path Less Clear’ (Speech, International Conference, Bank of Mexico, October 2013) (hereafter Cecchetti, ‘Central Bank Independence’); Tamim Bayoumi and others, ‘Monetary Policy in the New Normal’ (2014) Staff Discussion Notes No 14/3 (hereafter Bayoumi and others, ‘Monetary Policy in the New Normal’); Fisher, ‘Central Bank Independence’ (n 18); Goodhart and Lastra, ‘Populism and Central Bank Independence’ (n 36); Otmar Issing, ‘Central Bank Independence—Will It Survive?’ in Sylvester C W Eijffinger and Donato Masciandaro (eds), Hawks and Doves: Deeds and Words (CEPR Press 2018) (hereafter Issing, ‘Central Bank Independence’); John C Williams, ‘Monetary Policy and the Independence Dilemma’ (2015) FRBFS Economic Letters No 15. 43 Alesina and Stella, ‘The politics of monetary policy’ (n 24); Cecchetti, ‘Central Bank Independence’ (n 42); Bayoumi and others, ‘Monetary Policy in the New Normal’ (n 42); Issing, ‘Central Bank Independence’ (n 42). See also Joseph E Stiglitz, ‘A Revolution in Monetary Policy: Lessons in the Wake of the Global Financial Crisis’ (The 15th C D Deshmukh Memorial Lecture, Mumbai, 3 January 2013); Ed Balls, James Howat, and Anna Stansbury, ‘Central Bank Independence Revisited: After the financial crisis, what should a model central bank look like?’ (2016) M-RCBG Associate Working Paper No 67; Rodrik, ‘In Defence of Economic Populism’ (n 36). 44 Buiter, ‘Central Banks’ (n 5). 45 Bayoumi and others, ‘Monetary Policy in the New Normal’ (n 42); de Haan and Eijffinger, ‘Central Bank Independence under Threat?’ (n 36); Donato Masciandaro and Davide Romelli, ‘Central bankers as

3.29

50 THE ECONOMICS OF MONETARY INTEGRATION Central Bank Independence: Articles and Papers

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Figure 3.1 Articles with ‘central bank independence’ in the title (1991–2015)1 1The figure presents the evolution in the number of academic papers published with a title containing the phrase

‘central bank independence’ between 1991 and 2015. Data obtained from SSRN and JSTOR. Source: Masciandaro and Romelli, ‘Peaks and Troughs’ (n 45).

government’s solvency support for banking and financial institutions have been blurred, inevitably triggering a debate over the shape of central bank settings and, in particular, the features of CBI.46 3.30

In this context, an important question is whether the policy-blurring effect has made the pendulum swing towards concrete reforms that reduce CBI. Thus far, comparative analyses have not provided homogenous results.47 Overall, the general debate on the optimal degree of CBI and the need for an independent, supranational central bank in the EU—the institutional pillar of European monetary integration—is once again vivid and intense.

supervisors: do crises matter?’ (2018) 50 European Journal of Political Economy 120; Donato Masciandaro and Davide Romelli, ‘Peaks and Troughs: Economics and Political Economy of Central Bank Independence Cycles’ in David Mayes, Pierre L Siklos, and Jan-Egbert Sturm (eds), Oxford Handbook of the Economics of Central Banking (OUP 2018) (hereafter Masciandaro and Romelli, ‘Peaks and Troughs’). 46 Nier, ‘Financial Stability Frameworks’ (n 30); Charlie Bean, ‘Central Banking Then and Now’ (Sir Leslie Melville Lecture, Australian National University, Canberra, 12 July 2011); Stephen G Cecchetti and others, ‘The Future of Central Banking Under Post-Crisis Mandates’ (2011) BIS Paper No 55; Ingves, ‘Central Bank Governance and Financial Stability’ (n 30); Ricardo Reis, ‘Central Bank Design’ (2013) 27(4) Journal of Economic Perspectives 17; Cukierman, ‘Central bank independence’ (n 8); Alex Cukierman, ‘Monetary Policy and Institutions before, during and after the Global Financial Crisis’ (2013) 9 Journal of Financial Stability 373; Cecchetti, ‘Central Bank Independence’ (n 42); Taylor, ‘Central Bank Independence vs Policy Rules’ (n 22); Buiter, ‘Central Banks’ (n 5); Christopher A Sims, ‘Fiscal Policy, Monetary Policy and Central Bank Independence’ (Economic Policy Symposium Proceedings, Federal Reserve Bank of Kansas City, Jackson Hole, 2016); Alan S Blinder and others, ‘Necessity as the Mother of Invention: Monetary Policy After the Crisis’ (2017) 32 Economic Policy 707; Michael D Bordo and Pierre L Siklos, ‘Central Banks: Evolution and Innovation in Historical Perspective’ in Rodney Edvinsson, Tor Jacobson, and Daniel Waldenström (eds), Sveriges Riksbank and the History of Central Banking (CUP 2018). 47 Bodea and Hicks, ‘Price stability and central bank independence’ (n 28); Donato Masciandaro and Davide Romelli, ‘Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession’ (2015) 22 Financial History Review 259; Jakob de Haan and others, ‘Central Bank Independence before and after the Crisis’ (2018) 60 Comparative Economic Studies 183.

Conclusion 51 Consequently, citizens’ and politicians’ perceptions of the advantages and disadvantages of being a member of the EMU are likely to be subjected to closer scrutiny, thereby confirming the endogenous and dynamic nature of such an inquiry.

IV. Conclusion Triggered by the 2007–08 financial crisis, crucial questions about the macroeconomic costs and benefits of the EMU have come into focus. It is well known that in the run-up to the single currency, there was intense debate as to whether the European currency union, which was characterized by an independent, supranational central bank, imperfect and fragmented markets for inputs and outputs, and national, non-monetary policies with incomplete and partial coordination, could progressively reap the net benefits of an OCA via a gradual convergence of policies and performance. However, following the establishment of the euro area, the idea that the economic benefits in various countries were endogenously associated with the EMU’s progress dominated, while the possibility of adverse macroeconomic dilemmas remained relatively hidden or country contingent.

3.31

The main lesson of the financial crisis is that significant financial shocks intertwined with sensible real and fiscal heterogeneities among member countries can pose a relevant threat to the sustainability of the EMU. A country that does not have exchange-rate flexibility or discretionary monetary policies at its disposal may find that the interaction between deep differential growth and financial imbalances, including fiscal imbalances, calls for viable, effective European institutions and policies that can safely and soundly maintain membership in the currency union. In the absence of supranational institutional devices, adverse shocks might magnify the existing real and financial asymmetries, thereby destabilizing the EMU, especially given that political attitudes toward currency-union membership are dynamic and contingent on economic and political drivers.

3.32

Against this background, the following question emerges: How can the advantages and disadvantages of membership in the single currency union be captured in a simple and systematic way? The present chapter has offered a general framework for discussing the economics and political economy of the European monetary integration process. The bottom line is that the net benefits of a single currency are calculated by elected national politicians—ie career-concerned players who try to maximize consensus by pleasing voters and/or lobbies. In so doing, they influence their country’s evaluation of the medium to long-term benefits of fixing the exchange rate and establishing an independent, supranational central bank, and the costs associated with losing the monetary flexibility needed to smooth short-term macroeconomic unbalances and/or implementing potentially unpopular fiscal and structural policies. The role of the political willingness to be a more or less active player in the EMU process can trigger centripetal or centrifugal forces that can either reinforce or weaken the robustness of the EMU’s institutional setting. In other words, the direction and speed of the EMU process depends on two different yet intertwined endogeneity phenomena: endogeneity in the evolution of the advantages and disadvantages of EMU membership, and endogeneity in the political weights assigned to its costs and benefits.

3.33

52 THE ECONOMICS OF MONETARY INTEGRATION 3.34

All in all, for each country, the attitude towards the EMU is an endogenous, dynamic variable that is characterized by booms and busts depending on the political evaluation of the economic costs and benefits of membership in the currency union. In turn, the cycles of national attitudes towards the EMU are likely to accelerate or decelerate its evolution, including the safe and sound functioning of its currency—the euro—and the credibility of its monetary actor, the ECB. The ways in which individual political decisions in each member country can affect the common path of the economic supranational institution is a particularly interesting issue that deserves further analysis.

4

THE POLITICS OF ECONOMIC AND MONETARY UNION Erik Jones

I. Introduction II. An Economic Perspective

A. Irrevocably fixed exchange rates B. Coordinated aggregate demand management C. Fiscal stabilization D. Central bank independence and rules over discretion E. Summarizing the economic perspective

4.1 4.9 4.11 4.18 4.25

4.31 4.40 III. A Political Science Perspective 4.43 A. Expectations and preference convergence 4.45 B. Constitutive effects 4.53 C. Intergovernmental bargaining and power politics 4.61 D. Trading places 4.70

E. Summarizing the political science perspective

IV. Unintended Consequences

A. Phase 1: uncertainty and cognitive dissonance (August 2007–September 2008) B. Phase 2: core versus periphery (September 2008–July 2012) C. Phase 3: Germany versus the ECB (July 2012–July 2015) D. Phase 4: the future of financial governance (July 2015–March 2018) E. Lessons from the crisis

IV. The New Politics of Economic and Monetary Union

4.78 4.82 4.84 4.92 4.107 4.116 4.126 4.131

I. Introduction The purpose of this chapter is to explain why so many experts were surprised by the politics that surrounded Europe’s economic and monetary union (EMU) both during and after the financial crisis that dominated the first two decades of the twenty-first century. This question is important because it has changed fundamentally the relationship between the euro as a single currency and the European Union (EU) as a larger project. Before the crisis, it was fair to say that the euro existed to serve the EU, as one of the many important building blocks in the wider project of European integration. During and after the crisis, it became more common to assert that an end of the euro would entail the end of the European project. That inversion of priorities was unexpected—and it explains, more than anything else, why the politics of economic and monetary union can no longer be ignored.

4.1

The content of this chapter is more about ideas than events or dates. That is surprising as well. Normally, you would expect an analysis of the politics of economic and monetary union to be a narrative of how and why the single currency came about.1 The problem is

4.2

1 The two classic histories are Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union (OUP 1999) and Harold James, Making the European Monetary Union (Harvard UP 2014). Erik Jones, 4 The Politics of Economic and Monetary Union In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0005

54 THE POLITICS OF ECONOMIC AND MONETARY UNION that such narratives tend to obscure more than the reveal about the politics of economic and monetary union today. The reason for this confusion is that ideas about what economic and monetary union entails and the events that led to its construction developed at the same time and in different ways. European monetary integration started in the early 1960s as an economic project with political implications. By the late 1980s and early 1990s, it evolved into a political project with economic implications. Along the way, understanding of the ‘politics of economic and monetary union’ developed along parallel lines within distinct academic communities. Economists focused on the distributive effects associated with sharing a single currency. They talked about who wins, who loses, and whether it would not make more sense to maintain a system of fixed but adjustable (or even floating) exchange rates. Political scientists only picked up the conversation later. In their analysis they focused on constitutive effects and power dynamics. The questions they asked were about the role of a common currency in creating a shared identity and in imposing the values or preferences of one country on the rest. 4.3

These academic interpretations of monetary integration played an outsized role in the politics surrounding the project because they shaped both the design of the institutions or governance arrangements and the perception of interests around them. The reason has to do with the uniqueness of the experiment. The euro is the only currency in history that was constructed with an eye to what may or may not constitute ‘an optimum currency area’. Other currencies emerged either to serve existing political organizations or, more recently in the form of crypto-currencies, to defy any necessary link between money and politics. The euro operates somewhere between these extremes and so the politics of its creation has centred on whether—in economic terms—such a half-way arrangement is a good idea. Somewhat belatedly, the literature—and the political debate—expanded to consider whether there might be beneficial side effects associated with adopting a common currency above and beyond a system of irrevocably fixed exchange rates between the national currencies of participating countries. The French economist Jacques Rueff famously quipped in 1950 that ‘L’Europe se fera par la monnaie ou ne se fera pas’; it took almost forty years for political scientists to explore precisely what he meant.

4.4

Across this evolution of concerns, the two visions of the politics of economic and monetary union—held by economists and political scientists—only partly overlapped. Political scientists read the economics literature, but the reverse rarely happened.2 Hence, political scientists were prepared to build the distributive consequences of sharing a single currency into their analysis. Up into the mid-2000s, the synthesis they offered seemed to hew closely to events. While economists complained that Europe’s countries were not well-suited to share a common currency, political scientists pointed out that Europe’s political leaders were determined enough to complete the economic and monetary union even if the economic consequences were not the same (or even beneficial) from one participating country to the next. That said, the complex and overlapping issues associated with the wider project of European integration often drowned out any clear ‘politics of economic and monetary union’ even when governments—as in Denmark, Sweden, or the United Kingdom—either

2 For a recent illustration, see Markus K Brunnermeier, Harold James, and Jean-Pierre Landau, The Euro and the Battle of Ideas (Princeton UP 2016).

Introduction 55 called a referendum or threatened to call a referendum on the specific question of joining the single currency. Europe as a larger project was always more important than the euro. The onset of the global economic and financial crisis in 2007 and 2008 changed that calculus—because the trigger for the crisis was not something anyone either in the economics community or in the political science community ever anticipated in their analysis of monetary integration. The single currency held up well initially only to show unexpected signs of weakness as the crisis dragged on. These problems were first recognized inside the European Central Bank (ECB), which began to experiment with unconventional settings in the use of its monetary policy instruments in order to alleviate some of the worst symptoms of the crisis. With hindsight, critics have accused the bank of responding too slowly. At the same time, however, central bankers everywhere—but particularly in Europe—were in uncharted territory. In turn, the crisis raised the salience of the single currency from an area of predominantly elite concern to something approaching more general interest as the uncertainty of the new situation began to undermine popular confidence in Europe’s monetary arrangement. Economists made it clear they always had doubts about the economic wisdom of adopting a single currency and political scientists expressed concerns that the monetary union would emerge as a source of division rather than unity.3

4.5

Politicians and policy-makers also played a role in the drama that followed. On the one hand, they were quick to hide behind both the ECB as a monetary authority and the powerful market infrastructures that the economic and monetary union put into place. On the other hand, they were equally quick to mobilize voters against common European institutions which they blamed for exacerbating an already bad situation. The most extreme form of this political response arose during the Greek crisis in July 2015 when it looked as though one group of participating countries would eject another from the single currency. Both economists and political scientists noted that this might spell the end of the monetary union. And it was at this point that high-ranking European officials like European Council President Herman van Rompuy went even further to claim that a failure of the euro would be the end of the European Union as a whole.

4.6

Now the politics of economic and monetary union centres on finding some way for Europe’s politicians and policy-makers to pull back from the brink. In doing so, they have to expose the blind spots in the theoretical analysis of economic and monetary unions so that they can address some of the flaws built into the design of Europe’s economic institutions. They also have to manage both the divisions that have appeared during the recent crisis and the resentment that surrounds the exercise of power politics. This is a delicate task made more complicated by the emergence of an ethical perspective on economic and monetary union that cuts across both economic and political analysis. The politics of economic and monetary union is no longer about distributive or constitutive considerations; instead it is about finding an appropriate balance between national responsibility and European solidarity where the standards for appropriateness are measured in terms of ‘right’ and ‘wrong’. This is a politics that is completely different from the events that

4.7

3 Barry Eichengreen, ‘European Monetary Integration with Benefit of Hindsight’ (2012) 50 Journal of Common Market Studies 123–36; Matthias Matthijs and Kathleen R McNamara, ‘ “The Euro Crisis” Theory Effect: Northern Saints, Southern Sinners, and the Demise of the Eurobond’ (2015) 37 Journal of European Integration 229–45.

56 THE POLITICS OF ECONOMIC AND MONETARY UNION resulted in the creation of the euro and also different from the ideas put forward by economists and political scientists about how Europe’s economic and monetary union is likely to function or should be understood. 4.8

This chapter surveys the politics of economic and monetary union in five sections. The first sets out the economic perspective that dominated the debate from the 1960s until the late 1980s and that covers the canonical economic issues associated with the theory of optimum currency areas and the argument for central bank independence. The second section turns to the political science community in order to bring in notions of identity formation, preference convergence, and power dynamics. The third section highlights the unintended consequences of creating a single currency in Europe that were revealed by the onset of the global economic and financial crisis. The fourth section maps the political debate that has evolved in response to the crisis and has shaped the reform agenda for the decade that followed. The fifth section concludes by showing how the politics of economic and monetary union intersects with the politics surrounding the European Union as a whole. The single currency was originally conceived as an instrument to support the European project; now, it seems, the European project is focusing ever more narrowly on ensuring that the euro does not fall apart as an economic and monetary union.

II. An Economic Perspective 4.9

The economic perspective on ‘the politics of economic and monetary union’ has four central features. The most important is that it focuses on trade and unemployment rather than capital flows, price stability, or the symbolic value that ordinary people may attach to the international value of their domestic currency. Beyond that, the economic perspective expands to the broader framework for macroeconomic policy-making and the associated possibility of an ‘exploitable’ trade-off between inflation and unemployment.4 The economic perspective also draws attention to the functioning of shared fiscal institutions and the desirability of a politically independent central bank.5 The basic premise is that a single currency would be uncontroversial wherever a government can insulate workers from unnecessary unemployment arising from external shocks to trade, where governments can stabilize macroeconomic performance through the active use of monetary and fiscal policy, where shared fiscal institutions work to eliminate any differences among regions within the same currency area, and where monetary policy-makers are insulated from political interference in the exercise of their policy mandate. In fact, these issues are so deeply embedded in the foundations of how we understand and talk about European monetary integration that there is hardly any debate about whether ‘politics’ in the real world corresponds in any way with the assumptions economists have made about what people should be discussing and what they should not.

4 William D Nordhaus, ‘The Political Business Cycle’ (1975) 42 The Review of Economic Studies 169–90. 5 Peter B Kenen, ‘The Theory of Optimum Currency Areas: An Eclectic View’ in Robert A Mundell and Alexander K Swoboda (eds), Monetary Problems of the International Economy (University of Chicago Press 1969) 41–60 (hereafter Kenen, ‘The Theory of Optimum Currency Areas’); Finn E Kydland and Edward C Prescott, ‘Rules Rather than Discretion: The Inconsistency of Optimal Plans’ (1977) 85 Journal of Political Economy 473–91 (hereafter Kydland and Prescott, ‘Rules Rather than Discretion’).

An Economic Perspective 57 As with most forms of conventional wisdom, this economic notion of the politics of economic and monetary union is the result of a long and gradual accumulation of insights. It is also a function of the contingencies associated with that evolutionary process. The project to integrate national currencies in Europe emerged in the early 1960s, shortly after the deadline for introduction of full currency convertibility among participants in the Bretton Woods system of fixed but adjustable exchange rates. The project was not fully formed until the advent of the Werner Plan in the late 1960s, but the seeds of the idea took root at about the same time that the countries which signed the 1958 Treaty of Rome began to elaborate their European Economic Community.6 The timing is important for a number of reasons: the Bretton Woods system relied on national capital controls, and so the ‘full convertibility’ referred only to currency transactions related to the movement of goods and services across national boundaries; the macroeconomics profession had not yet embraced the notion of freely-floating exchange rates as a viable policy alternative to the fixed-but-adjustable model for currency management; and the Keynesian consensus on the use of macroeconomic instruments to stabilize aggregate demand across the business cycle was still in ascendance. These factors are worth underscoring because they focused attention on the importance of currency for trade, because they limited the scope of comparison between a monetary union and other arrangements, and because the only real competition for the assignment of macroeconomic policy instruments was between external targets like the balance of payments and internal targets like inflation and unemployment.

4.10

A. Irrevocably fixed exchange rates Within this context, it is unsurprising that analysis of the politics of economic and monetary union focused primarily on two dimensions: one is the impact of creating a monetary union among two countries on the balance of trade between those countries (or regions); the other concerns the options for policy-makers in one country (or region) who face a sudden external shock to the demand for their exports to the other country (or region). A monetary union is an irrevocably fixed exchange rate between any two currencies, which may or may not extend to the introduction of a single currency managed by a shared central bank. Since the exchange rate is irrevocably fixed, the only way for policy-makers in one country to respond to the sudden drop in demand for their output by the other country in the monetary union would be to find some other way to change the relative prices of what they produce for export and what they import from abroad.

4.11

That ‘other way’—called an ‘internal’ devaluation because devaluing the currency externally is no longer an option—involves lowering relative wages and, given downward wage stickiness, rising unemployment. In turn, the only way to relieve that unemployment is for workers to move from the country that experiences the shock, where wages are falling, to the country that benefits in relative terms, where wages remain high. Hence, as Robert Mundell argued, an ‘optimum currency area’ is one where labour is free to move across

4.12

6 See, for example, Ivo Maes, Economic Thought and the Making of European Monetary Union (Edward Elgar Publishing 2002). See also Chapter 1 Section I of this work.

58 THE POLITICS OF ECONOMIC AND MONETARY UNION borders. Where labour is not free to move from one place to another, policy-makers would be better off rejecting a system of irrevocably fixed exchange rates (or monetary union) and retaining the ability to change the exchange rate so that they could avoid unnecessary unemployment.7 4.13

This notion of the optimum currency area rests on a number of simplifying assumptions, of which the economic ones are the most obvious. There are only two countries (or regions) in the model Mundell used for illustration and so any shortfall in demand for exports from one country (or region) to another cannot be made up by the rest of the world. The two-country model also focuses attention on relative prices within the currency union and not between the currency union and everywhere else. These assumptions should be understood in terms of the advantages that a monetary union has to offer. The main reason for policy-makers to fix exchange rates between countries irrevocably is to stabilize relative traded goods prices and so strengthen an already intense economic relationship. The more two countries (or regions) trade with one-another, the stronger these advantages become. Hence it only stands to reason that the argument would ignore the outside world in trying to establish a clear cost-benefit calculus.

4.14

The political assumptions are subtler and have tended to go unnoticed. Nevertheless, they have played a decisive role in shaping how we understand the politics of economic and monetary union. To begin with, policy-makers have to care about the unemployment that results from trade shocks. Specifically, politicians care because voters will hold them to account. In political terms, this means that anyone who suffers from unemployment or even the heightened risk of unemployment as a result of a fall in the demand for exports is going to make some sort of connection between their plight as individuals and the political decision to fix exchange rates irrevocably with a major trading partner. Mundell’s simple model for an optimum currency area also assumes that policy-makers would try to respond to unemployment using the exchange rate rather than some other policy instrument. In turn that means that voters care less about a change in the exchange rate than they care about the rise of unemployment.

4.15

These political assumptions are hard to reconcile with the experience of the 1950s and 1960s. For example, successive British governments showed very little regard for the impact of trade shocks on manufacturing employment; indeed, they often used monetary policy instruments to slow down the domestic economy in response to external shocks so that they could increase the downward pressure on wages and hence also the speed of adjustment. British macroeconomic performance tended to follow a stop-go pattern as a result. British governments also worried about the political symbolism surrounding the pound sterling as an international currency and the domestic political response they would suffer if they pound were to lose value against major trading partners. For their part, the British people showed little evidence of concern that political obsession with the external value of the pound sterling would do lasting damage to the British economy.8

7 Robert A Mundell, ‘A Theory of Optimum Currency Areas’ (1961) 51 The American Economic Review 657– 64 (hereafter Mundell, ‘A Theory of Optimum Currency Areas’). 8 Stephen Blank, ‘Britain: The Politics of Foreign Economic Policy, the Domestic Economy, and the Problem of Pluralistic Stagnation’ (1977) 31 International Organization 673–721.

An Economic Perspective 59 Moreover, the exceptions were not limited to those countries that suffered a sudden drop in demand for their exports. Countries that experienced a surge in demand also faced adjustment problems for which a change in the exchange rate was politically inexpedient. Here the best illustration is Germany. When the German government made the Deutschemark fully convertible in 1958, international demand for German exports pushed the domestic economy toward overheating. This confronted German policy-makers with a choice between increasing the value of the Deutschemark relative to the outside world or allowing upward pressure on wages. Export industries argued initially that any Deutschemark appreciation should be avoided as a threat to their international competitiveness. When the German Bundesbank experimented with trying to hold the exchange rate between the Deutschemark and the United States (US) dollar constant, however, the rest of the German population complained about the sudden upward pressure on domestic price inflation. Ultimately policy-makers adopted a compromise that served neither set of interests effectively, periodically raising the Deutschemark by increments small enough not to spark the ire of powerful export manufacturers and yet not large enough to fend off the persistent threat of suddenly accelerating inflation.9

4.16

Mundell was well-aware of the fact that his model for optimum currency areas was politically unrealistic. In his view, optimum currency areas correspond with economic regions of relatively free labour mobility that may be smaller than national boundaries and may also encompass parts of different countries. That is why he was insistent that ‘the optimum currency area is the region’; that ‘in the real world . . . currencies are mainly an expression of national sovereignty’; and that ‘actual currency reorganization would be feasible only if it were accompanied by profound political changes’. He cited the project to create an economic union in Western Europe as one such opportunity for re-engineering monetary relations, and he concluded that the relative merits of the project boil down to an empirical question as ‘to whether or not Western Europe can be considered a single region’.10 This question has dominated the economic debate about European monetary integration ever since.

4.17

B. Coordinated aggregate demand management The notion of an economic ‘region’ has also attracted other forms of attention. The British and German examples are useful to underscore that forming an economic and monetary union has implications that extend beyond trade and factor mobility to touch on the broader framework for macroeconomic policy-making. This broader context is where the ascendant Keynesian consensus on aggregate demand management comes into play, as does the widespread reliance on capital controls within the context of the Bretton Woods system. In the presence of fixed exchange rates, monetary policy is more effective in influencing macroeconomic performance in the presence of capital controls, while fiscal policy is more effective with capital mobility; where exchange rates are allowed to move, the situation is reversed.11 9 Michael Kreile, ‘West Germany: The Dynamics of Expansion’ (1977) 31 International Organization 775–808. 10 Mundell, ‘A Theory of Optimum Currency Areas’ (n 7) 660–62. 11 Robert A Mundell, ‘The Monetary Dynamics of International Adjustment under Fixed and Flexible Exchange Rates’ (1960) 74 The Quarterly Journal of Economics 227–57.

4.18

60 THE POLITICS OF ECONOMIC AND MONETARY UNION 4.19

Ronald McKinnon’s contribution to the debate on optimum currency areas built on this wider context by focusing attention on the relative dependence of the domestic economy on trade with the outside world and hence the relative effectiveness of monetary and fiscal policy for aggregate demand management. McKinnon also drew attention to the liquidity value of currency and hence the demand for foreign balances. Where a country trades a lot with the outside world, macroeconomic policy instruments are less effective and domestic residents have an incentive to hold onto foreign currency; where a country trades less with the outside world, macroeconomic policy instruments are more effective and the incentive to hold balances in foreign currency is diminished. By implication, a larger currency area not only gives policy-makers greater power to stabilize unemployment and inflation, but it also benefits from greater liquidity—meaning the ability to convert other assets, including real goods or services, into money.12

4.20

As with Mundell’s contribution, the political assumptions underpinning McKinnon’s analysis are subtle. Governments may cobble their national currencies together to create a more effective space for aggregate demand management and yet not agree on how to use their shared macroeconomic instruments or what constitutes an appropriate trade-off between inflation and unemployment. By the same token, domestic residents may have different preferences for liquidity or price stability. To simplify the analysis, McKinnon assumes away any such divisions. In his model, governments hold roughly the same preferences around the trade-off between inflation and unemployment and people in different countries hold roughly the same preferences for liquidity and price stability.

4.21

Again, these assumptions are hard to reconcile with experience. The spread of Keynesian ideas about aggregate demand management was uneven and the instruments deployed by governments tended to differ significantly from one country to the next.13 Monetary and fiscal policy were only two of the levers West European policy-makers used to influence inflation, unemployment, and the balance of payments. Wage concertation and credit rationing were also prominent in the policy mix.14 Where they have been used, such policies have a profound influence on how policy-makers and the public perceive the trade-off between inflation and unemployment; they also influence how the public views the role of money and the relative merits of price stability.15

4.22

McKinnon concludes his piece with an observation about the different dimensions of factor mobility. He notes that Mundell’s argument focuses on mobility in geographic terms and yet mobility between sectors may be equally important. McKinnon frames his observation as a way to restore national autonomy. Governments with efficient local factor markets (that is, where labour moves easily between productive sectors within a given geographic space) have less need for either monetary integration or cross-border labour mobility. They may choose to engage in monetary integration as part of some broader strategy for industrial 12 Ronald I McKinnon, ‘Optimum Currency Areas’ (1963) 53 The American Economic Review 717–25. 13 This is the theme that runs throughout Peter A Hall, The Political Power of Economic Ideas: Keynesianism across Nations (Princeton UP 1989). 14 See, for example, John Zysman, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change (Cornell UP 1984); Peter A Hall, Governing the Economy: The Politics of State Intervention in Britain and France (OUP 1986). 15 Peter A Hall, ‘Central Bank Independence and Coordinated Wage Bargaining: Their Interaction in Germany and Europe’ (1994) 31 German Politics and Society 1–23.

An Economic Perspective 61 specialization and they may also choose to foster greater cross-border labour mobility to run alongside that choice for a single currency, but that is essentially a political decision. McKinnon’s observation about the different dimensions of factor mobility is important be- 4.23 cause it reveals a complex set of trade-offs surrounding the choice to fix exchange rates irrevocably. For example, it is unclear that mobility between sectors within a region or country is a close substitute for immigration or emigration in political terms. This is true not just because of the possibilities for mixing (or losing) populations but also because the institutions that create labour market rigidities within countries (or regions) and the institutions that create labour market rigidities between countries (or regions) serve different functions and so reflect different sets of values. Imagining a clear ‘politics’ of the choice to form an economic and monetary union in that context implies a huge capacity on the part of both politicians and voters to make connections from one area of economic policy- making to the next. Moreover, the issue is not limited to factor markets. It is also unclear that voters can recognize the connections between the choice of exchange rate regime and the government’s strategy for industrial policy. Again, the simplifying assumption from Mundell is that politicians and voters view the choice to fix exchange rates irrevocably in terms of the balance of payments and the threat of unnecessary unemployment as a consequence of shocks to the demand for exports. McKinnon’s goal is to expand that consideration to include the effectiveness of macroeconomic policy instruments in aggregate demand management. His political assumption is that politicians who opt for more effective macroeconomic instruments through monetary integration will somehow be rewarded by voters. Yet the reality is that many regions within countries suffer from persistently high levels of unemployment and also periodic shocks to the demand for what they produce. Moreover, those regions are often ill-served by the way macroeconomic policy instruments are targeted to meet the needs of the national economy as a whole. Hence it is reasonable to ask why those regions do not rebel against the imposition of a common currency that irrevocably fixes exchange rates between themselves and other parts of the country.

4.24

C. Fiscal stabilization Peter Kenen confronted this problem of persistently poor regional macroeconomic performance within monetary unions from two different directions, empirically and institutionally. His empirical approach focused on the relative diversity of industrial structures and hence the correlation of business cycles both across regions within countries and across countries. Where production structures are well diversified and hence business cycles are tightly correlated, then regions or countries should benefit from the same macroeconomic policies. This notion of industrial diversification and correlated business cycles offers another window on what constitutes an optimum currency area. It does not explain, however, how countries hold together when the business cycles in different regions are uncorrelated. That is where institutions come into the mix. Kenen suggested that the fiscal institutions for raising taxes and distributing transfers would have an implicit stabilizing function on regional economic performance insofar as regions at the top of the business cycle would pay higher taxes and receive fewer transfers relative to the national average while regions at the

4.25

62 THE POLITICS OF ECONOMIC AND MONETARY UNION bottom of the business cycle would pay lower taxes and receive more transfers. Within this argument, it does not matter much if the tax and transfer institutions are strongly or weakly progressive across social groups or income classes; what is important is that the institutions for taxes and transfers be the same (or similar) from one region to the next.16 4.26

Kenen’s argument is the third classic in the theory of optimum currency areas and like Mundell’s and McKinnon’s work, it rests on a foundation of subtle and yet important economic and political assumptions. In economic terms, for example, Kenen’s argument about business cycle correlations assumes that the different regions of the country all respond in similar fashion to the influence of monetary and fiscal policies. If there are asymmetries in the transmission of monetary policy or in the pattern of discretionary fiscal spending, they would complicate the analysis. Hence, it is simpler to assume they are the same. Similarly, Kenen assumes that the same tax and transfer institutions will have similar implications across different parts of the country. This is the same as assuming that all the rich people do not congregate in one part of the country and all the pensioners somewhere else—or that cyclical unemployment is evenly distributed from one place to the next. Real-world demographics do not reflect this kind of geographical symmetry but building asymmetries into the argument overcomplicates the modelling (and can in any case be pulled out of empirical tests through the judicious use of control variables).

4.27

In political terms, some of Kenen’s assumptions reflect those made by McKinnon. All parts of the country are assumed to have similar attitudes toward Keynesian aggregate demand management, for example. More important, they all have the same regard for the operation of common institutions for taxes and transfers. Where Kenen adds something new is in the assumption he makes about the politics of fiscal stabilization across regions: people in those regions at the top of the business cycle should be indifferent to or even supportive of the implicit transfers they are making to other, less fortunate parts of the country. More important, perhaps, voters everywhere should be indifferent to or even supportive of those fiscal institutions that make interregional transfers automatically through the levying of taxes and the payment of benefits.

4.28

Like the political assumptions made by Mundell and McKinnon, Kenen’s political assumptions are hard to reconcile with experience. This is easiest to describe with respect to implicit and automatic transfers across regions. Although it is possible to find arrangements like the system for Finanzausgleich across West German Länder (or regions) before unification which provide for a geographic redistribution of income, most welfare states redistribute across social groups and not geographic space. Moreover, most countries where shared fiscal institutions redistribute income across regions are wracked by controversy and conflict. A good example is Belgium. That country’s intra-mural tensions have many roots, but the north-south transfers through welfare state and fiscal institutions feature prominently among the grievances—and have since the country was founded in the nineteenth century.17

16 Kenen, ‘The Theory of Optimum Currency Areas’ (n 5). 17 See, for example, Rudy Aernoudt, Vlaanderen—Wallonië Je t’aime moi non plus (Roularta Books 2006); Juul J Hannes, De mythe van de omgekeerde transfers: Fiscale prestaties van Vlaanderen, Wallonië en Brabant, 1832–1912 (Roularta Books 2007).

An Economic Perspective 63 The assumption that different countries have similar or even compatible attitudes toward Keynesian aggregate demand management is also problematic. Indeed, macroeconomic policy divergence in response to the crisis of the early 1970s is what brought an end to Europe’s first attempt to create an economic and monetary union. Although the governments that opted to join the European Snake Mechanism for exchange rate coordination during the breakdown of the Bretton Woods System were well aware of the requirement to coordinate the use of their macroeconomic instruments, each responded differently in light of their distinctive policy traditions and domestic imperatives. By the mid-1970s, a group of experts headed by French diplomat Robert Marjolin concluded:

4.29

Europe is no nearer to EMU than in 1969. In fact, if there has been any movement it has been backward. The Europe of the Sixties represented a relatively harmonious economic and monetary entity which was undone in the course of recent years; national economic and monetary policies have never in twenty-five years been more discordant, more divergent, than they are today.18

This experience does not vitiate the assumptions underlying the theory of optimum currency areas. Models rely on simplification to generate insight. The challenge is to wait for the conditions for monetary integration to be more appropriate. That is why so many economists have spent so much time constructing and executing empirical tests to answer the question Mundell posed at the outset: is Europe an economic region? The answers have only become more complicated as the conditions for optimality have multiplied.

4.30

D. Central bank independence and rules over discretion In the meantime, the experience of divisions among European macroeconomic policy- 4.31 makers was in many ways self-correcting. The mid-1970s marked the start of a gradual convergence of macroeconomic preferences around a limited set of general principles focused on the virtues of ‘stable money’ and ‘sound finances’. The convergence centred on domestic policy-making rather than any imperative for monetary integration. Economists looked to see whether Europe was an economic area suitable for monetary integration but for policy- makers the convergence in macroeconomic preferences reflected domestic rather than European (or ‘regional’) objectives. As a result of the crisis of governance in the early-to mid-1970s, policy-makers gained as appreciation of the ‘economics of interdependence’ within which international coordination is necessary for governments to achieve their domestic policy agendas.19 They developed a practice of international economic summitry.20 They also began to share insights on financial regulation with an eye to developing common standards and shared best practice.21

18 Robert Marjolin, ‘Report of the Study Group “Economic and Monetary Union 1980” ’ (1975) Commission of the European Communities Working Document 8 (hereafter Marjolin, ‘Report of the Study Group’). 19 Richard N Cooper, The Economics of Interdependence: Economic Policy in the Atlantic Community (McGraw- Hill Book Company 1968). 20 Robert D Putnam and Nicholas Bayne, Hanging Together: The Seven-Power Summits (Chatham House 1984). 21 Charles Goodhart, The Basel Committee on Banking Supervision: A History of the Early Years (CUP 2011).

64 THE POLITICS OF ECONOMIC AND MONETARY UNION 4.32

Within that convergence, granting political independence to central banks emerged as the strongest point of consensus. The economic arguments for central bank independence derived their strength from the time inconsistency dilemma and the long-run neutrality of money: monetary policy-makers can exploit the trade-off between inflation and unemployment in the short run only by surprising market participants with a sudden easing of monetary conditions; in the long-run, however, the result of that monetary easing cannot push the economy beyond full employment and so will only result in price inflation.22

4.33

The rational expectations of market participants further exacerbate an already bad situation. Once market participants learn to anticipate efforts by central banks to overstimulate the economy, they will start to build higher prices into their pricing decisions and wage contracts. Hence active use of monetary policy for political purposes not only results in higher rates of inflation, but also risks the possibility of accelerating expectations. The first best solution, therefore, is not only to ensure that politicians cannot influence monetary policy decisions in line with their short-term political interests; it is also to install central bank governors who are more conservative in their attitudes toward price stability than is the median voter.23

4.34

The political implications of this confluence of factors for the practice of economic governance are striking. To begin with, fiscal policy-makers have to start thinking in terms of two-level games, where coordination with governments in other countries is at least as important as efforts to satisfy domestic constituencies.24 This situation is more complicated for central bankers, however, because they are implicated in two different roles—as financial market regulators as well as monetary policy-makers. Even those central banks that do not have direct supervisory authority, like the Bank of England between 2001 and 2013, are implicated in bank supervision through their lender-of-last-resort functions. Moreover, central bankers should be insulated from political interference in their conduct of monetary policy-making. As a consequence, they face a two-level game in financial market regulation, and yet the political game they play in terms of monetary policy lacks a domestic dimension. Indeed, central bankers are ill-equipped to play domestic monetary games because they are selected (and socialized) to have a different perspective on monetary issues from the mainstream of the electorate.

4.35

These political implications changed the conduct of macroeconomic governance, particularly in Europe, in three ways. First, fiscal policy-makers and monetary policy- makers evolved into two very different communities, only one of which remained under strict political control. Second, central bankers tended to focus more attention on monetary policy-making, where they achieved increasing levels of political independence, than on financial market regulation or lender-of-last-resort functions, where they remained under political scrutiny.25 Third, central bankers began to interact more—and 22 Kydland and Prescott, ‘Rules Rather than Discretion’ (n 5); Robert J Barro and David B Gordon, ‘Rules, Discretion, and Reputation in a Model of Monetary Policy’ (1983) 12 Journal of Monetary Economics 101–21. 23 Kenneth Rogoff, ‘The Optimal Degree of Commitment to an Intermediate Monetary Target’ (1985) 100 The Quarterly Journal of Economics 1169–189. 24 Robert D Putnam, ‘Diplomacy and Domestic Politics: The Logic of Two-Level Games’ (1988) 42 International Organization 427–60. 25 Charles A E Goodhart, ‘Global Macroeconomic and Financial Supervision: Where Next?’ in Robert C Feenstra and Alan M Taylor (eds), Globalization in an Age of Crisis: Multilateral Economic Cooperation in the

An Economic Perspective 65 more easily—with one-another than with their own domestic political institutions and counterparts. They became, as Juliette Johnson describes them, a ‘wormhole community’, whose political legitimacy rests on their ability to deliver satisfactory policy outcomes over the longer term.26 A weaker point of consensus is that fiscal policy should accommodate some kind of monetary target, whether in the form of an exchange rate commitment or an expected rate of inflation. This accommodation by fiscal policy-makers is not a complete abandonment of Keynesian aggregate demand management. It is also not a repudiation of the welfare state. On the contrary, fiscal policy-makers can and should respond to periodic economic downturns either through automatic stabilizers (meaning automatic reductions in taxes or increases in benefits payouts as in Kenen’s contribution to the theory of optimum currency areas). Governments are also free to redistribute income provided they do not run excessive deficits. Hence the accommodation of fiscal policy to monetary policy exists primarily as an injunction to avoid over-shooting when stimulating in the context of cyclical downturns and it is also a rejection of structural imbalances between revenues and expenditures at any given point in the business cycle.

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What unites these two points of consensus is a growing preference for rules over discretion in the conduct of macroeconomic policy. Central bankers should follow rules in setting their monetary instruments; fiscal policy-makers should follow rules in their decisions on taxing and spending. The political independence of central bankers is a rule that effectively ensures the predominance of monetary policy over fiscal policy. And the injunction against running excessive deficits in response to macroeconomic downturns or across the business cycle is a rule that sets boundaries on the conduct of fiscal policy.

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The major assumption here is that everyone accepts the same policy rules. In many ways, this is a variation on McKinnon’s assumption about the similarity of attitudes toward the conduct of monetary policy across the business cycle and Kenen’s assumption about the shared acceptance of fiscal institutions for taxes and transfers. The ‘politics’ surrounds the choice of the rule and not the day-to-day conduct of policy-making within the rule-based framework. Application of the rules may create winners and losers from one situation to the next, but those distributive implications are easily ignored by the electorate.

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Europe’s economic and monetary union reflects this unique pattern of preference convergence. The initial plan was drafted by a committee of central bankers under the leadership of the President of the European Commission, Jacques Delors.27 That plan included provisions for a clear separation between monetary policy and fiscal policy, with monetary policy instruments assigned to achieve the goal of price stability. Fiscal policy remained relatively unconstrained so long as it did not interfere with the conduct of monetary policy or its

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Twenty-First Century (University of Chicago Press 2012); Maurice Obstfeld, ‘Finance at Center State: Some Lessons of the Euro Crisis’ (2013) Economic Papers 493. 26 Juliette Johnson, Priests of Prosperity: How Central Bankers Transformed the Postcommunist World (Cornell UP 2016). 27 See Chapter 1 Section I of this work.

66 THE POLITICS OF ECONOMIC AND MONETARY UNION achievement of that price-stability objective. Finally, the plan centred on the creation of a European system of central banks—and a European Central Bank—that would work collectively, independent of political oversight or interference.28

E. Summarizing the economic perspective 4.40

The influence of economists in framing the debate about European monetary integration is unsurprising. Although the creation of a single currency was a major political project, not many politicians or policy-makers had much understanding of the many technical issues involved. Hence, they relied on economic advisors who built on the latest developments in economic analysis to identify those issues that they considered most important and those that they could relegate to the sidelines of the debate. The most important issues were, in the first instance, trade and adjustment, policy autonomy, and either some synchronization of business cycles across the monetary union or some mechanism to smooth out any asymmetries in macroeconomic performance. Later on, economists stressed the need for any monetary union to embrace the evolving conventional wisdom regarding the conduct on macroeconomic policy in a domestic context, which means insulating monetary policy- making from political interference, making fiscal policy in some ways accommodate the requirements for monetary stability, and creating a rule-based framework for coordinating policies from one country to the next.

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This collection of issues was internally consistent and intellectually coherent. Moreover, it afforded a ‘politics’ that both politicians and policy-makers could recognize. You can see the impact of this economic perspective, for example, on the ‘five tests’ that Gordon Brown created to assess whether Britain should join the euro (see Box 4.1). The language of the tests draws explicitly upon the theory of optimum currency areas; it also builds on Brown’s prior

Box 4.1 Gordon Brown’s Five Economic Tests for British Participation in the Euro Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis? If problems emerge is there sufficient flexibility to deal with them? Would joining EMU create better conditions for firms making long-term decisions to invest in Britain? What impact would entry into EMU have on the competitive position of the UK’s financial services industry, particularly the City’s wholesale markets? In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs? Source: http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/euro_assess03_repexecsum. htm.

28 Jacques Delors, ‘Report on Economic and Monetary Union in the European Community’ (Committee for the Study of Economic and Monetary Union 1989) (hereafter Delors, ‘Report on Economic and Monetary Union’).

A Political Science Perspective 67 decision to give operational independence to the Bank of England. Most important, the very existence of the tests reflects the predominance of rules over discretion: the politics lies in the choice of the rules, of which the choice to fix exchange rates irrevocably between the pound and the euro is the most important; once the rules are accepted, that politics comes to an end.29 Consistent and coherent is not the same as comprehensive. Brown’s five tests missed a lot of what we might conventionally think of as the ‘politics’ surrounding Britain’s participation in the euro. Moreover, much of what the tests left out was omitted from the economic analysis of optimum currency areas and central bank independence. The symbolic importance of the currency is arguably the most obvious element. The potential for conflict over macroeconomic strategies, fiscal institutions, or the underlying policy trade-off between inflation and unemployment are important as well. Most important, perhaps, is the politics associated with institutional adaptations that would be required to join the single currency (or participate fully in the common market). This touches on something that McKinnon highlighted in his work. Nevertheless, the question is not whether labour markets are sufficiently flexible within or across national boundaries, but rather how to achieve that flexibility in terms of labour market (or factor market) performance. The politics of institutional reform and adaptation is significant, as is the politics surrounding labour market performance. The question is not just about the relative balance of power between labour and capital as it plays out in terms of labour market protection and flexible adjustment; it is also about whether domestic flexibility and international, cross-border flexibility are functionally compatible and politically equivalent. These are all concerns that Brown’s five tests did not touch upon and that also failed to emerge from the economic perspective on the politics of monetary integration.

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III. A Political Science Perspective The political science perspective fared only slightly better than the economic perspective in developing a comprehensive overview of the politics of economic and monetary union. The reason is at least partly because political scientists grounded their analysis in the economic theory of optimum currency areas and so brought all the same assumptions made by economists into their understanding of what an economic and monetary union would entail and how it would function. The questions political scientists asked were about why the membership criteria and governance structures often failed to reflect the kinds of issues that economists thought should be important. More fundamentally, they were about why politicians would want to adopt a single currency across countries that did not constitute an economic area in Mundell’s sense of the term. These are significant questions insofar as they underscore that the politics of economic and monetary union is about more than just what is ‘optimal’ for Europe as a whole. The give and take between Member States also matters. Moreover, the questions posed by political scientists suggest the possibility that the creation of a monetary union will bring more to the European project than just a marginal improvement in market efficiency and macroeconomic policy

29

Alasdair Blair, Saving the Pound? Britain’s Road to Monetary Union (Prentice Hall 2002).

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68 THE POLITICS OF ECONOMIC AND MONETARY UNION coordination. In this sense, political scientists succeeded in capturing elements of the politics of economic and monetary union that economists left out of their analysis. They just did not go far enough. 4.44

The goal in surveying the political science perspective is not to denigrate its accomplishments any more than it would make sense to deny the advances made by economists. Rather the point is to explain how even a richer analysis of the politics of economic and monetary union as it unfolded failed to reveal the blind spots in the design and functioning of the single currency that would emerge during the crisis. This richer analysis of the politics of economic and monetary union also failed to anticipate the political contestation that would erupt once the single currency got into trouble. For all their accomplishments, political scientists did a better job capturing the politics of economic and monetary union as it was than they did in anticipating what it would become.

A. Expectations and preference convergence 4.45

The political science perspective starts with the convergence of policy preferences and expectations that took place in Europe starting in the 1970s and continuing through the 1980s. The difference, however, is that political scientists were (and still are) more willing to describe that convergence as a historically contingent sharing of ideas than as the result of some evolutionary development in the more general understanding of states and markets.30 Hence, where economists were quick to celebrate the neoclassical synthesis as the next stage in the development of their profession, political scientists were more willing to accept that this temporary convergence of views may break down at some point in the future. Monetary integration no doubt benefited from the convergence of preferences among macroeconomic policy-makers because it became easier to agree on a specific institutional arrangement to be shared across countries. The fact of such agreement at any one point in time, however, should not be confused with a sense of permanence.31

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The French government’s decision in 1982– 83 to embrace austerity and to reject ‘Keynesianism in one country’ was the pivotal moment in this meeting of minds across countries.32 Successive French governments convened under the leadership of French President François Mitterrand could have retreated from the requirement to make their country’s economic performance mirror that in Germany in order to stabilize the exchange rate between the French Franc and the Deutschemark. They could have planned an economic future outside the European Monetary System (EMS) and its attendant Exchange Rate Mechanism (ERM) altogether. Instead they opted for ‘convergence’.

30 Mark Blyth and Matthias Matthijs, ‘Black Swans, Lame Ducks, and the Mystery of IPE’s Missing Macroeconomy’ (2017) 24 Review of International Political Economy 203–31. 31 Kathleen R McNamara, The Currency of Ideas: Monetary Politics in the European Union (Cornell UP 1998); Kathleen R McNamara, ‘Consensus and Constraint: Ideas and Capital Mobility in Monetary Integration’ (1999) 37 Journal of Common Market Studies 455–76. 32 Patrick McCarthy, ‘France Faces Reality: Rigueur and the Germans’ in David P Calleo and Claudia Morgenstern (eds), Recasting Europe’s Economies: National Strategies in the 1980s (University Press of America 1990) 25–78.

A Political Science Perspective 69 What these successive French governments achieved played out in terms of macroeconomic performance rather than microeconomic institutions.33 In other words, the French economy began to behave much like the German economy in terms of the movement in broad aggregates even though the organization of French firms, labour markets, and financial systems remained characteristically different. Most political scientists viewed this variation in microeconomic structures as a potent potential source of instability in the convergence of preferences across countries. Indeed, many still do.34 Drawing upon economic logic very similar to that used by Mundell, they argued that domestic interest groups disadvantaged by a given policy regime would eventually make themselves heard. Politicians might be able to ignore powerful vested interests in the short run; in the long-run, however, the preferences of those groups will come to dominate the policy process.35

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Nevertheless, the combination of similarity and difference (or unity with diversity) was in many ways a hallmark of the change in European economic performance during the latter 1980s and it was an important foundation for the relaunching of European integration that came along with it. The completion of the internal market and the drive for capital market liberalization were both products of a conscious decision by European leaders to accept and even benefit from the variation in institutions and opportunities from one Member State to the next.36 Moreover, there is a clear market logic associated with the combination: a division of labour is easiest in the context of absolute and comparative advantage; capital markets are more efficient when the surplus savings generated in those countries at the frontier of technological development can be redeployed in those economies that need to catch up.

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Monetary integration was only on the margins of this this wider pattern of market integration. The Italian economist Tomaso Padoa-Schioppa referred to the irrevocable fixing of exchange rates as the first-best solution to the threat that speculation in currencies would pose under conditions of liberalized capital markets.37 Padoa-Schioppa did not argue that monetary union or capital market liberalization would fundamentally change the way market participants operated and neither did he sketch the implications for cross-border financial institutions. He may have anticipated these things, but they were not central to his assertion about the supportive function that irrevocably fixed exchange rates would play for the wider European project. In turn, the report of the ‘committee for the study of economic and monetary union’ chaired by Jacques Delors placed the irrevocable fixing of exchange rates squarely in the context of the completion of the internal market.38 And, for their part, political scientists continued to focus on the persistent differences in how firms and markets were organized from one country to the next and the implications this would have for the politics of their integration.39

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33 Andrea Boltho, ‘Has France Converged on Germany? Policies and Institutions since 1958’ in Suzanne Berger and Ronald Dore (eds), National Diversity and Global Capitalism (Cornell UP 1996) 89–106. 34 Fritz W Scharpf, ‘International monetary regimes and the German model’ (2018) MPIfG Discussion Paper  18/1. 35 Jeffry A Frieden, ‘Invested Interests: The Politics of National Economic Policies in a World of Global Finance’ (1991) 45 International Organization 425–51. 36 Wayne Sandholtz and John Zysman, ‘1992: Recasting the European Bargain’ (1989) 42 World Politics 95–128. 37 Tomaso Padoa-Schioppa, Efficiency, Stability and Equity: A Strategy for the Evolution of the Economic System of the European Community (OUP 1987). 38 Delors, ‘Report on Economic and Monetary Union’ (n 28). 39 Jonathan Story and Ingo Walter, Political Economy of Financial Integration in Europe: The Battle of the Systems (MIT Press 1997).

70 THE POLITICS OF ECONOMIC AND MONETARY UNION

Box 4.2 The Maastricht Treaty Convergence Criteria (paraphrased from Article 109j and associated protocols) Consumer price inflation not more than 1.5 percentage points above the three best European Union Member States. Long-term interest rates not more than 2 percentage points about the three best performing EU Member States in terms of price stability. Participation in the exchange rate mechanism (ERM II) for two years without severe tensions. Public deficits at, below, or declining toward 3 per cent of gross domestic product (GDP) at a substantial and continuous rate and public debt at, below, or declining toward 60 per cent of GDP at a substantial and continuous rate. National central banking statutes that are compatible with the requirements for political independence of the European System of Central Banks. (Article 108) Source: http://europa.eu/european-union/sites/europaeu/files/docs/body/treaty_on_european_union_en.pdf

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Nevertheless, political scientists did notice the difference between the monetary union European policy-makers were developing and the criteria for optimality described by economists. Where economists, following McKinnon and Kenen, would argue strongly in favour of the need for greater convergence in factor market performance and industrial structures as a precondition for participation in a monetary union, the Maastricht Treaty included criteria for membership that focused more clearly on central bank independence and macroeconomic policy convergence (see Box 4.2).40

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The explanation political scientists offered for the difference between the concerns expressed by economists and the criteria introduced by European treaty negotiators was two- fold. First, government policy-makers in Germany were all too aware of the possibility that any apparent convergence of macroeconomic preferences or performance could diverge at some point in the future.41 Hence, they sought reassurance that commitments to stable money and sound public finances would be binding. These reassurances ultimately took the form of criteria for ‘price stability’ (how stable is the rate of inflation), ‘exchange rate stability’ (how closely does that rate of inflation track with other countries), and long-term interest rate convergence (how much do market participants believe that inflation will continue to track the best performers in terms of price stability when looking to the future). Such criteria—together with injunctions to avoid excessive deficits and to avoid political interference in monetary policy-making—did not alleviate all concerns in Germany and political scientists were quick to focus on the conflict that erupted between the German government and the German Bundesbank.42 Nevertheless, the Maastricht convergence criteria were an important concession by other countries to Germany’s preferences. 40 For greater emphasis on real convergence, see Paul Krugman, ‘Lessons of Massachusetts for EMU’ in Francisco Torres and Francesco Giavazzi (eds), Adjustment and Growth in the European Monetary Union (CUP 1993) 241–69. 41 Wayne Sandholtz, ‘Choosing Union: Monetary Politics and Maastricht’ (1993) 47 International Organization 1–39. 42 Karl Kaltenthaler, Germany and the Politics of Europe’s Money (Duke UP 1998); Dorothee Heisenberg, The Mark of the Bundesbank: Germany’s Role in European Monetary Cooperation (Lynne Reinner Publishers 1998).

A Political Science Perspective 71 Second, political scientists argued, the irrevocable fixing of exchange rates between Germany and the countries of the European Economic Community (EEC) or European Union could do more than just stabilize the internal market against the threat of financial speculation. A monetary union could bind Germany to the West through the tangled web of overlapping institutional commitments associated with the irrevocable fixing of exchange rates and the institutionalization of a common monetary policy. The completion of the single market already accomplished this objective to a great extent, and yet the introduction of a single currency would go much further.43 Even more, the introduction of a single currency could offer a powerful symbol of the European Union more generally.44 In this sense, the politics of monetary integration is about the constitution of a European identity as much as it is about the credible commitment of policy-makers to a specific set of macroeconomic preferences. This constitutive aspect was an entirely new contribution from the political science perspective.

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B. Constitutive effects The problem with political science arguments about the constitutive effects of monetary in- 4.53 tegration is that they have so little empirical basis. Worse, what empirical foundations they have point in different directions. To understand why, it is necessary to retrace some of the reasoning in this chapter. From the outset, the economic perspective on the politics of economic and monetary union was important because it rested on an ahistorical thought experiment—if policy-makers wanted to characterize an economic region that would benefit from having a single currency, it would be useful to know what attributes that region should possess. This thought experiment only ever informed the creation of one global currency— the euro. As Mundell admitted, most other currencies emerged from sovereign authority and not economic rationality. Given this ordering of institutions, with sovereignty preceding currency, it is hard if not impossible to determine whether—historically—popular political identities emerged from the introduction of a specific currency or from the sovereign authority that introduced that currency in the first place. People in any given country can have a strong attachment to their national currency but only because of this prior causal influence. The strong affection Germans held for the Deutschmark is a good illustration of prior causality. The introduction of the new German currency in 1948 offered a dramatic representation of the growing competence of the emerging Federal Republic (and its support among western occupying powers) and yet the Deutschmark did not make the people who lived in West Germany any more ‘German’.45 If anything, the new currency divided Germans, East and West. A similar point can be made about the United Kingdom. Although there has been much hue and cry about the symbolism of the British currency, the Queen only made 43 Simon Bulmer, ‘Shaping the Rules? The Constitutive Power of the European Union and German Power’ in Peter J Katzenstein (ed), Tamed Power: Germany in Europe (Cornell UP 1997) 49–79. 44 Benjamin J Cohen, The Geography of Money (Cornell UP 1998); Larry Seidentop, Democracy in Europe (Penguin 2000). 45 Matthias Kaelberer, ‘Deutschmark Nationalism and Europeanized Identity: Exploring Identity Aspects of Germany’s Adoption of the Euro’ (2005) 14 German Politics 283–96; Dennis L Bark and David R Geiss, A History of West Germany: From Shadow to Substance, 1945–1963 (vol 2, Blackwell 1993) 200–25.

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72 THE POLITICS OF ECONOMIC AND MONETARY UNION her first appearance on the five-pound note in the early 1960s. Before that, the five-pound note was a foldable parchment that looked more like a marketable security than anything that would pass as a banknote today. The British people may identify strongly with their currency, but less because of its symbolism than because they were British in the first place. If anything, currency is a symbol of division among British subjects. The only widely recognizable notes are those issued by the Bank of England; the notes used in Scotland and Northern Ireland are issued by private banks and so look very different. 4.55

The German and British anecdotes are consistent with what we know about the history of states and their currencies more generally. They also reflect an underlying tension between the two main constitutive effects of ‘binding’ and ‘identification’. In functional terms, the decision by sovereigns to introduce money was to exercise control. In pre-modern economies, most goods and foodstuffs were produced locally for local consumption. They were not subject to market exchange and had no widely known fungible price. Moreover, these goods were difficult to move from one place to the next—which made it hard for centralized political authorities to levy taxes on distant provinces. The introduction of money in this context was meant to make it easier for sovereigns to expropriate surplus value. They could force local producers to monetize their output and then the authorities could carry the money away. This history supports the idea that participation in a common currency would bind Germany to the West in institutional terms, but it sheds a different light on the notion that the euro would emerge as a focal point for European identity. Indeed, far from being a reason to identify with the sovereign, early forms of money were regarded as an expression of sovereign intrusion into the local economy.46

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This tension in the constitutive effects of a common currency extends well up into the modern era. The gold standard of the nineteenth century provides a good illustration. On the one hand, governments found many advantages in adhering to the gold standard because doing so facilitated both trade and capital mobility. On the other hand, adherence to the gold standard compelled governments to give priority to the international economy over the domestic economy and so tended to alienate important domestic interests—like workers, farmers, and anyone who provided locally-oriented services—which in turn came to resent the constraints that the gold standard implied. Ultimately such tension is what forced governments to break their commitments to the gold standard and subsequently ushered in an era of economic nationalism. The only way to escape the binding force of gold as an international currency was to turn identification inward. Karl Polanyi refers to this turning inward as marking the high point of national ‘sovereignty’.47 In turn, competition between sovereigns brought the nations of the world into conflict.

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Mundell made his thought experiment about ‘optimum currency areas’ toward the end of that period of economic nationalism and close to the start of another international economy. Hence the sovereign authorities he alludes to are those that emerged from the wreckage of the previous system. Moreover, Mundell’s economic and political assumptions reflect in many ways the experience of how the classical gold standard came to an end. He 46 Herman M Schwartz, States versus Markets: The Emergence of a Global Economy (3rd edn, Palgrave Macmillan 2009). 47 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (2nd edn, Beacon Press 2001).

A Political Science Perspective 73 starts with a triumph of politics over economics and considers what it would take to run the developments the other way. The constitutive claims made by political scientists take this line of argument to its logical extreme. They offer a triumph of economics over politics that in in many ways stands outside the arc of history. Although it is possible to sketch mechanisms that connect national currencies to national identities, the reality is that national currencies are a recent and relatively tenuous innovation.48 The British and Danish decisions to opt out of the single currency during the Maastricht Treaty negotiations are more consistent with the historical record. The British opt-out came almost immediately after the British government’s decision to join the EMS and to embrace the rigors of the fixed-but-adjustable exchange rates within the ERM. In economic terms, it would have made more sense either to stay outside the ERM or to pledge to join the economic and monetary union as a means of shoring up the credibility of the commitment to fixed-but-adjustable exchange rates. In political terms, however, joining the single currency was not an option. The British government was defending the pound so much as it was defending the sovereignty of the parliament at Westminster—which included the right for parliament to change its view about whether to fix the exchange rate. Hence it came as no surprise that speculators in financial markets would bet against Britain’s ERM participation. In doing so, financial market participants bet that politics would triumph over economics— and, in September 1992, they won. The British government ceased participation in the ERM as the pressure of speculation built up and as their efforts to defend the pound within the European Monetary System proved politically unsustainable.

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Of course, it could be argued that the British government was right to stay out of the single currency for economic reasons and that market participants were right to bet against British participation in the ERM for economic reasons as well. Britain is a large country with a relatively specialized economic system that could benefit from having its own currency along the lines argued by McKinnon. That is why the Danish case is so interesting. Denmark’s economy is more dependent upon trade with the European Continent than Britain’s economy, and Denmark is too small to have an autonomous macroeconomic policy in the sense McKinnon outlined. Hence it is hard to find a good economic argument for Denmark not to adopt an irrevocably fixed exchange rate with the rest of the European Union. Indeed, Denmark’s economic policy establishment has a long track record of advocating monetary integration for precisely that reason. A prominent Danish economist, Niels Thygesen, sat on the Marjolin committee that decried the failure of the European Snake Mechanism in 1975 and he also joined the Delors committee for the study of economic and monetary union in 1989.49

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Despite the economic logic for Denmark to join the euro, the Danish people were unenthusiastic. They voted against the ratification of the Maastricht Treaty in a June 1992 referendum at least partly as an expression of their reluctance to join the single currency. (Indeed, that vote set the stage for speculation against Britain’s position in the ERM).50

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48 Eric Helleiner, ‘National Currencies and National Identities’ (1998) 41 American Behavioral Scientist 1409– 36; Eric Helleiner, The Making of National Money: Territorial Currencies in Historical Perspective (Cornell UP 2002) (hereafter Helleiner, The Making of National Money). 49 Marjolin, ‘Report of the Study Group’ (n 18); Delors, ‘Report on Economic and Monetary Union’ (n 28). 50 See Bryon Higgins, ‘Was the ERM Crisis Inevitable?’ (1993) 78(4) Economic Review 27–40.

74 THE POLITICS OF ECONOMIC AND MONETARY UNION The Danes voted to support ratification of the Maastricht Treaty in a May 1993 referendum after the Danish government committed to exercise its right to opt out of the economic and monetary union. The Danish central bank nevertheless adopted a monetary policy that fixed the value of the Danish kroner relative to first the Deutschmark and then the euro. Danish authorities called another popular referendum in September 2000 to try and join the single currency, only to have participation in the euro rejected by a majority of the Danish population.51 Thereafter, Danish monetary authorities have maintained their peg on the euro but without the benefits of membership in the economic and monetary union. Denmark is bound by Europe’s economic and monetary union and yet the Danes refuse to identify with the euro as a common currency. Politics triumphed over economics rather than resulting from it.

C. Intergovernmental bargaining and power politics 4.61

As with the British case, the Danish view on joining the euro was (and probably still is) more closely connected with sovereign control than monetary symbolism. Danish monetary policy-makers preferred the advantages of having an irrevocably fixed exchange rate and yet the Danish people worried that joining the euro would lead to Denmark’s domination by European institutions or other countries. At a crucial moment in the 2000 referendum campaign, Danish judicial authorities explained that Denmark could always withdraw from the single currency only to have European Commission President Romano Prodi explain that they could not. Worse, when the government tried to argue that joining the euro would give it a voice on the Governing Council of the European Central Bank, the Danish central bank governor insisted she would remain politically independent—which the voters interpreted to mean ‘not Danish’. Finally, Danes began to fear that participation in the euro would make it harder to maintain their distinctive welfare state. No matter what arguments politicians made to counter these concerns, the voters preferred to hold onto their room for manoeuvre.52

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The Danes were hardly alone in wanting to retain national sovereignty and the British (and the Swedes) were not their only company. That preference for national control was also widespread among those countries that joined the euro. Hence, political scientists argued, it is not only important to see which countries have the most influence in the constitution of Europe’s economic and monetary union, but it is also necessary to pay attention to those countries that seek to influence how the economic and monetary union works. The two most important Member States were France and Germany; within the Franco-German couple, however, Germany emerged as primus inter pares.53

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Paradoxically, German strength in shaping how the euro worked stemmed not only from Germany’s structural power as Europe’s largest economy but also the country’s economic 51 Martin Marcussen and Mette Zølner, ‘The Danish EMU Referendum 2000: Business as Usual’ (2001) 36 Government & Opposition 379–401 (hereafter Marcussen and Zølner, ‘The Danish EMU Referendum 2000’). 52 Marcussen and Zølner, ‘The Danish EMU Referendum 2000’ (n 51); Karen Siune and Palle Svensson, ‘The Danes and the Maastricht Treaty: The Danish EC Referendum of June 1992’ (1993) 12 Electoral Studies 99–111. 53 Kenneth Dyson, ‘The Franco-German Relationship and Economic and Monetary Union: Using Europe to “Bind Leviathan” ’ (1999) 22 West European Politics 25–44.

A Political Science Perspective 75 and political weakness in the early to mid-1990s. Economically, the government struggled in the early 1990s to absorb (and redistribute) the costs of unification; politically, the government found itself constrained by the provisions of the Basic Law (or constitution), the ‘Grundgesetz’, which did explicitly not allow the federal central bank (‘Bundesbank’) to be part of a European system of central banks giving supremacy to another central bank (the European Central Bank). Beyond the very wording of the German Constitution, there was a ‘constitutional expectation’ (Verfassungserwartung) to create a common currency which is part of a ‘community of stability’ (Stabilitätsgemeinschaft) pledged to safeguard price stability.54 Yet, this expectation was no constitutional requirement under the Basic Law before 1992. Caught between these two forces, the German government had little scope for compromise. Germany could not offer net fiscal transfers or even a more accommodating monetary policy that would make it easier for other Member States to join the euro and it also could not guarantee its own participation in the single currency as an automatic feature of the Maastricht Treaty. Instead, the German parliament would have to give its assent to German participation and it could only do so if Europe’s economic and monetary union met specific functional requirements implied by the explicit wording of the Basic Law and, more importantly, by the ‘constitutional expectation’ of creating a stable common currency that is obliged to primarily safeguard price stability. These constraints on Germany became apparent in the exchange rate crises that unfolded in 1992 and 1993 and in the October 1993 German constitutional court ruling on the Maastricht Treaty.55 The exchange rate crises pushed economists to start paying more attention to financial market dynamics. The constitutional court ruling pushed lawyers to explore the evolving European judicial framework. What the political science community drew as a lesson from this experience, however, focused on the essential significance of intergovernmental bargaining and power politics.

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Liberal intergovernmentalism was already the leading theory for interpreting the politics that surrounds grand bargains like major reform treaties.56 It became the principal lens for understanding how politics unfolded between treaty negotiations as well. The original Maastricht Treaty offered inadequate reassurance that German preferences would be met and so the German government opened negotiations to strengthen the institutions surrounding the economic and monetary union. For their part, the French sought to extract what they could while offering concessions to German concerns. The result was not just a ‘Stability and Growth Pact’ that strengthened the processes surrounding the Maastricht Treaty’s excessive deficits procedure but also an expansion of EU competencies into the fight against unemployment in the form of a new ‘title’ introduced into the European treaties.57

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54 Matthias Herdegen in Theodor Maunz and Günter Dürig (eds), Grundgesetz (C.H. Beck 2018) Article 88 GG, para 34. Only on 21 December 1992 (see Bundesgesetzblatt, Teil I, 21 December 1992, No 58, 2086), in order to make the Basic Law ready for the ratification of the Maastricht Treaty, the constitutional legislator introduced the second sentence in Article 88 GG, according to which tasks and competences of the German Federal Central Bank can be transferred upon the European Central Bank, which has to be independent and obliged to secure price stability. 55 BVerfG, Judgment of 12 October 1993–2 BvR 2134/92 and 2 BvR 2159/92. 56 Andrew Moravcsik, ‘Preferences and Power in the European Community: A Liberal Intergovernmentalist Approach’ (1993) 31 Journal of Common Market Studies 473– 524; Andrew Moravcsik, The Choice for Europe: Social Purpose and State Power from Messina to Maastricht (Cornell UP 1998). 57 Martin Heipertz and Amy Verdun, ‘The Dog That Would Never Bite? What We Can Learn from the Origins of the Stability and Growth Pact’ (2004) 11 Journal of European Public Policy 765–80.

76 THE POLITICS OF ECONOMIC AND MONETARY UNION 4.66

This was not the only situation where intergovernmental bargaining and power politics had both a constraining and an expansive influence on the structure of Europe’s economic and monetary union. Another illustration concerns the leadership of the ECB and the size of the initial cohort of participating Member States. The battle over who should be the first president of the ECB pit Germany against France in a constraining sense. The Germans wanted the Dutch central bank governor, Wim Duisenberg, whom they believed would be closer to their own monetary preferences, and the French wanted their own central bank governor, Jean-Claude Trichet. In the end, the German and French governments agreed to split the difference and to have Duisenberg take the first half of an eight-year term as ECB president while Trichet picked up a full term starting in the second half of Duisenberg’s mandate. This agreement made sense from a political perspective and yet it raised important questions about the ECB’s political independence.58

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The expansive bargain concerned the original membership of the euro area. Initially the German government pushed for a strict reading of the convergence criteria. This implied, however, that Belgium would be left out because of its very high debt-to-GDP ratio (and despite the Belgian government’s efforts to consolidate public finances). The French government was more eager for Belgium to be included. When the German government agreed, that opened the door for a more relaxed interpretation of the convergence criteria and hence a much larger number of Member States. Even Italy, with its own very high debt-to- GDP ratio, was able to qualify. So, with a delay, was Greece. Again, the decision made sense from a political perspective and yet it raised important questions about the synchronization of business cycles across Member States as in Kenen’s analysis, whether domestic labour markets would be flexible enough within each Member States as McKinnon suggested, and whether labour mobility across Member States was a consequence that all Member States could embrace (as in Mundell’s original work).

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The story about Italy is important because it shows the other side of intergovernmental bargaining. Where German strength at the European level was a function of the German government’s relative weakness at home, the situation in Italy was the reverse. The Italian government used its weakness abroad as a source of domestic strength. This idea emerged directly from the economic analysis of fixed exchange rate regimes and central bank independence. In the late 1980s, two Italian economists argued that the government could gain credibility in the markets for domestic monetary policy-makers by tying their hands through an exchange rate commitment to a country with a reputation for stable prices.59 A decade later, centre-left Italian governments generalized this argument by using foreign commitments to add credibility to their domestic reform efforts. Specifically, Italian prime ministers used qualification for entry into the euro area as the goal in tackling unsustainable pension arrangements and inflexible labour market institutions.60

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Ultimately, that Italian policy was a success. Successive Italian governments not only managed to achieve significant reforms but also ensured that Italy was one of the first countries 58 David Howarth and Peter Loedel, The European Central Bank: The New European Leviathan? (Palgrave 2003). 59 Francesco Giavazzi and Marco Pagano, ‘The advantages of tying one’s hands: EMS discipline and Central Bank credibility’ (1988) 32 European Economic Review 1055–75. 60 Vincent Della Sala, ‘Hollowing Out and Hardening the State: European Integration and the Italian Economy’ (1997) 20(1) West European Politics 14–33.

A Political Science Perspective 77 to adopt the euro as a common currency. This success raised the question, however, about how long the government could maintain momentum for reform once the goal of participation in the euro was attained. Political scientists had a relatively clear understanding of the politics leading up to economic and monetary union and yet not much basis for anticipating what would happen after the single currency was in place.

D. Trading places The change in circumstances with the creation of an economic and monetary union affected Germany before any other country. The election of a centre-left government that brought together the German social democrats (SPD) and Greens in September 1998 quickly ushered in a conflict between the German finance minister, Oskar Lafontaine, and the German-favoured ECB President, Wim Duisenberg. Lafontaine wanted Duisenberg to relax the common monetary policy to stimulate the euro area economy and so alleviate unemployment; Duisenberg wanted to focus his attention on the ECB’s price stability mandate while at the same time shoring up his (and his institution’s) reputation for political independence. The conflict between them simmered until the Socialist French Finance Minister, Dominique Strauss-Kahn, finally intervened with Lafontaine to ask him to stop undermining the ECB. Shortly thereafter, in March 1999, Lafontaine resigned from office in a fight with the German Chancellor.

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This turn of events shook the political science perspective on the politics of economic and monetary union to its foundations. Although political scientists had be willing to acknowledge the contingent nature of any convergence in preferences around a specific set of macroeconomic policies and institutional arrangement, virtually no-one analysing the politics of economic and monetary union believed that the French and German governments would ever swap preferences. On the contrary, the two countries have very different economic traditions that should lead them to ‘revert to type’ at the end of any preference convergence. The French should become more French and the Germans should become more German. This is not just a cultural prejudice among political scientists and neither it is a blind respect for structural conditions and bounded rationality. The existence of stable national preferences is a fundamental assumption underpinning the liberal intergovernmentalist view of Member State bargaining.

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Nevertheless, Lafontaine’s battle with Duisenberg and the ECB was not an isolated situation. The German government repeatedly broke with its own conventions during the early years of economic and monetary union. The three most noteworthy events took place in 2002 and 2003. In February 2002, the German government gave its solemn promise to the Council of Economics and Finance Ministers (Ecofin Council) to correct a fiscal imbalance that threatened to become an excessive deficit and then failed to live up to that commitment; in July 2002 German Chancellor Gerhard Schröder justified his government’s continued fiscal laxity by underscoring that the excessive deficits procedures were part of a stability and growth pact; and in November 2003, the German and French governments worked together within the Ecofin Council to hold the excessive deficits procedure ‘in abeyance’ in order to escape the threat of sanctions from the European Commission.61

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61

These events are narrated in Erik Jones, ‘The Politics of Europe 2003: Differences and Disagreements’ (2004)

78 THE POLITICS OF ECONOMIC AND MONETARY UNION 4.73

The political science community was quick to adapt to the change in circumstances. It did so in part by pushing economic and monetary union to the background. If German preferences changed, that was because German politicians faced an unprecedented situation. Rules they developed in one period for other countries turned out to be inappropriate for Germany in the prevailing economic context. Rather than strap themselves to the mast, the Germans adapted. Governments do that, particularly around difficult elections. The Irish government did much the same in 2000 and 2001, when it was running a significant fiscal surplus. The Greek government broke the rules around the time of the 2004 Athens Olympics so that it would not be embarrassed with a significant deficit. Economic and monetary union was not a major factor in any of these decisions; instead it was just part of the wider context. If anything, the more important debate in the early 2000s was about the survival of the European social model and not the future of economic and monetary union.62 The European Union needed to adapt its macroeconomic governance to this new imperative; if that meant compromising some of the commitments made during and immediately following the Maastricht Treaty negotiations, then so be it.

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Pushing economic and monetary union to the background was relatively easy to accomplish after the changeover from national notes and coins to the euro as a single currency. There was a moment of wonder followed by a longer period of adjustment. Within a relatively short time, however, the novelty wore off and the euro became another aspect of the ‘banal authority’ of the European Union.63 The same is true for the European Central Bank. In some senses, this banal authority was a weak form of the constitutive effect political scientists had expected. Europeans identified the euro with the European project and they also connected using the euro with participating in that project. In a transitive way, Europeans who used the euro identified themselves as European.

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In a more important sense, the banal authority of the euro was considerably less than political scientists imagined at the start of the 1990s. The new European identity did not replace their national identity or even compete with it in any meaningful sense. Instead, it added a new dimension for public interaction and political discourse.64 The everyday politics of Europe lived alongside the usual politics that takes place within and between Member States.65 What began around the start of Europe’s economic and monetary union as a relatively dramatic change in German economic preferences quickly gave way to something much more familiar to anyone used to making comparison from one political environment to the next.

35 Industrial Relations Journal 483–99; Erik Jones, ‘The Politics of Europe 2004: Solidarity and Integration’ (2005) 36 Industrial Relations Journal 436–55. 62 Andre Sapir, ‘Globalization and the Reform of European Social Models’ (2006) 44 Journal of Common Market Studies 369–90. 63 Laura Cram, ‘Imagining the Union: A Case of Banal Europeanism?’ in Helen Wallace (ed), Interlocking Dimensions of European Integration: One Europe or Several? (Palgrave Macmillan 2001) 233–46; Laura Cram, ‘Does the EU Need a Navel? Implicit and Explicit Identification with the European Union’ (2011) 50 Journal of Common Market Studies 71–86 (hereafter Cram, ‘Does the EU Need a Navel?’); Kathleen R McNamara, The Politics of Everyday Europe: Constructing Authority in the European Union (OUP 2015). 64 Thomas Risse, A Community of Europeans? Transnational Identities and Public Spheres (Cornell UP 2010) ch 7. 65 Cram, ‘Does the EU Need a Navel?’ (n 64).

A Political Science Perspective 79 The big exception lay not inside the euro area but in those countries that opted to remain 4.76 outside the single currency. Those countries—meaning both the governments and the people—felt a sense of exclusion, not because they wanted to participate in the euro, but because a world with an economic and monetary union is not the same as a world without one and so the status quo these countries sought to preserve no longer existed.66 The two- country models used to imagine optimum currency areas gave little incentive to consider how the formation of an economic and monetary union would affect the politics of those countries left behind. The original Maastricht Treaty negotiations recast any negative consequences of exclusion as incentives for achieving convergence. With the formal creation of an economic and monetary union, however, the prospect of a two-speed Europe could no longer be ignored. Indeed, the tension between insiders and outsiders was evident already in 1998, which the British government held the rotating presidency of the European Council of Ministers during the time that the first participants in the euro were selected. British Prime Minister Tony Blair could announce the coming of economic and monetary union, but he could not really join in the celebration of those who would participate. The tension between insiders and outsiders became more pronounced as the euro area Member States began to organize informal networks to coordinate their economic decision-making on the margins of European Council summits and Ecofin Council meetings. Over time, ‘opting out’ became a powerful and negative source of identification, embarrassing diplomats and government officials and alienating substantial parts of the electorate from the wider European project.67

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E. Summarizing the political science perspective Political scientists built on the notion of optimum currency areas to ask questions about why the design of Europe’s economic and monetary union did not match the recommendations set out in economic theory. What they underscored was the conditional nature of any convergence in macroeconomic policy preferences and hence the desire of stronger Member States—meaning Germany in particular—to lock their own preferences into the criteria for membership. The also explored the possibility that participation in the single currency might somehow transform the politics of Member States.

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The first of these insights proved to be the more enduring. The politics of economic and monetary union is in many ways constituted by intergovernmental bargaining—over how the institutions are set up, who may participate, and, ultimately, how they function. Sometimes this bargaining was restrictive; other times it was empowering. The evolution of Europe’s economic and monetary union is the result of both developments. This explains not just why there are members who obviously do not fit in any objective notion of an economic area in Mundell’s sense of the term, but also why Europe’s economic and monetary union extends so far beyond irrevocably fixed exchange rates to encompass an

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66 Lloyd Gruber, Ruling the World: Power Politics and the Rise of Supranational Institutions (Princeton UP 2000) 38–43. 67 Rebecca Adler-Nissen, Opting out of the European Union: Diplomacy, Sovereignty and European Integration (CUP 2014).

80 THE POLITICS OF ECONOMIC AND MONETARY UNION ever-expanding range of competencies associated with the European battle against long- term structural unemployment. What is important to note about this evolution is how the domestic and the European become intertwined—partly because intergovernmental bargaining is a two-level game but also because, as both Mundell and McKinnon anticipated, macroeconomic policy-making at the level of the economic and monetary union and factor market institutions within the participating countries are deeply interconnected. 4.80

The transformative aspect of economic and monetary union was less impressive than political scientists expected, at least for those countries that chose to participate. The introduction of the single currency did not lock down policy preferences and it also did not create Europeans. The euro emerged as an important part of the economic infrastructure and yet its impact on both politics and identities was not extensive. This finding is consistent with the emergence of territorial currencies in other periods and places.68 Nevertheless, it was surprising.

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Even more surprising was the impact of the euro on countries that did not participate. Political scientists were slow to recognize the full extent of this impact, nevertheless they were quick to realize it is important. Just how important remained to be seen. During the first decade of Europe’s economic and monetary union, the euro was a success and political controversy focused on other issues. During the second decade that was no longer the case. Both the economic and the political science perspectives on the politics of economic and monetary union proved to be inadequate in the face of crisis.

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The economic and financial crisis that emerged in 2007 started in a US asset market (for sub-prime household mortgages) and spread throughout the global financial system.69 It was not a trade shock. It was asymmetrical, but the asymmetry was more important across financial institutions than across countries. Many of the institutions were based in countries outside the euro area and were operating in different currencies. Ultimately, however, the entire euro-area financial system was affected. This source and pattern of contagion was not something that was anticipated in the theory of optimum currency areas and so fell outside the economic perspective on economic and monetary union. To the extent to which the crisis had an impact on sovereign debt markets, it reinforced attitudes about the importance of fiscal consolidation that were inappropriate to the economic circumstances. In this sense, the political science perspective on the politics of economic and monetary union also pointed in the wrong direction insofar as macroeconomic policy coordination became pro-cyclical rather than counter-cyclical and so tended to deepen the crisis rather than softening its impact.70 More important, no-one had a clear sense of the politics that would surround massive bank bailouts and cross-border deleveraging.71 Europe’s economic 68 Helleiner, The Making of National Money (n 48). 69 Arnold Kling, Unchecked and Unbalanced: How the Discrepancy between Knowledge and Power Caused the Financial Crisis and Threatens Democracy (Rowman & Littlefield Publishers 2010) 1–38; Ben S Bernanke, The Courage to Act: A Memoir of a Crisis and Its Aftermath (W W Norton & Company 2015) 133–97. 70 Mark Blyth, Austerity: The History of a Dangerous Idea (OUP 2013). 71 Cornelia Woll, The Power of Inaction: Bank Bailouts in Comparison (Cornell UP 2014) 171–72 (hereafter Woll, The Power of Inaction).

Unintended Consequences 81 and monetary union was not designed to manage a large-scale, cross-border financial crisis and so no-one really knew what to expect.72 The European experience of the crisis developed in four phases—starting with banks, moving to sovereign debt markets, shifting to focus ever more tightly on the ECB, and then moving back into the banking system. Each phase marked a shift in the politics of economic and monetary union, starting with a deep sense of uncertainty and cognitive dissonance in the first phase, and then evolving into a series of conflicts between those countries at the core of the euro area and those the periphery, between Germany and the ECB, and over the future of European financial governance. During the course of this evolution, the survival of the euro became an existential concern for the wider European project.

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A. Phase 1: uncertainty and cognitive dissonance (August 2007–September  2008) The collapse of sub-prime mortgage markets in the United States during the first-half of 2007 imposed significant losses on a number of large European banks and investment funds. Some of these losses were outright insofar as institutions were exposed directly to mortgage-backed securities or other types of real estate assets; others were indirect insofar as firms were exposed to derivatives underwriting the value of assets at risk or credits underpinning by those assets. Indeed, the indirect exposures could be many times larger than the whole of the US sub-prime mortgage asset class. By implication, the losses could be more substantial and more widespread than the figures for sub-prime mortgages would imply.

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The problem for market participants was that no-one could be certain how large the losses would eventually become or how they would be distributed across institutions. Hence banks became wary of lending to one-another in short-term money markets. As these money-markets dried up, banks and other financial firms that relied on short-term lending markets to meet their funding requirements were also at risk—as were the banks and other firms that were exposed to institutions that depended upon the money markets for funding. This shift of concern from assets to liabilities spread the contagion even further and deepened the scale of potential losses.

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Initially, the ECB stepped in to fill the gap by providing additional liquidity and by extending the duration of its liquidity operations.73 Other major central banks, like the Bank of England and the United States Federal Reserve, stepped up liquidity provision as well. Nevertheless, such operations could not address the underlying uncertainty in the markets about the size and distribution of losses and the sharp contraction of banking activity began to disrupt the markets and imposes further losses on financial institutions. Given that many of these firms operated in many different countries both inside and outside the euro area, central banks also needed to coordinate their interventions. Central bankers pushed their

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72 Martin Sandbu, Europe’s Orphan: The Future of the Euro and the Politics of Debt (Princeton UP 2015) 15–17, 106–07 (hereafter Sandbu, Europe’s Orphan). 73 C Randall Henning, ‘The ECB as a Strategic Actor: Central Banking in a Politically Fragmented Monetary Union’ in James A Caporaso and Martin Rhodes (eds), The Political and Economic Dynamics of the Eurozone Crisis (OUP 2016) 167–99 (hereafter Henning, ‘The ECB as a Strategic Actor’).

82 THE POLITICS OF ECONOMIC AND MONETARY UNION monetary policy considerations to the background and focused the bulk of their attention on shoring up financial stability.74 4.87

Governments were also implicated in the crisis and their actions required coordination as well. This was particularly true in the smaller Member States which either played host to bank branches or subsidiaries that belonged to parent companies originating in larger Member States—in the way Ireland hosted German banks and the Baltic States hosted banks from Sweden—or that served as home to major financial conglomerates with assets under management that were many times the size of the country’s gross domestic product— like Iceland, Belgium, and the Netherlands. The challenge for governments was not just to stabilize their domestic financial institutions but also to avoid creating market distortions with their rescue efforts that would jeopardize the survival of banks in other countries. Moreover, the time pressure on governments was immense because financial markets can move money across borders much more quickly than policy-makers can coordinate.75

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Finally, the central bankers and the governments had to work in tandem. Financial stability is not an area where central banks can claim political independence. On the contrary, it is an area where central bankers require political cover from elected policy-makers who have greater popular legitimacy. This dependence is not immediate and central bankers have a window where they can act autonomously. Over time, however, the political exposure of central bankers becomes increasingly apparent, particularly when financial firms must be wound up or the damage from the financial crisis moves into the real economy.76

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This problematic did not feature in the design of Europe’s economic and monetary union and it was not anticipated by those who studied the politics of the single currency either among economists or political scientists. It was new and unexpected.77 As policy-makers struggled to respond, they had to go back to first principles—starting with the impact of capital market liberalization on European financial institutions, looking again at the dual role of central bankers as monetary authorities and financial markets regulators, considering the fiscal implications of massive bank bailouts, and asking whether the greater risk in capital market integration is not the potential for speculation between currencies but rather the threat that many years of accumulated cross-border investment might suddenly unwind.

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This first phase of the crisis ended during the weeks prior to the collapse of Lehman Brothers with a period of cognitive dissonance. Although some countries outside the euro area had been badly hit by the crisis—like Iceland, Latvia, Hungary, and the United Kingdom—the euro area itself appeared better insulated. The European Commission expressed some concern about the quality of Greek fiscal accounting around the same time Bear Sterns was forced into a merger in March 2008 and market pressure on Greece increased, but most observers believed the crisis had passed and that Europe’s economic and monetary union had demonstrated its resilience. Indeed, in the summer of 2008, the ECB began to take measures 74 Timothy Geither, Stress Test: Reflections on Financial Crises (Crown Publishers 2014). 75 See the essays in Iain Hardie and David Howarth, Market-Based Banking and the International Financial Crisis (OUP 2013). 76 Panicos Demetriades, A Diary of the Euro Crisis in Cyprus: Lessons for Banking Recovery and Resolution (Palgrave Macmillan 2017) 95–102 (hereafter Demetriades, A Diary of the Euro Crisis in Cyprus). 77 Sandbu, Europe’s Orphan (n 72) 266–68.

Unintended Consequences 83 to withdraw some of the excess liquidity it had introduced during the previous year and to limit its exposure to risky assets used as collateral in routine liquidity operations. Such moves show that the ECB was refocusing attention back toward monetary policy-making and away from financial stability. According to most economists and political scientists, the first decade of the euro was a success.78 That appearance was deceiving. Powerful forces were already at work in the euro area that threatened to undermine European financial market integration and hence interfere with the functioning of the common monetary policy.79 Those same forces would also complicate the practice of fiscal policy coordination and send economic performance across Member States in diverging directions.80 Some countries would receive a sudden inflow of capital and so benefit from a relatively low cost of borrowing; other countries would experience a sudden outflow of capital and so experience a sudden spike in borrowing costs followed by a chronic shortage in liquidity. All that was required to move from the first phase of the crisis to the next was another major increase in uncertainty. The collapse of Lehman Brothers in September 2008 was the catalyst.

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B. Phase 2: core versus periphery (September 2008–July 2012) Central bankers in the United States miscalculated the implications of allowing Lehman Brothers to fail.81 As with the collapse of US sub-prime mortgage markets, the potential losses were many times greater than the direct exposure of firms to Lehman Brothers and they were distributed in ways that could not be easily anticipated. Worse, as firms worried about unforeseen losses due to Lehman Brothers, they also became risk averse in other markets. This risk aversion had an immediate impact on Greece where the government announced a modest revision in its fiscal accounts under pressure from the European Commission. Suddenly market participants began to speculate about whether a sovereign borrower in the euro area could go bankrupt. The pressure mounted in January 2009 as Standard & Poor’s downgraded Greece, citing the poor quality of Greek fiscal data as a primary cause for concern.82 European institutions had no obvious mechanism to respond.

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Greece was not alone. Ireland also got into trouble. In the Irish case, however, the problem was with banks and not sovereign borrowing.83 The Irish government had undertaken a massive fiscal consolidation effort in the previous two decades and brought its public debt level down from over 100 per cent of gross domestic product (GDP) to 27 per cent. The

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78 Erik Jones, ‘The Euro and the Financial Crisis’ (2009) 51(2) Survival 41–54; Erik Jones, ‘Reconsidering the Role of Ideas in Times of Crisis’ in Leila Simona Talani (ed), The Global Crash: Towards a New Global Financial Regime? (Palgrave 2010) 52–72 (hereafter Jones, ‘Reconsidering the Role of Ideas in Times of Crisis’). 79 Benedicta Marzinotto, ‘ “United We Fall”: The Eurozone’s Silent Balance of Payments Crisis in Comparison with Previous Ones’ in James A Caporaso and Martin Rhodes (eds), The Political and Economic Dynamics of the Eurozone Crisis (OUP 2016) 100–21 (hereafter Marzinotto, ‘ “United We Fall” ’). 80 Mark Hallerberg, ‘Fiscal Governance and Fiscal Outcomes under EMU before and after the Crisis’ in James A Caporaso and Martin Rhodes (eds), The Political and Economic Dynamics of the Eurozone Crisis (OUP 2016) 145–66. 81 Lawrence R Jacobs and Desmond King, Fed Power: How Finance Wins (OUP 2016). 82 Erik Jones, ‘Getting to Greece: Uncertainty, Misfortune, and the Origins of Political Disorder’ (2013) 12 European Political Science 294–304. 83 Sandbu, Europe’s Orphan (n 72) ch 4.

84 THE POLITICS OF ECONOMIC AND MONETARY UNION problem for the Irish government in the early 2000s was not that it was running excessive deficits but rather that it was not running large enough surpluses to cool down an overheating economy. The Irish banks were responsible for much of that excess, fuelling a boom in both commercial and residential real estate markets that left the country exposed to a sudden market collapse. Soon after the failure of Lehman Brothers, the Irish government had to step in to reassure the markets that these banks could weather the shock. It did so by promising to safeguard all banking liabilities with government finances. This decision effectively reversed two decades of fiscal consolidation. Again, European institutions had no obvious way to respond. 4.94

The parallelism between the Greek and the Irish case is important because the Greek case centred on public borrowing where the Irish problem was in the private sector. Europe’s economic and monetary union area was not equipped by the theory of optimum currency areas to handle either problem.84 Hence policy-makers at the core of the European Union— meaning primarily in Germany and France, but also other Northern European countries and including the ECB—adopted ad hoc prescriptions. They called on the Irish government to absorb the losses of the banking system out of fear that any attempt to impose losses on bondholders would collapse available channels for bank funding and so create additional channels for contagion. In the Greek case, however, the German Finance Minister Peer Steinbrück took a different tack. In a February 2009 speech to the German business community he explained that no euro area government would be allowed to go bankrupt. When challenged about the legality of that commitment, he had an assistant explain to the Financial Times that European rules about not bailing out sovereign borrowers were less important than financial stability.85

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These contrasting responses are important because they show the range of possibilities. European policy-makers can offer support to governments in distress as Steinbrück did for Greece, or they can insist that national governments are on their own, as in the Irish case. The market data for 2009 show the contrast between the alternatives of national responsibility in the Irish case and solidarity in the case of Greece. Although Greek bonds traded at a discount to Irish bonds (and yields were correspondingly higher) at the start of the year, after the Irish government took decisive action while the Greek government continued to struggle, the situation reversed and the Irish bonds lost value as the consequences of having to bailout the banks became more apparent. In the meantime, Greek bonds strengthened in price (and yields declined) as market participants embraced Germany’s commitment that the Greek government would not be allowed to go bankrupt (see Figure 4.1).

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The political situation changed in September 2009.86 German elections brought a new coalition into government and the finance minister shifted from Peer Steinbrück to Wolfgang Schäuble. Angela Merkel remained German chancellor but the German government’s 84 Jonathon Moses, Eurobondage: The Political Costs of Monetary Union in Europe (ECPR Press 2017) 30–35, 171–78. 85 Erik Jones, ‘The Forgotten Financial Union: How You Can Have a Euro Crisis without a Euro’ in Matthias Matthijs and Mark Blyth (eds), The Future of the Euro (OUP 2015) 44–69 (hereafter Jones, ‘The Forgotten Financial Union’). 86 Wade Jacoby, ‘Europe’s New German Problem: The Timing of Politics and the Politics of Timing’ in Matthias Matthijs and Mark Blyth (eds), The Future of the Euro (OUP 2015) 187–209 (hereafter Jacoby, ‘Europe’s New German Problem’); Erik Jones, ‘Merkel’s Folly’ (2010) 52(3) Survival 21–38.

Unintended Consequences 85 6.50

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4.00 009 y 2009 h 2009 il 2009 y 2009 e 2009 ly 2009 st 2009 r 2009 r 2009 r 2009 r 2009 e e e e r ry 2 n 2 Ju 2 Augu ptemb Octob ovemb ecemb nua Februa 2 Marc 2 Apr 2 Ma 2 Ju a J 2 2 2 2D 2N 2 Se Greece

Ireland

Figure 4.1 10-year Government Bond Yields (percent)

policy toward Greece became very different. European solidarity became more restricted and national responsibility became the norm. At the same time, however, the Irish case began to look ever more like the situation in Greece. Having underwritten and recapitalized its major banks, the Irish government now faced concerns in the market about its fiscal solvency. The Greek situation was worse because the Greek government started with a much higher debt-to-GDP ratio and because the Greek government continued to struggle with its fiscal accounts, but Ireland was not far behind. The challenge for both countries was to prevent the flight of capital because that would further weaken both the banking systems and the government’s accounts.87 Without restricting capital flows, however, there is very little that a government acting alone can accomplish to restore market confidence in the face of a growing sense of panic. This is the lesson that the Greeks learned in the winter of 2009 and 2010.88 When Angela Merkel made it clear in the March 2010 European Council summit that Greece would only get support from other parts of the euro area once it lost access to private capital markets, she all be ensured that Greece would need a bailout.

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The challenge for European policy-makers was to construct a bailout facility that would be consistent with the rules set down in the European treaties and that would also be credible in the markets. Moreover, they soon realized they had to create this facility not only for Greece but also potentially for other countries on the periphery of the euro area that were vulnerable to capital flight and hence also a sudden shortfall in government finances. Again, the

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87 Sandbu, Europe’s Orphan (n 72) 51–53, 90–93. 88 George Papaconstantinou, Game Over: The Inside Story of the Greek Crisis (Create Space Independent Publishing 2016) 134–45.

86 THE POLITICS OF ECONOMIC AND MONETARY UNION line of tension ran between national responsibility and European solidarity.89 Increasingly, moreover, the debate began to centre on the problem of ‘moral hazard’—understood as the problem where solidarity at the European level begins to encourage governments, banks, and financial market participants more generally to behave in an ‘irresponsible’ manner by assuming commitments they cannot meet or taking on risks they cannot absorb.90 This is a problem that the drafters of the Maastricht Treaty had hoped to avoid through the prohibition of excessive deficits and monetary financing.91 4.99

The ECB faced similar tensions.92 On the one hand, the ECB needed to ensure that banks across the euro area maintained access to liquidity. On the other hand, the ECB needed avoid taking unnecessary risk onto its balance sheet and to engage in anything that looks like the monetary financing of governments.93 The tension between these two objectives surfaced as soon as Greece required a bailout. Greek banks rely on sovereign debt instruments as collateral to access liquidity from the Bank of Greece (as a corresponding institution for the wider European System of Central Banks—and hence the ECB) and yet the ECB will only accept sovereign debt instruments as collateral for routine liquidity operations if they have an investment grade rating. Once the Greek government declared its need for support, the ratings agencies downgraded Greek sovereign debt well below investment grade. The ECB decided to waive its ratings requirements to ensure that Greek banks did not lose access to liquidity as a consequence. Then, as tension spread to other sovereign debt markets, the ECB announced a ‘securities markets program’ to make outright purchases of sovereign debt instruments in secondary markets order to stabilize those markets in distress.

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The discretionary use of collateral rules and creation of a securities markets program broad politics into the ECB and it also brought the ECB into politics.94 A number of board members on the ECB’s Governing Council expressed concern that outright purchases of sovereign debt instruments brought the ECB too close to monetary financing and protested that the ECB was exceeding its mandate. Bundesbank President Axel Weber eventually withdrew from consideration to become the next president of the ECB and resigned from office at the Bundesbank for ‘personal reasons’ that many interpreted as an act of protest.95 ECB Executive Board member Jürgen Stark announced his own resignation in August 2011 for similar (and in his case, more transparent) reasons.96 These actions started a progressive politicization of the Governing Council as the ultimate body responsible for decision- making in the ECB that was not so obvious beforehand.

89 Waltraud Schelkle, The Political Economy of Monetary Sovereignty: Understanding the Euro Experiment (OUP 2017) 166–74 (hereafter Schelkle, The Political Economy of Monetary Sovereignty). 90 Abraham Newman, ‘The Reluctant Leader: Germany’s Euro Experience and the Long Shadow of Reunification’ in Matthias Matthijs and Mark Blyth (eds), The Future of the Euro (OUP 2015) 117–35 (hereafter Newman, ‘The Reluctant Leader’). 91 Erik Jones and Gregory W Fuller, ‘Europe and the Global Economic Crisis’ in Ronald Tiersky and Erik Jones (eds), Europe Today: A Twenty-First Century Introduction (Rowman & Littlefield Publishers 2014) 356–58. 92 Henning, ‘The ECB as a Strategic Actor’ (n 73) 167. 93 Jones, ‘Reconsidering the Role of Ideas in Times of Crisis’ (n 78). 94 Henning, ‘The ECB as a Strategic Actor’ (n 73) 171–75. 95 Heather Stewart, ‘Axel Weber to Step Down from Bundesbank for “Personal Reasons” ’ The Guardian (11 February 2011). 96 Phillip Inman and Helena Smith, ‘Markets Plunge Following Resignation of German ECB Official Jürgen Stark’ The Guardian (9 September 2011).

Unintended Consequences 87 Meanwhile, ECB President Jean-Claude Trichet used the new instruments at his disposal to push the ECB into what looks a lot like national politics. Specifically, Trichet drafted letters to the governments of Ireland, Spain, and Italy—in the Spanish and Italian cases with the co-signature of the national central bank governor. Trichet sent the Irish letter in November 2010, threatening to cut the Irish banks off from emergency liquidity assistance unless the Irish government committed to a bailout with strict conditionality. He sent the letters to Spain and Italy in August 2011 offering to intervene directly into the Spanish and Italian sovereign debt markets if the Spanish and Italian governments would commit to a specific program of structural reform and fiscal consolidation. In all three cases, he justified his actions out of concern to avoid monetary financing and to strike an appropriate balance between institutional solidarity and national responsibility.97

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As the crisis deepened, the divisions between those countries at the core of the euro area 4.102 that received flight capital and those countries on the periphery that experienced capital flight deepened as well. This division could be seen in part in the differential treatment given countries by Trichet and the ECB. But it could also be seen in how national leaders— particularly in France and Germany—began to make decisions without consulting either the European institutions or the smaller Member States.98 The most important of these decisions concerned ‘private sector involvement’, which is the phrase used to describe how losses could be spread across financial market participants in the event of any bailout. German Chancellor Angela Merkel and French President Nicolas Sarkozy announced their intention to pursue private sector involvement in the second Greek bailout when they met in Deauville in October 2010—shortly before Trichet insisted that the Irish government request a bailout. The immediate impact of the policy was to drive more capital from the periphery of the euro area—where investors knew it would be at risk—to the countries of the core. Ireland requested a bailout soon thereafter and Portugal followed in the first-half of 2011. As financial market pressure spread to Spain and Italy, however, the resources available for sovereign bailouts were clearly inadequate. Moreover, the willingness of other Member States like Germany to commit additional resources was limited. Trichet’s letters were an act of desperation to try and convince the leaders of both Spain and Italy to do whatever they could to restore confidence in the markets. Initially Spain succeeded even if Italy appeared to fail before finding new and more decisive political leadership. As Trichet prepared to hand the presidency of the ECB over to his successor, Mario Draghi, the sovereign debt crisis remained precariously balanced.

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That balance was only temporary. Beneath the surface in both the Spanish and the Italian cases, the liquidation of foreign-owned assets that had accumulated over the years and the flight of capital from the periphery to the core of the euro area, and Germany in particular, constituted an almost unstoppable force.99 Under its new president, the ECB managed to win some respite by introducing new long-term refinancing operations which allowed banks the euro area (but principally in Spain and Italy) to borrow over a three-year period

4.104

97 Sandbu, Europe’s Orphan (n 72) 130–33. 98 Herman Van Rompuy, Europa in the Storm: promise and prejudice (Davidsfonds 2014). 99 Sebastian Royo, Lessons from the Economic Crisis in Spain (Palgrave Macmillan 2013) ch 6; Erik Jones, ‘Italy’s Sovereign Debt Crisis’ (2012) 54(1) Survival 83–110.

88 THE POLITICS OF ECONOMIC AND MONETARY UNION at very low costs and to use the liquidity they received to buy their own government’s securities. By March 2012, however, even that formula had reached its limits. Moreover, the prospect that Spanish and Italian banks might someday get tied up in some form of private sector involvement should their own governments run into trouble only served to undermine confidence in both countries among market participants. 4.105

Going into the summer of 2012, the Presidents of the main European institutions— meaning the European Council, the European Commission, the European Central Bank, and the European Parliament—began experimenting with another fundamental change in the architecture of Europe’s economic and monetary union. Specifically, they sought to use European bailout facilities to inject capital directly into banks in need of recapitalization. In order to ensure that these banks would not experience moral hazard and so behave irresponsibly, the Presidents also sought to create a single supervisory mechanism for euro area financial institutions. Ultimately, the political leaders of the euro area Member States accepted that these institutions were necessary for financial stability. In doing so, they paved the way for the creation of a European banking union to underpin financial integration in the economic and monetary union.100

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Even this innovation proved inadequate to stem the flight of capital from the periphery to the core. Nevertheless, it did create space for Draghi to insert the ECB as a stop-gap measure until the necessary institutions could be created. Draghi gave a speech to the London finance community insisting that he would do ‘whatever it takes’ to prevent the further disintegration of European financial markets. This commitment succeeded in stabilizing the markets. It also pushed the ECB into a political role that further deepened divisions on the governing council. And it heightened the role of the ECB as a political actor at the European level.101

C. Phase 3: Germany versus the ECB (July 2012–July 2015) 4.107

Draghi’s commitment to reverse the disintegration of European financial markets marked a dramatic shift from acute crisis to something that appeared more stable. Although significant problems remained across the euro area periphery, the threat that one or more countries would leave the euro all but vanished. Moreover, European institutions began to make significant and rapid progress to build out the arrangements that would contain financial pressures in the future. The heads of state and government transformed the temporary bailout facility that had been created immediately following the first Greek request for assistance into a more permanent, intergovernmental European Stability Mechanism. The ECB began equipping itself to act as single supervisor for banks operating in the European financial system. The Council of the European Union working with the ECB and the European Commission fleshed out the procedures for taking decisions about how to manage banks in distress. They developed proposals for funding banking recovery and resolution. And

100 Rachel A Epstein, Banking on Markets: The Transformation of Bank-State Ties in Europe & Beyond (OUP 2017) ch 5. 101 Erik Jones and Matthias Matthijs, ‘Rethinking Central-Bank Independence’ (2019) 30(2) Journal of Democracy 127 (hereafter Jones and Matthijs, ‘Rethinking Central Bank Independence’).

Unintended Consequences 89 they began to talk about standardizing and perhaps even unifying deposit insurance across Member States. In terms of formal integration, the European Union made unprecedented progress on the path toward completing its economic and monetary union.102 Running alongside that progress, however, an important line of tension developed between key figures in the German economic policy establishment and the European Central Bank.103 This tension focused initially on the instrument announced in September 2012 to underpin Draghi’s commitment to do ‘whatever it takes’. Called outright monetary transactions (OMT), this commitment was essentially a promise by the ECB to buy ‘unlimited’ amounts of a distressed country’s sovereign debt at short maturities. In exchange, the government of the distressed country would have to agree to enter into some kind of official financial stabilization program and to accept the conditionality imposed by European institutions. Bundesbank President Jens Weidmann objected to this arrangement because he saw such a commitment as stretching beyond the formal mandate of the ECB and because he worried that the prospect of an unlimited ECB bond purchasing program—even if only conditional—would create significant distortions in the bond markets. The official position of the German government was to support Draghi and not Weidmann.104 Given his political independence, however, Weidmann was able not only to voice his objections but also to file a brief arguing against the legality of the ECB’s new policy as part of proceedings before the German Federal Constitutional court.105

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The March 2013 crisis in Cyprus added another element of tension through the reluctance of many policy-makers in Germany and other parts of northern Europe to permit the direct recapitalization of distressed banks on the European periphery with European resources.106 The Cypriot banks had large exposures to Greek sovereign debt and to their own domestic property markets. They also had significant funding from Russian oligarchs. As the banks got into trouble because of the weakness in their assets, there was little desire in Germany or elsewhere to bailout their creditors. For its part, the government of Cyprus was reluctant to impose losses on the financial institutions that lay at the heart of its national business model. The ECB got caught in the middle through the provision of emergency liquidity assistance from the Central Bank of Cyprus. When the ECB’s Governing Council decided it could no longer authorize emergency liquidity assistance for the Cypriot banks, that decision provoked a stand-off between the Cypriot government and the other EU Member States. In the end, the Cypriot government had to back down and resolve and restructure its two largest domestic banks—mainly, but not exclusively, at the expense of foreign depositors. In doing so, however, it almost dropped out of the euro. The Dutch President of the Eurogroup, Jeroen Dijsselbloem, heralded the Cypriot bank restructuring as a template for future bank restructuring in the euro area and argued that the goal should be to avoid the direct recapitalization of banks with European resources under any circumstances. ECB President Mario Draghi retorted soon thereafter that such a policy would place severe

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102 Rachel A Epstein and Martin Rhodes, ‘International in Life, National in Death? Banking Nationalism on the Road to Banking Union’ in James A Caporaso and Martin Rhodes (eds), The Political and Economic Dynamics of the Eurozone Crisis (OUP 2016) 200–32. 103 Jacoby, ‘Europe’s New German Problem’ (n 86); Newman, ‘The Reluctant Leader’ (n 90). 104 Sandbu, Europe’s Orphan (n 72) 160. 105 Deutsche Bundesbank, ‘Stellungnahme gegenüber dem Bundesverfassungsgericht zu den Verfahren mit Az 2 BvR 1390/12, 2 BvR 1421/12, 2 BvR 1439/12, 2 BvR 1824/12, 2 BvE 6/12’ (Deutsche Bundesbank 2012). 106 Demetriades, A Diary of the Euro Crisis in Cyprus (n 76) 113–19.

90 THE POLITICS OF ECONOMIC AND MONETARY UNION constraints on European financial integration. He also added that the brinkmanship over Cyprus was ‘not smart’.107 4.110

The Cypriot model for bailing in bank creditors to finance banking resolution quickly became the norm. This was possible in part because of the existence of new European institutions for crisis management, which helped to ensure that bailing in creditors in one country would not scare away creditors in all the rest as had been the fear in the Irish case. And it was consistent with a widespread belief shared by central bankers that some form of private sector involvement is necessary to prevent moral hazard. Nevertheless, the strong insistence on avoiding any direct recapitalization with European resources and limiting public bailouts placed central bankers in an awkward position. Since they control emergency liquidity assistance and are also responsible for banking supervision, central bankers are easily blamed for the consequences when banks fail. The central bank governor of Cyprus at the time of that country’s crisis left office under a cloud of death threats.108 The central bank governor of Slovenia, who had to resolve important domestic banks later in 2013, faced a similarly hostile reception and also left office early under death threats. In both the Cypriot and the Slovenian cases, moreover, national politicians blamed their national central bank governors specifically—and the ECB more generally—for the losses incurred by savers and investors.109

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A third line of tension opened between Germany and the ECB as the ECB’s Governing Council experimented with new techniques for injecting liquidity into the markets.110 This experimentation started in 2014 when it became clear that OMT could not repair the damage to European financial market integration and that growth would not return to Europe without further monetary accommodation. This experimentation started in June 2014 with the introduction of negative interest rates for deposits held by banks with the ECB alongside new ‘targeted’ long-term refinancing operations that effectively paid banks to lend to non-financial firms. The experimentation continued in October 2014 as the ECB expanded its outright purchases of covered bonds and started acquiring asset backed securities. And it widened even further when the ECB began making large-scale purchases of sovereign debt in March 2015. At each step along the way, Weidmann staked out the opposition, arguing that the introduction of this additional liquidity was unnecessary, that both the negative deposit rates and the outright purchases would distort markets, and asserting that large-scale sovereign debt purchases would encourage governments to avoid necessary reforms.

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The Greek crisis brought the various threads of tension between Germany and the ECB together in what developed as an existential threat to Europe’s economic and monetary union.111 The January 2015 Greek national elections brought a Syriza-led coalition into power that made clear its ambition to challenge European fiscal orthodoxy. This challenge raised three questions at once—about whether the ECB would do ‘whatever it takes’ to keep

107 Erik Jones, ‘The Euro Crisis: No Plan B’ (2013) 55(3) Survival 81–94. 108 Demetriades, A Diary of the Euro Crisis in Cyprus (n 76) 175–77, and interview with the author. 109 Jones and Matthijs, ‘Rethinking Central Bank Independence’ (n 101). 110 Henning, ‘The ECB as a Strategic Actor’ (n 73) 175–76. 111 And the IMF. See Paul Blustein, Laid Low: Inside the Crisis that Overwhelmed Europe and the IMF (Center for International Governance Innovation 2016).

Unintended Consequences 91 Greece inside the euro, about how the ECB would manage is complicated relationship as both liquidity provider and supervisor for the Greek banking system, and about how the Greek crisis and the ECB’s unconventional monetary policies would interact. The answers revealed how political the ECB had become.112 Draghi made it clear from the outset that the ECB would only support those governments that agreed to abide by their international commitments. If Greece would not meet its program requirements, then it would not receive ECB support. To underscore the point, the ECB’s governing council pulled the waiver on ratings requirements that made it possible for Greek banks to access routine central bank liquidity with Greek sovereign debt as collateral. After February, those banks would have to rely on emergency liquidity assistance and the ECB would determine how much the Bank of Greece could make available. This triggered (or further encouraged) the flight of deposits from the Greek banks. It also meant that eventually the ECB would have to cut off the Greek financial system, because the flight of deposits undermined the solvency of the Greek banks and insolvent banks cannot access emergency liquidity assistance.

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Meanwhile, the start-up of large-scale asset purchases meant that the contagion from Greece was limited. It also meant that the ECB could offer the Greek government a carrot as well as a stick. If the Greek government could live up to its European commitments, the ECB could restore the waiver that makes Greek debt eligible for use as collateral and perhaps even extend that waiver to bring Greek debt into the ECB’s asset purchasing program. Of course, Draghi and the ECB governing council insisted that each of these actions was consistent with their institutional mandate. Nevertheless, as the crisis peaked in the summer of 2015, it was very hard for the ECB to strike a balance that was independent of politics.113

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The Greek crisis came to an end when the Greek government chose to remain inside the euro and the German government chose not to push the Greeks out. Once again, the ECB found itself caught in the middle. The Greeks accused the ECB of exacerbating their situation by undermining the banking system and the Germans accused the ECB of creating a false impression of stability that only encouraged moral hazard. These contrasting perceptions of the ECB are hard to reconcile because making concessions to either side of the debate only aggravates the other.

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D. Phase 4: the future of financial governance (July 2015–March 2018) As the tensions surrounding Greece receded, those surrounding Italy increased again. In some ways, this was a continuation of the conflict between Germany and the ECB over the deployment of unconventional monetary policy measures and treatment of European banks. In more important ways, however, the new Italian version of the crisis (or the new version of the Italian crisis) was simply a function of the long, deep recession, and the haltingly slow economic recovery. Successive Italian governments reformed the country’s pensions and liberalized the country’s labour markets. They could not, however, bring a halt

112 113

Jones and Matthijs, ‘Rethinking Central Bank Independence’ (n 101). Jones and Matthijs, ‘Rethinking Central Bank Independence’ (n 101).

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92 THE POLITICS OF ECONOMIC AND MONETARY UNION to the rise in bankruptcies among small and medium enterprises and the simultaneous increase in unemployment. 4.117

More important, the Italian government could do very little to dampen the impact that weak domestic economic performance had on the balance sheets of the country’s banks. The banks are ‘more important’ than either bankruptcies or unemployment because the Italian economy depends almost entirely on bank credit for working capital and investment. Hence, the deterioration of the banks put the country on a downward spiral. The Italian economy would only recover, once the government could stabilize the banks.

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The bank dependence of the Italian economy is not unique in the European context. The problem for Italian policy-makers was that the Italian banking crisis came too late. Italian banks had little exposure to the first phases of the economic and financial crisis because they have a very local orientation. By implication, the Italian banks only got into trouble as a result of the long recession. Countries with banks that had a more global role, like Germany, Belgium, and the Netherlands, got into trouble more quickly. Hence, the governments of those countries were able to bail out their banks with public resources at the start of the global economic and financial crisis, when concerns about contagion that could shut off the funding to banks predominated. After the 2013 bank resolutions in Cyprus, however, such public bailouts were no longer an option. Instead, governments had to impose losses on those who had invested or lent money to the banks first. Indeed, that requirement is written into the Bank Recovery and Resolution Directive (2014/59/ EU) (BRRD).

4.119

This bailing in of investors and creditors is politically more challenging than imposing the burdens of rescuing banks on taxpayers more broadly. The death threats received by the central bank governors of Cyprus and Slovenia are an extreme form of the problem, but they are also indicative of the intensity of the anger and the ease of attributing responsibility on the part of those affected. The Italian case is only different in terms of the level of imputed violence and the direction of the hostility; the ruling Democratic Party and not the Bank of Italy was the focus for negative attention.

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The problems started with four small banks in central Italy that needed to be resolved in the autumn of 2015. As is often the case, the problem was mismanagement as well as economic weakness. Making matters worse, the director of one of the banks was the father of a prominent government minister. This put the government in an impossible situation: if the government bailed out the bank, it was showing political favouritism; if the government bailed-in the bank’s investors and creditors, then the minister—and hence the government—could somehow be blamed for the losses. In the end, the government tried both options, first bailing in investors and creditors per European norms and then compensating many of those who lost money after the fact. Both actions drew heavy criticism.

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What followed was a serious of high level-profile banking problems, starting with Monte dei Paschi di Siena but including institutions across the industrialized central and northern parts of Italy. Many of these institutions suffered from mismanagement, Monte dei Paschi chief among them. All of them suffered from weak local economic performance. And all of them threatened to wipe out the savings and investments of local families

Unintended Consequences 93 while dragging down the local economy. Hence the Italian government spent most of 2016 and the first-half 2017 looking for ways to make exceptions to the bail-in requirements written into European legislation. As it delayed taking decisive action, the losses continued to mount and the political costs of being seen to be mismanaging the banking crisis only worsened. This is the backdrop against which European leaders discussed the completion of the economic and monetary union and the future of European financial governance. The main items under discussion concerned elements to reduce risks in the banking system and elements to share risks across the economic and monetary union as a whole. Governments in northern Europe looked at the Italian situation and argued that any reform should focus on risk reduction. Italian banks should clean up their balance sheets and become less dependent on relations with the Italian government. Italian banks should also face stricter (European) supervision so that they will be better managed. Italian banks should also face incentives to avoid excessive risk-taking. From this perspective, bailing in investors and creditors for banks how suffer losses is the only way to avoid moral hazard.114

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The Italian government saw this debate from a different perspective. They agreed that they should clean up the banks but rejected the idea that bailing in creditors is the best way to achieve that objective. Instead, Italian government officials argued that they should be allowed to bail out the banks like the German, Belgian, and Dutch governments did at the start of the crisis. They also argued that the best way to avoid contagion would be to strengthen the mechanisms for risk sharing, particularly those related to deposit insurance. And if the goal is to separate banks from their sovereigns, then there should also be adequate European funding for banking resolution.

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Where both sides in the debate were agreed is that Europe’s financial system will remain vulnerable to crisis so long as neither risk reduction nor risk sharing takes place. Where they disagree is not just whether risk reduction should precede risk sharing, or the reverse, but also whether either risk reduction or risk sharing would be sufficient. The northern European governments worried that governments on the periphery would never reduce the risks in their banking systems once risk-sharing mechanisms were in place; the peripheral governments worried that governments in the core and the northern parts of the euro area would never agree to share risks once they made the necessary efforts to clean up their domestic banks.

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The debate between the two groups reached an impasse in the winter of 2017 and 2018, after first Germany and then Italy faced difficult national elections. After a long period of negotiation, Germany formed a grand-coalition government within which the centrist parties staked out a strong case for risk-reduction on the periphery of the euro area while conceding little ground to the need for risk sharing. Subsequently, Italy formed a populist government with a sceptical view of economic and monetary union—including a rejection of the bail-in requirements written in the BRRD—and a strong preference for risk-sharing.

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114 Erik Jones, ‘European Economic Governance Reform: Moving Past Power Politics’ (2018) 7(1) SEFO— Spanish Economic and Financial Outlook 21–32 (hereafter Jones, ‘European Economic Governance Reform’).

94 THE POLITICS OF ECONOMIC AND MONETARY UNION

E. Lessons from the crisis 4.126

The economic and financial crisis revealed a very different kind of politics than was assumed in the theory of optimum currency areas.115 That crisis politics was also different from the inter-governmental bargaining that surrounded the creation of Europe’s economic and monetary union. In other words, neither the economists who studied monetary integration nor the political scientists who studied the European Union anticipated the politics that EU Member States would face. Moreover, each phase brought a new dimension of difference into play.116

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In the first instance, that politics centred on the problem of uncertainty. Europe’s economic and monetary union is a rule-based system, whose architects sought to channel Member State behaviour in the face of those challenges they could anticipate. Those rules provided little scope for the exercise of discretion. They certainly did not provide for governments to exercise discretion at a pace dictated by financial market dynamics. The result was a mixture of stop-gap measures, muddling-through, and experimentation. The frustration that usually accompanies a lack of coordination was also evident.

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As the crisis evolved, some countries proved more vulnerable to financial market dynamics than others. This vulnerability was not due to the structure of export demand or the volatility in per capital income. Rather it was due to the presence of accumulated foreign investments in specific asset markets and the speed with which those assets could be liquidated. It was also due to the difference in resources governments could access in trying to stabilize their banks. And it was due to the size of those banks relative to the domestic economy.117 Wealthier, capital exporting countries with large populations and relatively small banks fared better than poorer, capital importing countries with relatively smaller populations and relatively larger banks. Moreover, these structural differences translated quickly into differences in political interests and power resources.118

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European institutions struggled to remain neutral in the context of this political division. Such neutrality was almost impossible, however, given the unconventional nature of the instruments they had to deploy and the winners and losers that using such instruments created. Those countries that needed least assistance—again, wealthier, capital exporting countries with large populations and relatively small banks—chafed at the risks they perceived central banks as taking. Those countries that needed more assistance—poorer, capital importing countries with relatively small populations and relatively large banks— complained that ECB policies, however unconventional, were nevertheless inadequate. For its part, the ECB struggled to reconcile the extraordinary national of the actions it undertook with the rules and principles that underpinned its mandate. Like the economic and monetary union as a whole, the ECB is a rule-based institution. It is capable of exercising discretion, but even that capability is constrained.119

115 Sandbu, Europe’s Orphan (n 72); Schelkle, The Political Economy of Monetary Sovereignty (n 89) 19–21. 116

See the essays in Matthias Matthijs and Mark Blyth, The Future of the Euro (OUP 2015).

118

Marzinotto, ‘ “United We Fall” ’ (n 79). Jones and Matthijs, ‘Rethinking Central Bank Independence’ (n 101).

117 Woll, The Power of Inaction (n 71) 166. 119

The New Politics of Economic and Monetary Union 95 Ultimately it became apparent that the Achille’s heel of Europe’s economic and monetary union is finance and not trade.120 The key to stabilizing the euro as a common currency is to start by stabilizing European banks. This challenge is different for different countries, not only because of the legacies of their financial development but also because of their willingness to expose themselves to potentially risky behaviour elsewhere. The problem is framed as a contrast between risk sharing and risk reduction and yet the more political expressions of these concepts are solidarity and moral hazard. This is where the politics of economic and monetary union acquires an ethical dimension—one centring in a very normative sense on competing interpretations of what is ‘right’ and what is ‘wrong’—that neither the economists how tried to imagine an optimum currency area nor the political scientists who studied European treaty negotiations ever imagined. In the end, however, this ethical dimension turned out to be existentially significant. National governments would have to agree on an appropriate balance between national responsibility and European institution building—between arguments that encouraging moral hazard is the ‘wrong’ thing to do, and arguments that institutionalizing solidarity is the ‘right’ thing to do—or else they would be almost certain to face another crisis in the future.

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V. The New Politics of Economic and Monetary Union The new politics of economic and monetary union is dominated by two different perspectives. Once centres on financial engineering; the other centres on, for want of a better term, financial ethics.121 This new politics has only just breached the surface as Europe’s heads of State or government struggle to prepare for the next crisis. At this stage it is still fair to ask whether they will prepare adequately and in time.

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What is important to note is that this new politics is not sui generis. Beneath the surface there is still a strong commitment to the old economic and political science perspectives. Both the ethical and financial engineering perspectives, for example, call for a reorganization of the membership of the monetary union either to push it toward something that more closely resembles an economic area as Mundell described it or a political community that the strongest power—meaning Germany—will accept. The engineering perspective is heavily influenced by Kenen. It reinterprets cross-border risk sharing through financial insurance, it challenges the balance between rules and discretion, it seeks to return to a convergence of policy preferences, and it seeks to restore the political independence of central banks. From this engineering perspective, it is possible to maximize solidarity while minimizing the risk of moral hazard. The ethical perspective is heavily influenced by McKinnon. It stresses the importance of efficient local factor markets, but it denies the relevance of aggregate demand stabilization. In addition, it takes a very narrow view on central bank independence, prefers rules over discretion and risk reduction over risk-sharing. Within this perspective, it is not possible to eliminate moral hazard or even to expand solidarity without creating new risks that one Member State will take advantage of the rest. Such risks are politically unacceptable.

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120 121

Jones, ‘The Forgotten Financial Union’ (n 85). Jones, ‘European Economic Governance Reform’ (n 114).

96 THE POLITICS OF ECONOMIC AND MONETARY UNION 4.133

Behind this confrontation, the old politics of economic and monetary union imagined by economists retains its hold over much of the political consciousness. This is an understanding of monetary integration that, following Mundell, gives priority to trade over finance. Its proponents believe that the euro was created in error because too many countries were admitted. They insist that the problem is not just the structural criteria but also the ability of elites to live up to their commitments. And they argue that everyone would be better off if the membership of the euro area was restructured so that countries could have their monetary autonomy without the inconvenience of interdependence.

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The political science perspectives are also prominent. The question is not just whether Member States drive institutional reform through a process of intergovernmental bargaining, as the result of spill overs from past institution-building projects, or some combination of the two.122 It is also whether ideas and narratives have a power that is somehow independent of political actors as a mechanism that can unite or divide Europeans and as a motive force to guide European integration from one crisis to the next.123 Finally, there is the question about whether the interests of powerful groups and the ideas for economic policy-making remain congruent from one country to the next. If that convergence of ideas is no longer apparent, the prospects for conflict are significantly greater.

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It is no surprise that the politics of economic and monetary union continues to evolve alongside the ongoing elaboration and performance of monetary integration as a project. The point worth noting is that both the politics and the project remain strongly influenced by conceptions from the past. Although observers might point to radical departures of the that was then, this is now, sort, the reality is more complicated, and the continuities are significant. Hence understanding the politics of economic and monetary union today relies heavily on a willingness to explore the politics of the past and the ideas—both economic and political—that informed it.124

122 Erik Jones, R Daniel Kelemen, and Sophie Meunier, ‘Failing Forward? The Euro Crisis and the Incomplete Nature of European Integration’ (2016) 49 Comparative Political Studies 1010–34. 123 Craig Parsons and Matthias Matthijs, ‘European Integration Past, Present, and Future: Moving Forward through Crisis?’ in Matthias Matthijs and Mark Blyth (eds), The Future of the Euro (OUP 2015) 210–32. 124 Schelkle, The Political Economy of Monetary Sovereignty (n 89) 327–30.

5

THE INTERNATIONAL DIMENSION OF EMU The Interplay Between the Global Financial Stability Architecture and the European Union Shawn Donnelly and Ramses A Wessel

I. Introduction II. The Emergence of the Global Financial Stability Architecture

A. Precedents to the post-2008 GFSA B. The current GFSA

III. International Bodies and the EMU

A. Financial Stability Board B. Bank for International Settlements C. Basel Committee on Banking Supervision D. IADI: International Association of Deposit Insurers E. IOSCO and CPMI F. The OECD G. IMF

5.1

H. Interim conclusions: the GFSA and macroeconomic policy

5.5 5.6 5.15

IV. An Influence of International Law and Policies on the EMU?

5.23 5.24 5.41 5.48 5.58 5.63 5.69 5.72

5.77 5.81 5.81

A. Soft law and its implications B. EMU-GFSA links in macro-and microprudential surveillance C. EMU-GFSA links in macroeconomic and monetary policy D. EMU-GFSA links in relation to Banking Union E. EMU-GFSA links in securing the financial market F. EMU-GFSA links in macroeconomic surveillance

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V. Conclusion: An Interplay Between the GFSA and the EMU?

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5.87 5.91 5.94 5.98

I. Introduction It is a truism that the European Union’s self-proclaimed autonomy may be a helpful concept in legal terms—primary to preserve the monopoly of the European Court of Justice to interpret European Union (EU) law1—but it is equally clear that the EU is to a large extent influenced by the decisions and policies of other international institutions.2 The present chapter 1 Marise Cremona, Anne Thies, and Ramses A Wessel, The European Union and International Dispute Settlement (Hart Publishing 2017). 2 Ramses A Wessel and Steven Blockmans, Between Autonomy and Dependence: The EU Legal Order Under the Influence of International Organisations (TMC Asser Press 2013); as well as Ramses A Wessel and Steven Blockmans, ‘The Legal Status and Influence of Decisions of International Organizations and other Bodies in the European Union’ in Piet Eeckhout and Manuel Lopez-Escudero (eds), The European Union’s External Action in Times of Crisis (Hart Publishing 2016) 223–48; and earlier Andreas Føllesdal, Ramses A Wessel, and Jan Wouters,

Shawn Donnelly and Ramses A Wessel, 5 The International Dimension of EMU In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0007

5.1

100 THE INTERNATIONAL DIMENSION OF EMU aims to assess this external influence in relation to a specific, but core dimension of the EU, the Economic and Monetary Union (EMU).3 More specifically, we will assess the influence of what these days is known as the Global Financial Stability Architecture (GFSA), on the EMU. As will be further explained below, the GFSA is a network of the key global financial institutions that collect data, conduct research, provide insight and propose rules of conduct for the financial sector. Its mission is to rethink (global) macroeconomic policy to make economies more resilient—how to steer the economy clear of risks that could lead it to collapse; how to deal with real-time crises; and how to initiate recovery. Its primary method is to find out how differing components of financial markets act and react to one another, and to propose prudential regulation that shapes the behaviour of private financial service providers, of governments and of central banks.4 5.2

The main aim of the present chapter is to explain whether, and how, international institutions shape EU law, policies and procedures in the EMU context. Indeed, as the financial crisis revealed, the EU has been far from autonomous or isolated and its decisions where taken in the context of decisions taken in the GFSA, consisting of both formal international organizations (such as the IMF, World Bank, or OECD) and more informal international organizations (including a number of international standard-setting bodies).5 The latter in particular are characterized by different instruments (in which soft law dominates6), and

Multilevel Regulation and the EU: The Interplay between Global, European and National Normative Processes (Martinus Nijhoff Publishers 2008). 3 See for a more detailed analysis of the EMU, Chapters 2, 3, and 4. 4 Shawn Donnelly, ‘Institutional change at the top: from the financial stability forum to the financial stability board’ in Renate Mayntz (ed), Crisis and Control: Institutional Change in Financial Market Regulation (Campus Verlag 2012) 261–75 (hereafter Donnelly, ‘Institutional change at the top’); Eric Helleiner, ‘The Financial Stability Board and International Standards’ (2010) CIGI G20 Papers No 1; Anthony Elson, Governing global finance: The evolution and reform of the international financial architecture (Springer 2011); Geoffrey R D Underhill, Jasper Blom, and Daniel Mügge, Global financial integration thirty years on: from reform to crisis (CUP 2010); Geoffrey R D Underhill, ‘The Emerging Post-Crisis Financial Architecture: how far has reform gone?’ (2014) GR: EEN Working Paper No 46. 5 See on informal international lawmaking: Joost Pauwelyn, Ramses A Wessel, and Jan Wouters, Informal international lawmaking (OUP 2012) (hereafter Pauwelyn, Wessels, and Wolters, Informal international lawmaking); Joost Pauwelyn, Ramses A Wessel, and Jan Wouters, ‘When structures become shackles: stagnation and dynamics in international lawmaking’ (2014) 25 European Journal of International Law 733–63; Jan Wouters and Jed Odermatt, ‘Comparing the “Four Pillars” of Global Economic Governance: A Critical Analysis of the Institutional Design of the FSB, IMF, World Bank, and WTO’ (2014) 17 Journal of International Economic Law 49–76; Steven Bernstein and Hamish van der Ven ‘Best practices in global governance’ (2017) 43 Review of International Studies 534–56. 6 See, for instance, Jean Galbraith and David Zaring, ‘Soft law as foreign relations law’ (2014) 99 Cornell Law Review 735 (hereafter Galbraith and Zaring, ‘Soft law as foreign relations law’); Chris Brummer, Soft Law and the Global Financial System: Rule Making in the 21st Century (2nd edn, CUP 2015); Chris Brummer, ‘Why soft law dominates international finance—and not trade’ (2010) 13 Journal of International Economic Law 623–43 (hereafter Brummer, ‘Why soft law dominates international finance’); Chris Brummer, ‘How international financial law works (and how it doesn’t)’ (2011) 99 Georgetown Law Journal 257; Chris Brummer, Minilateralism: How trade alliances, soft law and financial engineering are redefining economic statecraft (CUP 2014); Douglas W Arner and Michael W Taylor, ‘The global financial crisis and the financial stability board: Hardening the soft law of international financial regulation?’ (2009) 32 UNSW Law Journal 488 (hereafter Arner and Taylor, ‘The global financial crisis and the financial stability board’); Kenneth W Abbott and Duncan Snidal, ‘Hard and soft law in international governance’ (2000) 54 International Organization 421– 56 (hereafter Abbott and Snidal, ‘Hard and soft law in international governance’); Kenneth W Abbott and others, ‘The concept of legalization’ (2000) 54 International Organization 401–19; Gregory C Shaffer and Mark A Pollack, ‘Hard vs. soft law: alternatives, complements and antagonists in international governance’ (2010) 94 Minnesota Law Review 706–99; Andrew T Guzman and Timothy L Meyer, ‘International soft law’ (2010) 2 Journal of Legal Analysis 171–225.

Introduction 101 policy narratives form a vital part of the substantive obligations7 to which EMU and its Member States are expected to conform, or explain their non-adoption.8 Those policy narratives are also part of what binds the single institutions into a cohesive whole with a greater overarching purpose, known as an architecture.9 It answers not only the question of what the overall mission of the architecture is (financial stability), but also on what basis, and with what means: in other words, with what strategy.10 Using the GFSA as our focal point is helpful not only to analyse the most relevant international institutions in relation to the EMU, but also to understand the legal and policy links between them. This chapter thus examines the nature of the GFSA and its relationship to EMU law, policy and practice. It does so by taking an outside-in perspective, focusing on global developments and institutions and their influence on the EMU. Other chapters in the present Volume approach the interplay between the EU and the outside world from the perspective of the EU’s external relations or by dealing with international agreements concluded between the EU and third States in relation to the EMU.11 The present chapter makes the case that the GFSA influences financial stability rules within the EU, and within EMU more specifically, by setting out standards and benchmarks for Europeans to adopt, with the goal of maximizing financial stability. As we will see, in part, the EU pushes this development;12 in part, however, it filters GFSA (soft) law to comply with European political priorities.13

5.3

This chapter is structured as follows. Section II sets the stage by analysing the relevant international bodies that are now seen as forming the Global Financial Stability Architecture. Section III aims to reveal the institutional links between the emergence of the GFSA and the

5.4

7 See Cornel Ban and Kevin Gallagher, ‘Recalibrating Policy Orthodoxy: The IMF Since the Great Recession’ (2015) 28 Governance 131–46 (hereafter Ban and Gallagher, ‘Recalibrating Policy Orthodoxy’); Stephen C Nelson, ‘Playing favorites: how shared beliefs shape the IMF’s lending decisions’ (2014) 68 International Organization 297– 328; Jaqueline Best, ‘From the top–down: the new financial architecture and the re-embedding of global finance’ (2003) 8 New Political Economy 363–84; Jeffrey M Chwieroth, ‘Controlling capital: the International Monetary Fund and Transformative Incremental Change from within International Organisations’ (2014) 19 New Political Economy 445–69. 8 Abraham Newman and David Bach, ‘The European Union as hardening agent: soft law and the diffusion of global financial regulation’ (2014) 21 Journal of European Public Policy 430–52 (hereafter Newman and Bach, ‘The European Union as hardening agent’); Assuming also that supranational institutions lack enforcement powers; see Jonas Tallberg and James McCall Smith, ‘Dispute settlement in world politics: States, supranational prosecutors, and compliance’ (2014) 20 European Journal of International Relations 118–44. 9 Susana Borrás and Claudio M Radaelli, ‘The politics of governance architectures: creation, change and effects of the EU Lisbon Strategy’ (2011) 18 Journal of European Public Policy 463–84; Kenneth Armstrong, ‘EU social policy and the governance architecture of Europe 2020’ (2012) 18 Transfer: European Review of Labour and Research 285–300; Paul Copeland, EU enlargement, the clash of capitalisms and the European social dimension (OUP 2014); Jonathan Zeitlin, ‘Towards a stronger OMC in a more social Europe 2020: A new governance architecture for EU policy co-ordination?’ in Eric Marlier (ed), Europe 2020 (P.I.E. Peter Lang 2010) 253–73. 10 Hervé Hannoun, ‘Towards a global financial stability framework’ (45th SEACEN Governors’ Conference, Siem Reap Province, Cambodia February 2010) 26 (hereafter Hannoun, ‘Towards a global financial stability framework’). 11 See in particular Chapters 6 and 7. 12 Daniel Mügge, ‘Europe’s regulatory role in post-crisis global finance’ (2014) 21 Journal of European Public Policy 316–26 (hereafter Mügge, ‘Europe’s regulatory role in post-crisis global finance’); Lucia Quaglia, ‘The sources of European Union influence in international financial regulatory fora’ (2014) 21 Journal of European Public Policy 327–45 (hereafter Quaglia, ‘The sources of European Union influence’); Elliot Posner, ‘Making rules for global finance: transatlantic regulatory co-operation at the turn of the millennium’ (2009) 63 International Organization 665–99. 13 Lucia Quaglia and Aneta Spendzharova, ‘Post‐crisis reforms in banking: Regulators at the interface between domestic and international governance’ (2017) 11 Regulation & Governance 422–37 (hereafter Quaglia and Spendzharova, ‘Post‐crisis reforms in banking’); Shawn Donnelly, ‘Advocacy coalitions and the lack of deposit insurance in Banking Union’ (2018) 21 Journal of Economic Policy Reform 1–14.

102 THE INTERNATIONAL DIMENSION OF EMU EU. This is followed in Section IV by an assessment of the influence of international law and policies on the EMU in relation to a number of specific areas of financial regulation. Finally, Section V will be sued to draw some conclusions.

II. The Emergence of the Global Financial Stability Architecture 5.5

The GFSA can really be considered an architecture since 2009, when the G20 made a concerted attempt to expand the activity and output of international standard-setting bodies (ISSBs) in the financial sector, connect them with one another, and to make their impact more than the sum of their parts. In general, only few international bodies have the competence to enact legally binding rules14 and the formal and informal bodies making up the GFSA are no exception. The GFSA largely provides ‘soft law’ at the international level to steer national governments and the EU in a certain direction, which then may transpose it into ‘hard law’. This does not imply that the norms produced in the framework of the GFSA are merely general, broad guidelines. On the contrary, they cover so- called ‘microprudential regulation’ (applicable only to one of banking, insurance or capital market sectors) and macro prudential supervision (which takes a holistic approach to how the three microprudential areas affect each other) and require additional measures, from regulation to capital controls to State aid and quantitative easing for financial markets. It also includes discussions within the G20 and its financial stability conferences on both the overall steering of the architecture, and the broad discussions of macroeconomic policy and strategy within the Group. To understand the composition of the GFSA and its impact, it is worthwhile looking at its development.

A. Precedents to the post-2008 GFSA 5.6

The post-2009 GFSA stands in contrast with previous periods. During the Bretton Woods era of 1945–71, public policy limited financial markets greatly, both globally and nationally. Financial stability consisted of a system of fixed exchange rates guaranteed by the United States government (Treasury and Federal Reserve) and the International Monetary Fund (IMF), which provided low-cost loans to governments in financial distress (unable to borrow to pay for government spending, to pay for trade deficits and ultimately unable to support the exchange rate).15

5.7

Financial stability during this era was primarily a national affair of macroeconomic policy (judicious use of monetary and fiscal policy to smooth out highs and lows of demand in the economic cycle), and largely inseparable from a strategy of supporting mass production, consumption and employment. The IMF provided the key means of dealing with countries in which this financial stability had broken down, and minimising the likelihood that the 14 See for instance Ramses A Wessel, ‘Informal International Law-Making as a New Form of World Legislation?’ (2011) 8 International Organizations Law Review 253–65. 15 Eric Helleiner, ‘A Bretton Woods moment? The 2007–2008 crisis and the future of global finance’ (2010) 86 International Affairs 619–36.

Global Financial Stability Architecture 103 country’s breakdown could spread to other members of the system—either through broken business contacts or through a general collapse of confidence in the system’s ability to sustain economic interdependence. This era distinguished itself from those preceding and following not only by these institutions, but by the overarching narrative of embedded liberalism that pursued global trade in a context of national social welfare systems, which the IMF and US government supported.16 During the first decade of the post-Bretton Woods era (1971–2007), exchange rates floated freely without guarantees from the USA, the IMF shifted from lending to support exchange rates to lending to sovereign default governments, and after a panic caused by the collapse of Herstatt Bank in Germany in 1974, the Basel Committee was established at the Bank for International Settlements (BIS) to agree on common regulatory standards for banks. It was the first microprudential ISSB, and heralded a period in which informal organizations started to supplement the functions of formal international organizations, such as the IMF. The International Accounting Standards Board (IASB) was also established as a private body promoting mutually-agreed financial reporting standards outside the United States.17

5.8

This first decade cannot be seen as a proper architecture of interlocking institutions with a common shared mission, but the first building blocks of what would follow. Rather than a shared narrative of proper public policy and its broader goals as found in Bretton Woods, this period was one in which shared expectations of what global financial stability entailed was absent. Similarly, the willingness of States to cooperate by a process of mutual accommodation and coordination was weaker than the tendency to descend into protectionism and attempts at providing local financial and economic stability at the expense of international trade. Protectionism rose, global and European governance devolved from rules and institutions to communication between national heads of government, and two efforts in Europe to peg exchange rates to one another in a precursor of EMU (the Snake and the Snake in the Tunnel) fell apart as national governments favoured the immediate demands of national constituents over the possible benefits of not undercutting each other through high debt and borrowing levels, high inflation rates, and competitive exchange rate devaluations.18 It was a time of turbulence and near anarchy in which a GFSA could not be said to exist.

5.9

The second decade of the post Bretton Woods saw the United States and the United Kingdom promote the establishment of two other ISSBs alongside the Basel Committee that brought together regulators from advanced economies: the International Association of Insurance Supervisors (IAIS) in London; and the International Organization of Securities Commissions (IOSCO) in Madrid. Alongside the Basel Committee, they were intended to promote common regulatory standards for the insurance and securities markets (stock and bond markets, hedge and other investment funds, credit rating agencies), respectively. After the Financial Crisis of 1997, which began in East Asia then went global, these bodies were

5.10

16 John Gerard Ruggie, ‘International regimes, transactions, and change: embedded liberalism in the postwar economic order’ (1982) 36 International Organization 379–415. 17 Louis W Pauly, ‘The old and the new politics of international financial stability’ (2009) 47 Journal of Common Market Studies 955–75. 18 Jonathan Story and Ingo Walter, Political economy of financial integration in Europe: The battle of the systems (MIT Press 1997). See also Chapter 2.

104 THE INTERNATIONAL DIMENSION OF EMU joined by the Financial Stability Forum,19 which the G7 called into being to acquire insight into how the Basel Committee, IAIS, IOSCO and IASB were learning from the past and responding to new challenges, and to act as a sort of steering committee for the bodies to act together toward a common goal. As the global economy recovered, however, the promise of a coordinated mission typical of an architecture faded. Nevertheless, the IMF and World Bank adopted these ISSB standards as benchmarks for their reviews of national government policies on financial stability, in an exercise known at the World Bank as the Report on Observance of Standards and Codes (ROSCO) and at the IMF as part of Article IV consultations.20 5.11

These standards worked from a new shared master narrative, known alternatively as the Washington Consensus and neoliberalism, that countries would do best by maximizing the role of capitalist markets within their countries, and allowing them to function between them as well. This meant the liberalization of (international) trade and finance, the reduction of public ownership and State regulation in the economy, and the introduction of macroeconomic policies geared to attracting (international) investment capital. The latter implied that governments should practice austerity in public finance—balancing budgets rather than borrowing and spending during downturns—and that central banks should act conservatively to control inflation through interest rates and the money supply, which in turn would keep inflation low and exchange rates strong, all things being equal. This became known as the Washington Consensus because the IMF and World Bank, both seated in Washington DC, had adopted the framework during this period, meaning that its terms and conditions on countries in financial distress, and its definition of what it meant to be a member in good standing of the international community with regard to financial stability, had been solidified. However, this understanding of financial stability had few provisions for financial stability per se. Markets were thought to be efficient and self-correcting, without inherent deficiencies that needed to be prevented through further regulation.

5.12

Within Europe, a similar shift from embedded liberalism to neoliberalism took place between 1978 and 1984. 1979 marked the second European attempt to coordinate national currencies and macroeconomic policies—with the launch of the European Monetary System (EMS).21 Instead of governments managing their currencies and economies politically with the expectation of mutual adjustment, coordination took place by Europe adjusting to the German economy, which served as an anchor until the establishment of EMU. This meant that governments committed themselves to adjusting to the expectations of financial markets rather than steering against them.22 19 See accessed 3 February 2020. 20 See and accessed 3 February 2020. 21 The first attempt was the Snake in the Tunnel arrangement of 1972, in which European currencies were pegged to each other, and collectively to the United States dollar. It ended under pressure in fall 1973. See Angelos Delivorias, ‘A History of European Monetary Integration’ (2015) European Parliamentary Research Service. See further Chapter 2. 22 Shawn Donnelly, Reshaping Economic and Monetary Union: membership rules and budget policies in Germany, France and Spain (Manchester UP 2004); Timothy J Sinclair, The New Masters of Capital: American bond rating agencies and the politics of creditworthiness (Cornell UP 2014).

Global Financial Stability Architecture 105 German ordoliberalism then became the central narrative for the EMS, and for EMU and Banking Union later on.23 A brief French period of resistance between 1981 and 1984 was followed with effective policy consensus within the future Eurozone.24 It shared with the neoliberal Washington Consensus a devotion to fiscal austerity for governments and a hard currency macroeconomic policy by central banks. It did not share the carefree view of financial market liberalization on the other side of the Atlantic, however. Although Germany introduced a series of Financial Market Promotion Acts to create new room for financial service providers to operate and financial markets to establish themselves, financial stability required strict precautionary measures to limit the size of financial markets, their business practices, and their behaviour toward the real economy.

5.13

During the last years before the GFC, these institutions worked to define how global financial stability could be furthered together with growth by pushing the financialization25 of the global economy even further. By financialization reference is made to the opening up of the economy, its markets and institutions to financing and risk management through stock, bond and derivative markets as an alternative to bank finance and strong regulation of risk. Securitization in particular could benefit flagging global economic growth by massively increasing the supply of money26 while increasing, through financial engineering and advances in probability analysis, the safety of financial instruments used as money,27 to the point that they were considered by central banks and regulators as foolproof.28

5.14

B. The current GFSA The post-GFC architecture was set up to relaunch securitization on a sound basis,29 and more broadly to rethink macroeconomic policy. The first of the goals remains, while the second has stalled due to a combination of uncertainty over actions and reactions in financial markets, and political divisions between Germany and the rest of the G7 over whether to pursue an accommodating or restrictive monetary policy. Over time, the ambition to redirect macroeconomic policy has given way to data collection on the interaction of many different kinds of prices in the global economy (including those of the real economy and those of financial markets), with a view to determining their ultimate effect on inflation, growth and sometimes employment rates. 23 David Schäfer, ‘A banking union of ideas? The impact of ordoliberalism and the vicious circle on the EU banking union’ (2016) 54 Journal of Common Market Studies 961–80. 24 Amy Verdun, European Responses to Globalization and Financial Market Integration: Perceptions of Economic and Monetary Union in Britain, France and Germany (Springer 2000). 25 Greta R Krippner, ‘The financialization of the American economy’ (2005) 3 Socio-Economic Review 173– 208; Jacob Assa, ‘Financialization and its consequences: The OECD experience’ (2012) 1 Finance Research 35–39. 26 Paul Langley, ‘Financialization and the consumer credit boom’ (2008) 12 Competition & Change 133–47. 27 Greta R Krippner, Capitalizing on Crisis (Harvard UP 2011); Robert W Parenteau, ‘The late 1990s US bubble: Financialization in the extreme’ in Gerald A Epstein (ed), Financialization and the world economy (Edward Elgar Publishing 2005) 111–48; John Bellamy Foster, ‘The Financialization of Capital and the Crisis’ (2008) 59(11) Monthly Review 1. 28 Carmen M Reinhart and Kenneth S Rogoff, This Time is Different: Eight centuries of financial folly (Princeton UP 2009). 29 G20 Leaders, ‘Statement at the 2009 London Summit’ (2 April 2009).

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106 THE INTERNATIONAL DIMENSION OF EMU 5.16

Each of the ISSBs had the mission to monitor, analyse and provide standards for their areas of specialty,30 and the Financial Stability Board (FSB) to link those standards together and promote Member State adoption.31 Rather than accept critiques that the system of financialization was broken beyond repair, and required a strong regulatory response to provide financial stability, the G20 chose instead to focus on incremental changes based on data collected and evidence-based conclusions that could make securitization safer. It lacks, however, agreement on a new meta-narrative of what constitutes proper macroeconomic policy and how financial market regulation fits into that mission.32 Critiques of the previous system remained,33 but did not lead to a new dominant direction.34 This took place in an environment of intense political competition over macroeconomic policy ideas.35

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The implications of this silence on securitization, financial regulation and macroeconomic policy were a continuation of financial activities leading to the crisis, and a macroeconomic policy intent on preventing financial sector collapse through quantitative easing. Meanwhile, the GFSA started creating the building blocks of a knowledge central to a new, as yet undefined macroeconomic policy in an environment where consensus was lower and uncertainty higher over how to rethink theory and practice. The collection and analysis of microeconomic data through microprudential supervisors created the building blocks, however, for shifting macroeconomic policy from broad principles to include how the laws of economics look in different parts of the economy.36

5.18

The decade leading up to the GFC was characterized by excessive risk taking and acceptance in bank lending and investments, securitization (through two kinds of financial engineering products: asset-backed securities (ABSs) and collateralized debt obligations (CDOs)),37 credit ratings, and shadow banking (hedge funds and other special purpose vehicles for unregulated market transactions). Until the crash, risk of default, and its impact on financial stability, was thought by financial stability experts to be manageable through a combination of pricing risk (at the point of providing retail and business loans), bundling risk (in synthetic securities), assessing risk (credit ratings),38 using synthetic securities as risk-free forms of capital, and insuring them against loss (financial derivatives known as 30 John Glenn, ‘In the aftermath of the financial crisis: risk governance and the emergence of pre-emptive surveillance’ (2014) 40 Review of International Studies 227–46. 31 Donnelly, ‘Institutional change at the top’ (n 4) 261–75. 32 Howard Davies, ‘Global financial regulation after the credit crisis’ (2010) 1 Global Policy 185–90. 33 Paul De Grauwe, The Limits of the Market: The Pendulum Between Government and Market (OUP 2016). 34 Kathleen R McNamara, The currency of ideas: monetary politics in the European Union (Cornell UP 1999); Cornel Ban, Ruling Ideas: How Global Neoliberalism Goes Local (OUP 2016); Kenneth Dyson and Ivo Maes, Architects of the Euro: Intellectuals in the Making of European Monetary Union (OUP 2016). 35 Henry Farrell and John Quiggin, ‘Consensus, Dissensus, and Economic Ideas: Economic Crisis and the Rise and Fall of Keynesianism’ (2017) 61 International Studies Quarterly 269–83; Sebastian Dellepiane‐Avellaneda, ‘The political power of economic ideas: The case of “expansionary fiscal contractions” ’ (2015) 17 The British Journal of Politics & International Relations 391–418; Matthias Matthijs and Kathleen R McNamara, ‘The euro crisis’ theory effect: northern saints, southern sinners, and the demise of the eurobond’ (2015) 37 Journal of European Integration 229–45; Vivien Schmidt, ‘The Resilience of “Bad Ideas” in Eurozone Crisis Discourse, Even as Rival Ideas inform Changing Practices’ (23rd Conference of Europeanists, Philadelphia, April 2016). 36 Joseph E Stiglitz, ‘Rethinking macroeconomics: What went wrong and how to fix it’ (2011) 2 Global Policy 165–75. 37 Andreas Jobst, ‘The regulatory treatment of asset securitisation: The Basel Securitisation Framework explained’ (2005) 13 Journal of Financial Regulation and Compliance 15–42. 38 Felix Salmon, ‘The formula that killed Wall Street’ (2012) 9(1) Significance 16–20; Paul Wilmott and David Orrell, The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets (Willey 2017) 207–25.

Global Financial Stability Architecture 107 credit default swaps). Banks could lend more, earn more, and retain less capital for emergencies because they maintained, and regulators accepted, that the algorithmic features of risk management, distribution, market support and insurance were foolproof. Even if this system proved not to be foolproof, credit rating agencies would monitor the composition of securitizations and report on the results; while banks would take out insurance against loss in the form of yet another security: credit default swaps (CDSs). Regulators accepted that this three-fold, complex means of ensuring financial stability would make bankruptcy a thing of the past, actually lowering capital requirements in Basel II. In other words, financial engineering was thought to make financial markets safer with greater efficiency and lower costs, as long as everyone played by the rules and did not abuse the securitizations model by putting too many problem assets into the products. The problem leading up to the GFC was that banks did precisely this: making loans at high interest rates to depositors who had little chance of repaying. This hollowed out the quality of the ABSs that contained these loans and the CDOs made up of ABSs.

5.19

The reasons for the blind faith in securitizations and reliance on it was not just a technical advancement in the nature of money and risk management through quantitative analysis, but a desire by banks to lower the cost of risk management, coupled with a political desire in the United States to expand the money supply domestically, and then globally after the 9/11 attacks of 2001. Securitizations radically expanded the money supply in two ways: by allowing banks to sell the loans they had made, re-lending the cash, and so on until they ran out of customers willing to borrow (rather than retaining the asset for interest income as banks traditionally do); and by allowing banks to use ABSs and CDOs with investment grade ratings as if it were cash for the purpose of their requirement to hold certain minimum levels of capital as a buffer against shocks; (rather than holding capital retained or from investors which could otherwise be lent out). Because these instruments paid interest, other banks, particularly large banks with an appetite for more sophisticated financial instruments readily bought them and used them instead of cash, which is how the US practice went global.

5.20

In the end, this means of diffusing ABSs and CDOs throughout the global economy, primarily over large banks with diversified portfolios, opened up channels of contagion that transformed the American financial collapse into a global one, and the Great Financial Crisis into a Eurozone Crisis (EZC). Europe struggled to find its feet, with Southern European governments and Ireland in particular experiencing financial fragility (inability to rejuvenate economic growth borrow on financial markets). This is the context in which calls for a recalibration of global financial stability policy were raised, in which the impetus for a new GFSA made itself felt, and in which the links between the global and European financial stability architectures were established. However, while the financial regulation community recognized that securitizations practice had undermined financial stability, it held to the notion that securitizations was safe in principle and could be made sustainable by recalibrating the level at which riskier assets could be incorporated.39 But residual

5.21

39 This is by no means a purely historical concern. The high level of non-performing loans in some European banking sectors has incited a number of proposals to bundle and sell off the assets into new securities that could replicate the pre-GFC problem in Europe. This is the central strategy behind the EU’s Capital Markets Union (CMU).

108 THE INTERNATIONAL DIMENSION OF EMU uncertainty remained regarding the source of instability for these assets that might not be traced back to poor lending practices. 5.22

The core of the global response in the short to medium term was therefore to look for a path to fix the system rather than radically change it. While the G20 opted to end the Washington Consensus as a running assumption in April 2009, it did not agree on a replacement and simultaneously agreed to pursue a cornerstone of the late Washington Consensus order: the goal to restore securitizations on a safe basis. It was in this environment that BIS Deputy SG Hannoun makes the case for a Global Financial Stability Architecture in 2009.40

III. International Bodies and the EMU 5.23

EMU policy fields have quite significant international dimensions. The present section aims to reveal the institutional links between the emergence of the GFSA and the EU. The first European legal/institutional response parallel to the global developments was to upgrade coordinating committees for microprudential regulation in the banking, insurance, and securities sectors into European Supervisory Authorities. It took effect at the beginning of 2011, establishing a European System of Financial Supervision (ESFS) to coordinate their activities, and a European Systemic Risk Board to advise European decision-makers on further legal, regulatory and monetary policy initiatives. Those bodies developed close contacts to their international counterparts, sometimes with overlaps of personnel, thereby facilitating the congruence of policy expertise and methods of pursuing goals. The subsections below outline the international bodies to which European institutions are linked. They start with the Financial Stability Board, which is tasked with steering the technical work of the GFSA’s various bodies on behalf of the G20. It is further tasked with compiling and discussing synergies between the various components for which individual ISSBs are responsible, in the context of macroprudential supervision, or supervision of the financial system as a whole, rather than individual sectors like banking, insurance and the others (financial market actors). That macroprudential supervision then provides the context in which the individual ISSBs that collectively make up the GFSA are relevant and discussed. It is striking that there is more than one body for banking issues. This reflects the urgency of dealing with failed banks after 2008, as well as building up the different components of a financial stability support structure for banks that are failing.

A. Financial Stability Board 5.24

The international body that was explicitly created with the goal of financial stability in mind, is the Financial Stability Board (FSB). The FSB deals with overarching issues of financial stability, but primarily on the regulatory side, while broader macroeconomic policy

40

Hannoun, ‘Towards a global financial stability framework’ (n 10) 26.

International Bodies and the EMU 109 questions (quantitative easing, etc.) are left to the G7/G20 and central banks. It was established in 2009 as a successor to the Financial Stability Forum and tasked with coordinating and linking up knowledge and standards across the three microprudential ISSBs outlined below.41 The Board itself is comprised of twenty-four members (all national with the exception of Hong Kong) and a number of non-governmental entities. While the EU is thus not a member as such, France, Germany, Italy, the Netherlands, Spain and the UK have seats at the table. Non-national institutional members consist of IFIs (WB and IMF), central banks (BIS and ECB), ISSBs (BCBS, IOSCO, IAIS, and IASB), ECB as head of the SSM, the OECD, and two further BIS Committees: the Committee on the Global Financial System and the Committee on Payments and Markets Infrastructures (CPMI).

5.25

While the FSB has a fairly limited membership, it practices outreach to other jurisdictions through so-called Regional Consultative Groups. This is a practice shared with other ISSBs, particularly the OECD. The purpose is to combine two competing impulses. On the one hand, membership is supposed to be limited to ease decision-making, compatible with club governance.42 This allows for transnational deals between like-minded experts and elites,43 though there is no guarantee that those deals will be ratified.44 On the other hand, the group aspires to see its standards adopted globally, by a large number of jurisdictions that have no formal membership. The Regional Consultative Groups allow the FSB to square this circle, or at least to attempt to do so. In practice, FSB-sanctioned standards are used more broadly as well. The IMF in particular took on the role of reviewing the degree of FSB standard adoption in all countries as a part of its Financial Services Assessment Program, and Article IV consultations.

5.26

The FSB consolidates these standards into commitments for FSB Member States. These 5.27 commitments are soft in two senses: the FSB has no legal personality nor capacity to issue binding standards; and its standards provide room for national legislators and competent authorities to flesh out the details of what it requires. Much like the OECD’s and EU’s open method of coordination,45 a combination of benchmarks, reporting and peer review is designed to assess performance and apply pressure for adaptation. FSB Member States are expected to adopt and implement standard recommendations to retain their status as members in good standing, while other States may, but otherwise face no consequence for non- observance and implementation. 41 Arner and Taylor, ‘The global financial crisis and the financial stability board’ (n 6) 488. Randall Germain, ‘The Financial Stability Board’ in Thomas Hale and David Held (eds), Handbook of transnational governance (Polity 2011) 50–4. 42 Eleni Tsingou, ‘Club governance and the making of global financial rules’ (2015) 22 Review of International Political Economy 225–56. 43 Abraham Newman and Elliot Posner, ‘Transnational feedback, soft law, and preferences in global financial regulation’ (2016) 23 Review of International Political Economy 123–52. 44 Quaglia and Spendzharova, ‘Post‐crisis reforms in banking’ (n 13) 422–37; Aneta Spendzharova, ‘Regulatory cascading: Limitations of policy design in European banking structural reforms’ (2016) 35 Policy and Society 227–37. 45 The so-called ‘open method of co-ordination’ is characterized by a ‘horizontal’, intergovernmental, approach and rests on soft law mechanisms such as guidelines and indicators, benchmarking and sharing of best practice. See for instance Egidijus Barcevičius, Timo Weishaupt, and Jonathan Zeitlin, Assessing the Open Method of Co- ordination (Palgrave Macmillan 2014).

110 THE INTERNATIONAL DIMENSION OF EMU 5.28

The Board’s intended impact is reflected in the existence of three standing committees: Assessment of Vulnerabilities (SCAV); Standards Implementation (SCSI);46 and Supervisory and Regulatory Cooperation (SCSRC).

5.29

The Standing Committee for Assessment of Vulnerabilities is where the FSB looks for sources of financial instability that might be significant enough to require countermeasures, as well as links between those sources and the rest of the global financial system. It can be thought of as the place that most directly reflects the state of FSB thinking on what financial (in)stability means in practical terms and what should be done about it. It is therefore here that one can best see evidence of how much the GFSA remains committed to a key part of its original mission—to relaunch securitization on a sound basis.

5.30

Of the topics dealt with by the Committee, three stand out as prominent topics. The first, and the only one to which SCAV devotes an annual report, is shadow banking.47 These are the hedge funds and special-purpose vehicles attached to banks that are largely unregulated, and responsible for both investing and trading in derivatives (securitizations), and for borrowing the funds to carry out those transactions.48 The second is derivatives trading, largely between these entities. The third and most recent is leverage, or borrowing, by shadow banks and corporate entities, with a strong focus on foreign exposures (borrowing in a foreign currency).49 All are key components to the problems underlying securitization that generated the Financial Crisis of 2007–09.

5.31

FSB work on all of these areas are typified by data collection and presentation about the magnitude of shadow banking, trading and leverage respectively as risks in and of themselves. The emphasis in all of them is on the magnitude of financial assets and liabilities being created and traded, particularly in relation to the overall size of the economy. Underlying this focus appears to be a belief that securitization is safe, even when it incorporates risky assets, provided the involvement of risky assets is contained to modest, but as yet vaguely defined levels. The same can be said for foreign exposures and to a lesser degree (of consensus) for leverage. Foreign exposures have long been recognized as important financial stability risks in emerging markets.

5.32

Derivatives trading is different than the other two, however, since it has been the subject of a regulatory initiative on the part of advanced economies to mandate the transfer of over-the-counter (OTC) derivatives through central counter parties (CCPs). CCPs are platforms functioning as financial institutions that underwrite trades between two other financial institutions. Should one of the parties to the transaction fail to pay, the CCP steps in to make the payment instead. The purpose is to prevent financial collapse 46 Financial Stability Board, ‘FSB assesses implementation progress and effects of reforms’ (Press Release Ref No 5/2017, Basel, 28 February 2017). 47 Financial Stability Board, ‘Global Shadow Banking Monitoring Report 2016’ (Basel, 10 May 2017). 48 Paul Langley, ‘Sub-prime mortgage lending: a cultural economy’ (2008) 37 Economy and Society 469–94; Thomas Wainwright, ‘Laying the Foundations for a Crisis: Mapping the Historico‐Geographical Construction of Residential Mortgage Backed Securitization in the UK’ (2009) 33 International Journal of Urban and Regional Research 372–88; Stephen C Nelson and Peter J Katzenstein, ‘Uncertainty, risk, and the financial crisis of 2008’ (2014) 68 International Organization 361–92. 49 Financial Stability Board, ‘Letter from IMF-FSB-BIS Work on Data Gaps Involving FX Exposures’ (Basel, 11 September 2014); Financial Stability Board, ‘Joint CGFS-FSB-SCAV Workshop on Risks from Currency Mismatches and Leverage on Corporate Balance Sheets’ (Basel, 11 September 2014). Financial Stability Board, ‘Corporate Funding Structures and Incentives’ (Basel, 25 September 2014).

International Bodies and the EMU 111 of one financial institution from unleashing a domino effect resulting in systemic contagion. The Standing Committee on Implementation and Compliance is responsible for the exercises 5.33 that compel members to file reports and submit to peer review on a regular basis.50 In a soft law context, it is the primary means by which FSB-sanctioned standards are translated into meaningful obligations by national governments, though the latter retain some discretion on how to transpose them. Some of the peer reviews are applied to all members at once on a specific issue of critical importance. To date these thematic issues have covered the same topics dealt with above: shadow banking; OTC derivatives trading; and bank regulation. A prerequisite for the FSB to become involved is that the topic is cross-sectoral or cross- functional, so that it does not replicate a review by one the microprudential ISSBs, the IMF or the World Bank. Other peer reviews cover the entire spectrum of financial market practices and regulations that apply within a specific country. Overall, the country reviews keep in mind three points: the overall provisions for financial stability; ensuring a commitment to openness and transparency of the financial sector, as well as implementing international standards.51 Data on implementation and compliance is derived from two sources: from country reviews, in which Member States are visited by counterparts from other FSB members; and from IMF reports under the Financial Sector Assessment Program (FSAP), that conclude with a Financial System Stability Assessment (FSSA) for the world’s twenty-five largest systemic jurisdictions. A great deal of the data collection is therefore already on hand when the FSB shows up. In addition to these reviews, SCSI has been given the task of conducting ex post impact assessments on the adoption of financial stability standards. In other words, it is responsible for asking whether adoption of standards in the past has made a meaningful contribution to financial stability that is worth the cost.

5.34

The Standing Committee on Supervisory and Regulatory Cooperation sets out the protocols and memoranda of understanding that regulate the collection, processing and sharing of data between national competent authorities, and interaction in the case of supervising and resolving cross-border financial institutions.

5.35

In addition to the standing Committees, the FSB has Regional Consultative Groups that allow the Board to discuss standards with non-members as well as members. The Regional Consultative Group for Europe has both Eurozone members (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain) and non-members (Czech Republic, Denmark, Hungary, Iceland, Israel, Norway, Poland, Sweden, Switzerland, UK, and GIFCS (Group of International Financial Centre Supervisors: small jurisdictions)). Each country is represented by finance or treasury ministers, central bank representatives and securities regulators.

5.36

In addition to linking up standards generated elsewhere, the FSB also acts as a clearing house of ongoing and innovative research into elements of the economy that are changing, developing, and impacting financial stability, as well as recommended standards in those

5.37

50 Financial Stability Board, ‘FSB Framework for Strengthening Adherence to International Standards’ (Basel, 9 January 2010). 51 Financial Stability Board, ‘Handbook for FSB peer reviews’ (Basel, 31 March 2017).

112 THE INTERNATIONAL DIMENSION OF EMU areas, particularly ones that help supervisors to collect further data for analysis. Examples of initiatives to generate better international oversight of financial market activity are the Data Gaps Initiative, the Legal Entity Identifier project, and the Unique Product Identifier project. Research and initiatives on new areas can be seen in reports on cybersecurity in financial services and artificial intelligence. 5.38

All in all, the FSB’s direction of global macroeconomic policy is negligible. Moschella52 notes that FSB goes beyond coordinating national affairs, to deal with assessing vulnerabilities and monitoring Member State implementation of Board-recommended initiatives. At the same time, Helleiner and Pagliari also note that the FSB’s capacity to work independently of it members is quite limited, so that the initiative lies with member applications rather than the other way around.53 It embodies the post-2008 focus on macro prudential supervision, but reflects a combination of intergovernmental compromise, and lowest denominator decision-making typical of organizations that require consensus.54

5.39

In this context, the FSB has worked on measures that reinforce the work of other standard setters, where technical knowledge matters greatly, and where specific international points of conflict can be sorted out, if anywhere. The most important output of standards that the FSB adopts is that they push financial institutions to hold more capital in reserve to hedge against the risk of a financial shock. This has a modest macroeconomic drag in the short term, in return, it is hoped, for greater resilience to shocks down the road. The wait and see approach to shadow banking and foreign exposures, coupled with the central counter parties initiative, however, is not only modest in terms of restricting securitization, but sets up the CCP infrastructure through which a relaunch of securitization on even grander scales can be prepared. As Underhill55 notes, this reflects an accommodating attitude toward monetary policy and financial regulation within the GFSA.

5.40

As will be highlighted with regard to EMU in section 4, the GFSA’s work to relaunch securitization on a sound basis resonates in EU Commission proposals for a Capital Markets Union, which promotes the use financial engineering to assist States and corporations, particularly banks, in existing the so-called doom loop of financial fragility between States and sovereigns in Southern Europe and Ireland. It also is behind the European Systemic Risk Board’s plans to use securitization, with all the precautions that go along with it, to keep the money supply stable and growing in the Eurozone in the absence of a large EU budget.56

52 Manuela Moschella, ‘Designing the Financial Stability Board: a theoretical investigation of mandate, discretion, and membership’ (2013) 16 Journal of International Relations and Development 380–405. 53 Eric Helleiner and Stefano Pagliari, ‘The end of an era in international financial regulation? A postcrisis research agenda’ (2011) 65 International Organization 169–200. 54 Fritz W Scharpf, ‘The joint‐decision trap revisited’ (2006) 44 Journal of Common Market Studies 845–64. 55 Geoffrey R D Underhill, ‘The emerging post-crisis financial architecture: The path-dependency of ideational adverse selection’ (2015) 17 The British Journal of Politics and International Relations 461–93. 56 Expertise on financial stability at international financial institutions (IMF, OECD) and key European think tanks broadly accepted the need for automatic fiscal stabilizers for the Eurozone to mitigate both economic shocks to the Eurozone’s weakest economies and long-lasting trends of low or negative economic growth that could prevent economies and banks from rebounding after an initial crash. See Shawn Donnelly, ‘Expert advice and political choice in constructing European banking union’ (2016) 17 Journal of Banking Regulation 104–18.

International Bodies and the EMU 113

B. Bank for International Settlements The BIS57 is responsible for overarching financial stability policy in the sense of combining macroeconomic policy expertise with financial stability and banking regulation.58 It also supports and coordinates a number of the committees and organizations outlined below. In a sense one might ask whether the contribution to the GFSA by the BIS is as meaningful as the one by the FSB described above. In practice, it is probably greater.

5.41

Part of the answer lies in the constitution of the BIS, the profile of its officers, and the Committees it forms to study topics of interest. Unlike the FSB, the BIS has a much larger staff, resources and high-profile representatives to give the Bank’s views and research greater standing. A great number of working and research papers are issued, and the position of Chief Economist provides profile to the views of the Bank. Whereas the FSB examines a wide but still limited range of phenomena, the Bank may focus on broader economic developments and their implications for macroeconomic practice, which may then have implications for standard setters, but often central banks and national governments as well. It is the true counterpart to the more politically-oriented G7 and G20 fora, in the sense that it is free to propose agenda items, promote discussion of policy and standards, and create the room for the ISSBs it supports (including the FSB) to set standards and guidelines themselves.

5.42

From time to time this means that the BIS may be critical of G7/G20 political compromises, or current trends by elected governments on either overall macroeconomic policy or specific parts of it, without explicitly referring to the global steering body. A recent development at the Bank that illustrates this willingness to wade into contentious issues (that affect the Eurozone in particular) is the warning by the Bank’s Head of Monetary and Economics Department that the extended period of low interest rates that has persisted since 2008 has permitted macroeconomic imbalances to develop in the form of asset bubbles that could endanger financial stability when they burst.59 This speaks in particular, though not exclusively, to the current fight between the Eurogroup and the ECB over whether national governments ought to cut back on borrowing to comply with EMU membership rules, or whether those rules should be relaxed in some way to allow for more robust economic growth.60 Low interest rates, a key component of quantitative easing,61 persist in part because economic growth remains anaemic in much of the Eurozone, which in turn is caused by the bloc’s strong and globally unique political focus on national budgetary retrenchment.62 These low interest

5.43

57 Kern Alexander, ‘Bank for international settlements’ in Christian Tietje and Alan Brouder (eds), Handbook of Transnational Economic Governance Regimes (Brill 2009) 305–18. 58 Beth A Simmons, ‘Why innovate? Founding the bank for international settlements’ (1993) 45 World Politics 361–405; Leonard Seabrooke, ‘The bank for international settlements’ (2006) 11 New Political Economy 141–49. 59 Claudio Borio, ‘Secular stagnation or financial cycle drag?’ (National Association for Business Economics, 33rd Economic Policy Conference, Washington DC, March 2017) 9 (hereafter Borio, ‘Secular stagnation or financial cycle drag?’). 60 Shawn Donnelly, ‘ECB-Eurogroup Conflicts and Financial Stability in the Eurozone’ (2018) 51 Credit and Capital Markets 113–26 (hereafter Donnelly, ‘ECB-Eurogroup conflicts and financial stability in the Eurozone’). 61 See Chapter 22 regarding Monetary Policy. Low and negative interest rates help to ensure that incentives are low to save money, and relatively high to spend it. They are a prerequisite for ensuring that increased liquidity into the financial system is not frozen again. 62 Shawn Donnelly, ‘The public interest and the economy in Europe in the wake of the financial crisis’ (2011) 10 European Political Science 384–92; Simona Piattoni, ‘The European Union between Intergovernmentalism

114 THE INTERNATIONAL DIMENSION OF EMU rates then follow to keep economies from crashing, but incite financial manias and crashes instead.63 5.44

In this context of chronic fragility, central bankers have found it difficult, if not impossible to taper quantitative easing (QE).64 QE was originally intended to compensate for temporary fragility during a downturn. Regardless of how gradual the raising of interest rates, the retraction of issued liquidity and the sale of financial instruments on central bank balance sheets is portrayed. While the Federal Reserve has had more room to taper due to more robust growth,65 the ECB has had to face a more fragile economy, leading it to take a ‘slower for longer’ approach to winding down QE.66 Meanwhile, QE has had further impacts on emerging markets worldwide.67

5.45

Another development illustrating the BIS’s leadership role in thinking about how to best approach financial stability is its development of policy rules for capital controls in November 2017 which help generate converging expectations on how to apply such controls.68 Given their increased use during local financial stability crises, and the IMF’s warming to capital controls during crises,69 the standards help steer the behaviour of financial sector actors, and most importantly, set and maintain the terms of international financial interdependence.

5.46

In this context, the BIS is best thought of as a body which does the real, overarching thinking behind financial stability in the GFSA, linking and weighing all the parts of the puzzle into a larger picture. It cannot be considered macro economically conservative in principle, but pragmatic. This means that there is greater flexibility in the rules and orientation of the Bank than one would find in EMU rules and regulations.

5.47

The BIS hosts a number of committees beyond the FSB that focus on key parts of the GFSA puzzle: the Basel Committee on Banking Supervision (BCBS); the Committee on the Global Financial System (CGFS); the Committee on Payments and Markets Infrastructures (CPMI); the Markets Committee and the Irving Fisher Committee on Central Bank Statistics. The Markets Committee and the CGFS have similar functions to the FSB’s SCAV—they monitor developments, risks and vulnerabilities and think through possible and “Shared and Responsible Sovereignty”: The Haptic Potential of EMU’s Institutional Architecture’ (2017) 52 Government and Opposition 385–411. 63 Borio, ‘Secular stagnation or financial cycle drag?’ (n 59). 64 European Central Bank, ‘Financial Stability Review 2015’ (Frankfurt, November 2015) 48. 65 Jana Randow and Carolynn Look, ‘ECB’s Follow-the-Fed Strategy Set to Change on QE Exit Road’ Bloomberg (25 October 2017). 66 Failed attempts at tapering here. Mehreen Khan, ‘ECB dilemma looms over pace of expected QE tapering’ Financial Times (26 October 2017). 67 Barry Eichengreen and Poonam Gupta, ‘Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets’ (2015) 25 Emerging Markets Review 1–15; Joshua Aizenman, Mahir Binici, and Michael M Hutchison, ‘The transmission of Federal Reserve tapering news to emerging financial markets’ (2014) NBER Working Paper No 19980; Robert Lavigne, Subrata Sarker, and Garima Vasishtha, ‘Spillover effects of quantitative easing on emerging-market economies’ (2014) Bank of Canada Review 23–33. 68 Gurnain Kaur Pasricha, ‘Policy Rules for Capital Controls’ (2017) BIS Working Paper No 670. 69 Manuela Moschella, ‘The institutional roots of incremental ideational change: The IMF and capital controls after the global financial crisis’ (2015) 17 The British Journal of Politics & International Relations 442–60 (hereafter Moschella, ‘The institutional roots of incremental ideational change’); Barry Eichengreen and Andrew Rose, ‘Capital controls in the 21st century’ (2014) 48 Journal of International Money and Finance 1–16; Ban and Gallagher, ‘Recalibrating policy orthodoxy’ (n 7) 131–46; Manuela Moschella, ‘Governing Cross-border Capital Flows: The Dynamics of Capital Account Policies’ in Giliberto Capano, Michael Howlett, and M Ramesh (eds), Varieties of Governance (Palgrave Macmillan 2015) 27–50.

International Bodies and the EMU 115 solutions to them. CPMI is an important player in promoting ideas regarding payment and clearing systems and has taken on a prominent role together with IOSCO (a non-BIS institution discussed below) in conceiving and designing central counter party infrastructures that make it possible to ensure financial stability in a highly securitized environment. This means that BIS and its committees are doing much of the work that is required to provide financial stability, particularly in banking, in a highly securitized environment.

C. Basel Committee on Banking Supervision The Basel Committee is a small (twenty-four members), self-appointed group of central bankers and bank supervisors that sets standards by consensus on how much cash banks should have on hand at any given time, what counts as cash, how losses are insured, how banks are governed to avoid risky behaviour, and how financial instruments can be used to minimize the likelihood that an economic shock leads to collapse. Supported by the BIS, it is nevertheless fairly independent.70 Unlike most other ISSBs, it does not engage broadly with stakeholders but is more selective.71 While this promotes consensus, it does not guarantee it. Disagreements between the United States and Europe have led to disappointment in some cases regarding Basel Committee rules,72 specifically on leverage on bank balance sheets.

5.48

The BCBS deals with regulations designed to make banks resilient from economic shock, and well-governed. This amounts to standards covering capital adequacy, bank governance and the relationship between banks and their regulators. It is central to efforts to get the global economy safe again, with implications for EMU banks and Member States. Its links to EMU are made through terms of banking union, to stabilize EMU.

5.49

A central mission of the Basel Committee after the onset of the GFC was to revisit the existing rules known as Basel II and upgrade them in light of the fact that their observance had led to financial collapse in 2008. These standards had promoted the use of quantitative risk management that is at the core of the securitization process (which in turn was at the core of the financial crisis)73 and its stabilization.

5.50

Basel III negotiations focused on forcing global systemically-important banks (G-SIBs) to raise more capital than had been the case under Basel II and to hold it in reserve against future calamities (core equity tier 1 capital (CET), total-loss-absorbing capital (TLAC), minimum reserves and eligible liabilities (MREL), and a liquidity coverage ratio (LCR) that

5.51

70 Kevin L Young, ‘Transnational regulatory capture? An empirical examination of the transnational lobbying of the Basel Committee on Banking Supervision’ (2012) 19 Review of International Political Economy 663–88. 71 Geoffrey R D Underhill and Xiaoke Zhang, ‘Setting the rules: private power, political underpinnings, and legitimacy in global monetary and financial governance’ (2008) 84 International Affairs 535–54; Stefano Pagliari and Kevin L Young, ‘Leveraged interests: Financial industry power and the role of private sector coalitions’ (2014) 21 Review of International Political Economy 575–610. 72 Ranjit Lall, ‘From failure to failure: The politics of international banking regulation’ (2012) 19 Review of International Political Economy 609–38; Eric Helleiner, The status quo crisis: Global financial governance after the 2008 meltdown (OUP 2014); Andrew Baker, ‘The gradual transformation? The incremental dynamics of macroprudential regulation’ (2013) 7 Regulation & Governance 417–34. 73 Hyun Song Shin, ‘Securitisation and financial stability’ (2009) 119 The Economic Journal 309–32; James Crotty, ‘Structural causes of the global financial crisis: a critical assessment of the “new financial architecture” ’ (2009) 33 Cambridge Journal of Economics 563–80; Charles A Goodhart, ‘The background to the 2007 financial crisis’ (2008) 4 International Economics and Economic Policy 331–46.

116 THE INTERNATIONAL DIMENSION OF EMU includes a definition of high-quality liquid assets (HQLA). All of these standards are fairly detailed and serve as a template for European capital requirements for larger banks. 5.52

EU-US divisions made common standards impossible in the field of leverage, however. Leverage refers to the amount of debt a bank incurs in order to do business. Because banks in Europe are much more highly leveraged than their American counterparts, and because the US government identified high leverage as a source of vulnerability to economy shock that had to be reduced, agreement was not possible.74

5.53

The consequences of the Basel Committee’s efforts are new regulations intended to force banks to seek and hold higher levels of capital, to hold new kinds of capital (borrowing that converts to capital in a crisis) and to change the kind of borrowing they undertake (safer) to do business.

5.54

The effects of these changes are still ongoing, and were fully phased in 2019. But the initial effect is that banks have become more conservative in their capital structure and in their lending. This increase in resilience comes at the price of lowering money creation through business loans, which in turn leads to a reduction of economic and employment growth; and by implication, to lower bank revenues and increasing bank fragility as a chronic condition.75 This has had two implications. The first is that economic growth (in the Eurozone particularly) is hit by a double whammy of public sector retrenchment and declining credit levels as banks reduce their loans. The second, as the FSB has noted in its reviews on shadow banking, is that shadow bank’s lending activity is growing at a stronger rate than that of traditional banks.76

5.55

Bank supervisors have also been confronted with the challenge of banks becoming increasingly fragile due to long-term weakness of the economy, at the same time that they are trying to improve their resilience through increased capital buffers. Assets turn more frequently into non-performing loans (NPLs), financially fragile sovereigns put the investment grade status of treasury bills in question in some countries, and banks and sovereigns in some countries find themselves periodically cut off from financial markets, which increases their fragility. For this reason, bank resolution and the treatment of NPLs has come onto the radar for bank regulators. However, this research has been located in the BIS (specifically the Financial Stability Institute),77 and most importantly the International Association of Deposit Insurers (IADI, below).

5.56

In banking, the macroeconomic effect of macro prudential regulation is a trade-off: better bank resilience against future, indeterminate credit events paid for with a reduction of credit in the general economy, at least in the short to medium term. This trade-off was seen in 2017 in a European dispute referred to the Basel committee on whether European

74 Shawn Donnelly, Power Politics, Banking Union and EMU: Adjusting Europe to Germany (Routledge 2018) (hereafter Donnelly, Power Politics, Banking Union and EMU). 75 Bill Allen, Ka Kei Chan, Alistair Milne, and Steve Thomas, ‘Basel III: Is the cure worse than the disease?’ (2012) 25 International Review of Financial Analysis 159–66; Sami Ben Naceur, Katherin Marton, and Caroline Roulet, ‘Basel III and Bank-Lending: Evidence from the United States and Europe’ (2018) 39 Journal of Financial Stability  1–27. 76 Financial Stability Board, ‘Global Shadow Banking Monitoring Report 2017’ (Basel, 5 March 2018). 77 Patrizia Baudino and Hyuncheol Yun, ‘Resolution of non-performing loans—policy options’ (2017) FSI Insights on Policy Implementation No 3.

International Bodies and the EMU 117 banks would have to treat government bond assets from certain countries like Greece or Italy as safe or risky. Germany had brought up the issue as a quid pro quo for discussing the establishment of a European Deposit Insurance Scheme for the Eurozone. While the Eurozone crisis demonstrated that the bonds were in fact risky, Basel rules still allowed banks to determine themselves that the bonds were safe, even after review in Basel III. Doing so would absolve banks of any legal responsibility to raise capital against the likelihood of default. In addition to bank lobbying, the hostility of the US Trump administration to sharpened rules78 was followed by stalemate. In late 2017, the BCBS ruled that it could not rule on the question,79 demonstrating the limits of consensus-based decision- making on sensitive topics.80 Otherwise, Basel standards form the core for European capital adequacy standards, embodied in the Capital Adequacy Directive IV and the Capital Requirements Directive (2013). These standards adopted Basel initially for nearly all banks, but then later in 2017 carved out exceptions for smaller banks to relieve pressure on their finances. CAD IV and the CRR then formed a core measuring stick by which the ECB could determine whether a bank was sufficiently capitalized or whether it had to be resolved (shut down)(discussed below).

5.57

D. IADI: International Association of Deposit Insurers In the aftermath of the GFC, various national authorities worldwide reacted to protect deposits in differing ways, and with differing effects. A result of the process led to the following conclusions about how Deposit Insurance (DI) contributes to financial stability. Reimbursement should be set so that it covers the maximum number of depositors (reducing the likelihood of a panic), at a reasonable amount (many systems found they had too little coverage to contain panic) but not an unlimited volume of deposits (to contain taxpayer costs and encourage large institutional depositors to monitor bank behaviour). Furthermore, DI should be paid for by banks before crises to act (ex ante funding) as countercyclical shock absorbers in time of crisis, and paid out as quickly and simply as possible. All of these core principles are reflected in European deposit insurance regulations. DI also can and should be deployed as part of resolution. Resolution involves winding down a bank without causing collateral damage to other institutions. Asset separation, sale, and transfer are standard tools that can be used swiftly to ensure that bank customers are moved to another institution without the delays or uncertainties of regular insolvency law. This means that the rights of shareholders, creditors, and other counterparties can be set aside. In the wake of the GFC, many countries found themselves

78 Caroline Binham, ‘Basel puts new banking policy initiatives on hold until 2019 pending review’ Financial Times (25 April 2017). 79 Fiona Maxwell and Bjarke Smith-Meyer, ‘Basel banking reform talks to prevent future financial crises fail again’ Politico (16 June 2017). 80 BCBS, ‘The regulatory treatment of sovereign exposures—discussion paper’ (Basel, 7 December 2017); Shawn Donnelly, ‘Financial Stability Board (FSB), Bank for International Settlements (BIS) and Financial Market Regulation Bodies: ECB and Commission Participation Alongside the Member States’ in Jed Odermatt and Ramses A Wessel (eds), Research Handbook on the EU’s Engagement with International Organizations (Edward Elgar Publishing 2019).

5.58

118 THE INTERNATIONAL DIMENSION OF EMU learning by doing, and agreeing that banks should pay ex ante into resolution funds to be used to prevent contagion effects from bank failure, much like deposit insurance, to minimize the pressure on central banks and national treasuries to bail out banks, particularly ones considered too big to fail (TBTF). 5.59

The International Association of Deposit Insurers (IADI) was formed in May 2002 to enhance the effectiveness of deposit insurance systems by promoting guidance and international cooperation. Members of IADI conduct research and produce guidance for the benefit of those jurisdictions seeking to establish or improve a deposit insurance system. Members also share their knowledge and expertise through participation in international conferences and other forums. IADI currently has eighty-three members who represent deposit insurance organizations. IADI is a non-profit organization constituted under Swiss Law and is located at the Bank for International Settlements in Basel, Switzerland. The supreme authority in all matters of the Association is the General Meeting of its members. IADI is governed by the Executive Council, composed of individuals elected by the Members. Members of the Executive Council must comply with IADI’s Code of Conduct. The Executive Council is structured as a working body with broad participation encouraged by means of a committee structure that is largely self-reliant. All members of the Executive Council serve on at least one of the Association’s four Council Committees, and perhaps also Technical Committees, which other Members and Associates may join. In addition, Regional Committees have been created for Africa, Asia-Pacific, the Caribbean, Eurasia, Europe, Latin America, the Middle East and North Africa, and North America, to reflect regional interests and common issues through the sharing and exchange of information and ideas.

5.60

IADI consulted with the European Commission regarding Core Principles, along with the European Forum of Deposit Insurers, the FSB, IMF and World Bank. Those principles were formed parallel to the EU’s own legislation, the Deposit Guarantee Systems Directive 2014/49/EU.

5.61

IADI is also supported by the Bank for International Settlements, and promotes policy learning, exchange of views and best practice, and generates principles of good deposit insurance.81 In addition, it deals with bank resolution, and questions of public backstops (government financial assistance to the financial sector to prevent systemic collapse). Its purpose is to design principles of deposit insurance and resolution mechanisms based on mutual exchange and policy learning so that when a bank collapses, it does not lead to a chain reaction of bank failures (financial contagion) or bank runs (in which depositor fears of bank failure lead them to withdraw deposits, causing the bank to fail).

5.62

Finally, IADI also concluded that deposit insurance should also be buttressed by a public backstop to be called on in time of systemic crisis. A properly-designed DIS should minimize the need for public backstops, and minimize the likelihood of contagion, thereby also reducing the likelihood of expansionary monetary and policy to compensate for losses, but cannot handle all eventualities.

81

IADI, ‘Core Principles for Effective Deposit Insurance Systems’ (Basel, November 2014).

International Bodies and the EMU 119

E. IOSCO and CPMI The International Organization of Securities Exchange Commissions (IOSCO), deals with financial markets (traditionally stock and bond markets), including shadow banks (hedge funds, special purpose vehicles), credit rating agencies, securitization, and (jointly) central counterparts. IOSCO dates back to 1983 as a US-backed initiative to spread the acceptance of open, transparent financial markets and prudential regulation. It is the most open of the ISSBs, with most countries represented. Before the GFC, its ethos was one of promoting open and frank discussions about financial market developments, regulation, and promoting policy learning and experimentation. Principles of securities regulation were considered to be the extent of their soft law ambitions, as it was feared that anything further would stifle debate and learning. After 2008, however, IOSCO came under pressure from the G20 and the FSB to upgrade its legal output to cover most of what did not fall under banks or insurance. This has led to research on (dealing with) hedge funds,82 as well as principles for dealing with credit rating agencies83 and fintech84 alongside its traditional areas of business, in addition to the new work in central counter parties (see further section 4).

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IOSCO is the broadest organization in terms of membership in the global financial stability architecture. Nearly all countries have representatives in it, and decisions are still taken by consensus. It sees the open nature of the organization and the general nature of its principles and guidelines as a strength that encourages open debate and mutual learning about financial market trends, strengths, weaknesses, opportunities and threats that would prove more difficult if negotiations were to ensue about binding and extensive standards. In this sense, IOSCO has remained more aloof than the other ISSBs in relative terms about developing clear regulatory standards.

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IOSCO is headed by a General Secretary, and organized since 2012 into a Board that steers the organization’s activity. It consists of eighteen permanent and sixteen rotating members. France, Germany, Italy, the Netherlands, Spain, and the UK (still a member at the time of writing) are permanent Board members from the EU. Formal decisions are taken by the President’s Committee, which is in fact the General Assembly. The work of IOSCO is handled by a series of Committees, each with the task of seeking out consensus on how standards and guidelines might look, and how they might be different in different settings. The most important overall is the Technical Committee, which meets at different places worldwide to gather differing views in a broad-based consultation process. The Emerging Markets Committee deals both with the sometimes more lively and volatile nature of financial markets in those countries, and the more challenging nature of complying with standards appropriate elsewhere. The Assessment Committee brings together experts in the area of supervision. Regional Committees (which includes the European Regional Committee with twenty-two non-EU members and twenty-eight EU members) debate and consult on generally accepted interpretations of general standards in their regions. Finally, there are a number of Consultative Committees (Issuer Accounting & Disclosure; Secondary Markets; Market Intermediaries; Enforcement & Exchange of Information; Investment Management;

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82

IOSCO, ‘Hedge Funds Oversight: Final Report’ (Madrid, June 2009). IOSCO, ‘Code of Conduct Fundamentals for Credit Rating Agencies’ (FR05/2015, Madrid, March 2015). 84 IOSCO, ‘IOSCO Research Report on Financial Technologies (Fintech)’ (FR02/2017, Madrid, February 2017). 83

120 THE INTERNATIONAL DIMENSION OF EMU Credit Ratings Agencies; Commodities Derivative Markets; and Retail Investors) that provide a sounding board for IOSCO on the substantive standards that the organization is considering adopting, whether at an initial or more advanced stage of debate. 5.66

Both the European Commission (represented by DG FISMA) and the European Securities and Markets Authority (ESMA) are associate members of IOSCO since 2012, which provides them with the opportunity to participate and speak, but not to vote. This puts them in the same category as the Financial Services Authority of Monaco and Kazakhstan, who are the other two associates. The Commission’s request to sit on the Board was denied. In contrast, all EU MS are ordinary members. Six are permanent board members.

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IOSCO works together with CPMI (Committee on Payments and Market Infrastructures) at the Bank for International Settlements (BIS) to develop standards on central counterparties (CCPs). With this in mind, they jointly developed Principles for Financial Market Infrastructures (PFMI) in 2012. CCPs are required to assess what level of finances are required to manage liquidity and credit risk. CPMI and IOSCO introduced stress testing in 2012 and reviews in 2015 and 2017. This work was further enhanced by an April 2015 work plan on CCP resilience, recovery and resolvability.

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CPMI and IOSCO are central to improving the stability-oriented features of the GFSA that make securitization a major component of the global economy. It therefore has implications for the global supply of liquidity. IOSCO standards on securitization are therefore central to new EU plans to stabilize and rejuvenate the EMU economy through Capital Markets Union (a securitization plan to spin off toxic assets from zombie banks, and issue new loans to the economy) rather than a Fiscal Union.

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The Organization for Economic Cooperation and Development (OECD) is an intergovernmental organization that is devoted to a wide range of economic, social and technological policy issues related to competitiveness and quality of life, and related issues of public governance that impact the adoption of improvements in a positive or negative way. Its relevance to financial stability is centred on the issues of public finance, macroeconomic (im) balances on the various forms of structural adjustment that can make national economies sustainable. It provides economic policy analysis and performance surveillance, plus cutting-edge analysis of future trends and best practice. On principle its guidelines and principles stick to formulae that focus on common ground between members. However, it also issues country reports (general and macroeconomic imbalances) and economic performance data (national accounts).

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OECD has thirty-six members. European Commission representatives participate alongside Members in discussions on the OECD’s work programme, and are involved in the work of the entire Organization and its different bodies. While the European Commission’s participation goes well beyond that of an observer, it does not have the right to vote and does not officially take part in the adoption of legal instruments submitted to the Council for adoption. The Council is the main decision-making body, representing all members of the organization. It may adopt legally binding decisions and enter into agreements with

International Bodies and the EMU 121 members, non-Members and other international organizations. In addition, the Council may issue recommendations. Decisions are taken on the basis of consensus. 250 specialized bodies, called Committees or specialized bodies are in charge of the substantive work of the organization. OECD research into the impact of Growth Policies on Macroeconomic Stability85 underline that growth policies follow a combination of an accommodative monetary policy indicated by low interest rates (given contemporary low inflation levels), close attention to avoiding fiscal and macroeconomic imbalances, plus structural adjustments and strategic investments in new sunrise sectors. While these growth policies are generally beneficial, they can backfire if combined with rigidities in labour and product markets. OECD research is therefore necessarily granular and pragmatic, stressing a combination of growth-inducing and structural adjustment features. Concerned with macroeconomic imbalances, it is also the place where illusionary growth is called out as a risky path to recovery. This takes place in light of recent attention to asset price bubbles in the housing and raw materials sectors. Overall, OECD recommendations are not specifically contractionary, but focused on sustainable growth, without front-loading macroeconomic contraction measures.

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G. IMF The International Monetary Fund (IMF) and its staff provide for financial stability in two separate ways: by providing lines of credit to national governments in financial distress (or at risk of becoming so); and by assessing the health of national economies and financial sectors (surveillance). The former task has been the IMF’s core contribution to global financial stability since its inception in 1945. The latter dates back to 1952, when the IMF first introduced a policy of imposing conditions in return for financial assistance.

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The IMF is a large international organization with 189 State members, including all EU Member States. At the top of its organizational structure is the Board of Governors, consisting of one governor and one alternate governor from each member country, usually the top officials from the central bank or finance ministry. The Board of Governors meets once a year at the IMF–World Bank Annual Meetings. Twenty-four of the governors serve on the International Monetary and Financial Committee (IMFC), which advises the IMF’s Executive Board on the supervision and management of the international monetary and financial system. The day-to-day work of the IMF is overseen by its twenty-four-member Executive Board, which represents the entire membership and supported by IMF staff. The Managing Director is the head of the IMF staff and Chair of the Executive Board and is assisted by four Deputy Managing Directors.

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The IMF86 has a key role in approving capital controls, debt forgiveness, and promoting bazookas (countercyclical public backstops) that EMU does not provide. Its policy focus

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85 Douglas Sutherland and Peter Hoeller, ‘Growth Policies and Macroeconomic Stability’ (2014) OECD Economic Policy Papers No 8; OECD, ‘How do growth-promoting policies affect macroeconomic stability?’ (2014) OECD Economics Department Policy Notes No 22. 86 Adam Feibelman, ‘Law in the Global Order: The IMF and Financial Regulation’ (2017) 49 NYU Journal of International Law and Politics 687.

122 THE INTERNATIONAL DIMENSION OF EMU has adopted lessons from the 1997 crisis that have led it to stress budget retrenchment and structural adjustment policies less vigorously and to allow for more growth-oriented parts of the macroeconomic policy mix.87 In light of the Eurozone crisis, it has found itself in two different roles. It is a critical part of the Troika that provides advice on financial assistance under the ESM (Article 13(1), (2), and (7) ESM Treaty) and provides loans to programme countries cut off from financial markets. It also provides policy advice on public backstops, fiscal and monetary policy, and debt sustainability for program countries (receiving ESM assistance).88 These policy advices are in line with the rest of the GFSA and leading in the macroeconomic policy field in that they support a common public backstop to the Eurozone (not just provided by the ECB), and have been pragmatic about the introduction of capital controls and the use of debt forgiveness in the absence of such a backstop.89 5.75

In light of the Eurozone Crisis’ practical developments in 2015, the IMF’ found itself in the difficult position of being at odds with the Eurogroup, which is not as such part of the Troika, but is an effective veto player in talks over financial assistance and conditionality. IMF advice to reduce demands on Greece went unheeded to the point that the IMF nearly withdrew from the arrangement.90

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The EU is not a member of the IMF. IMF influence on the EU, however, has been clearly visible over the past years. As shown in a study by Bergthaler, this is visible in three different ways: First, certain obligations under the IMF’s Articles may have a direct binding effect on the EU, to the extent that the EU assumed the Member States’ competences under the TFEU related to obligations under the IMF’s Articles. Second, in the Member States’ exercise of their rights and obligations under the IMF’s Articles, IMF law interacts with and impacts EU law indirectly by way of EU Member States; and with respect to the specific field of financing and financial operations, EU law absorbed and was receptive to ‘borrow’ concepts and terminology from IMF law. Third, IMF law and EU law use similar concepts.91

H. Interim conclusions: the GFSA and macroeconomic policy 5.77

The GFSA has been remarkably active since 2008, and by some measures, extremely effective in preventing a sharp, global shock from developing into a global depression. What the sections above leave unrecorded is the role of the United States, and the Federal Reserve in particular, in getting the ball rolling in the early stages of the crisis to ensure that key central banks, the ECB included, were providing enough extra cash to their distressed economies and governments.92 They also leave untouched the fact that these GFSA bodies are 87 Kevin Farnsworth and Zoë Irving, ‘Deciphering the International Monetary Fund’s (IMFs) position on austerity: Incapacity, incoherence and instrumentality’ (2017) 18 Global Social Policy 119–42. 88 See also Chapters 12, 30, and 33. 89 Moschella, ‘The institutional roots of incremental ideational change’ (n 69) 442–60; Ban and Gallagher, ‘Recalibrating Policy Orthodoxy’ (n 7) 131–46; 90 Daniel W Drezner, ‘The IMF clears its throat very, very loudly on Greece’ Washington Post (15 July 2015). 91 Wolfgang Bergthaler, ‘The Relationship Between International Monetary Fund Law and European Union Law: Influence, Impact, Effect, and Interaction’ in Ramses A Wessel and Steven Blockmans (eds), Between Autonomy and Dependence: The EU Legal Order Under the Influence of International Organisations (TMC Asser Press 2013) 159, 195. 92 Daniel W Drezner, ‘The system worked: Global economic governance during the great recession’ (2014) 66 World Politics 123–64.

International Law and Policies on the EMU? 123 relegated to the sidelines in the event of a major dispute between Europe and the United States.93 After that moment, however, it was up to the G20, who made it up to the institutions of the GFSA to sort out the mechanisms of recovery, resilience, and future crisis prevention. The GFSA’s effort to upgrade financial stability and resilience is taken to take two separate moves: by upgrading regulatory standards and through those standards the safety of the banking, securities and insurance markets (in that order); and by linking them together in the pursuit of macro prudential insights, regulation and financial sector compliance. The first of these implies upgrading common standards of regulation and practice, while the second reflects a shift to macro prudential regulation beyond the simple use of monetary and fiscal policy to even out economic cycles and absorb systemic shocks to the global economy.

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The use of macroeconomic policy in contrast, remained officially the remit of the G7 and the G20, where a dispute between Germany and the other members could be managed. This did not prevent key GFSA institutions, however, particularly the IMF and the OECD from advocating the use of expansionary monetary and fiscal policy resources, and their creation in the case of the Eurozone, to provide the ultimate backstops for financial stability. This included advice on the microprudential innovations for the European banking sector and EMU as a whole, discussed further below.

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All in all, there is a significant body of, primarily soft, law coming from international standard-setting bodies, the FSB included, that have implications for EMU and how it is further stabilized. There are also peer review mechanisms intended to ensure that Member States transpose those expectations into national hard law. It is also expected that they are reflected in EU law as it retrofits EMU to be more stable. As will be seen hereafter, however, the EU has been highly selective in how it does this based on its own internal disputes. National politics (or in the case of the EU, international politics) filters international soft law.

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IV. An Influence of International Law and Policies on the EMU? A. Soft law and its implications In the context of the present chapter, it is important to note that the extent that international law and standards in financial stability impacts EMU, it does so by a combination of technical standard setting and a broad application of data collection, rather than norm setting and diffusion over choices in macroeconomic policy, regulation and surveillance. Indeed, the focus on ‘soft law’ is a clear element of financial regulation and has extensively been analysed over the past years.94 On the basis of existing research, the reasons to opt for soft 93 John C Coffee Jr, ‘Extraterritorial Financial Regulation: Why ET Can’t Come Home’ (2014) 99 Cornell Law Review 1259. 94 David T Zaring, ‘Finding Legal Principle in Global Financial Regulation’ (2012) 52 Virginia Journal of International Law 683; Brummer, ‘Why soft law dominates international finance’ (n 6) 623–43; Lawrence L C Lee, ‘The Basle accords as soft law: Strengthening international banking supervision’ (1998) 39 Virginia Journal

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124 THE INTERNATIONAL DIMENSION OF EMU law are also quite clear and they range from financial topics mostly being in the hands of the executive branch,95 a preference for more flexibility, to the involvement of various State and non-State actors.96 More in general, the highly technical nature of a policy area may define the ‘governance arrangement’ that is being chosen to make international cooperation possible.97 5.82

This is not the place to revisit the classic, extensive, and ongoing debate on soft law in international legal scholarship. In general, soft law has been defined as ‘rules of conduct that are laid down in instruments which have not been attributed legally binding force as such, but nevertheless may have certain (indirect) legal effects, and that are aimed at and may produce practical effects’.98 The absence of ‘legally binding force’ is indeed a common way of distinguishing soft law from hard law. As argued by one of the present authors elsewhere, however, this characteristic is confusing and does not seem to do justice to the fact that these norms (as law) form part of the legal order and that they commit the actors involved.99 The following description by Saurugger and Terpan is therefore more helpful: Soft law refers to those norms situated in-between hard law and non-legal norms . . . Hard law corresponds to the situation where hard obligation (a binding norm) and hard enforcement (judicial control or at least some kind of control including the possibility of legal sanctions) are connected. Non-legal norms follow from those cases where no legal obligation and no enforcement mechanism can be identified . . . In-between these two opposite types of norms lie different forms of soft law: either a legal obligation is not associated with a hard enforcement mechanism or a non-binding norm is combined with some kind of enforcement mechanism.100 of International Law 1; Glenn Morgan, ‘Market formation and governance in international financial markets: The case of OTC derivatives’ (2008) 61 Human Relations 637–60; Abbott and Snidal, ‘Hard and soft law in international governance’ (n 6) 421–56; Arner and Taylor, ‘The global financial crisis and the financial stability board’ (n 6) 488; Pierre-Hugues Verdier, ‘The political economy of international financial regulation’ (2013) 88 Indiana Law Journal 1405. 95 Galbraith and Zaring, ‘Soft law as foreign relations law’ (n 6) 735. 96 Anna Di Robilant, ‘Genealogies of soft law’ (2006) 54 The American Journal of Comparative Law 499– 554; Pauwelyn, Wessels, and Wolters, Informal international lawmaking (n 5); Kal Raustiala and Anne-Marie Slaughter, ‘International law, international relations and compliance’ (2002) Princeton Law & Public Affairs Paper No 02-2; Ryan Goodman and Derek Jinks, ‘How to influence states: Socialization and international human rights law’ (2004) 54 Duke Law Journal 621–703; Emilie M Hafner-Burton, David G Victor, and Yonatan Lupu, ‘Political science research on international law: the state of the field’ (2012) 106 The American Journal of International Law 47–97; Friedrich V Kratochwil, Rules, norms, and decisions: on the conditions of practical and legal reasoning in international relations and domestic affairs (CUP 1991); Richard H Steinberg and Jonathan M Zasloff, ‘Power and international law’ (2006) 100 American Journal of International Law 64–87; Claudio M Radaelli, ‘Harmful tax competition in the EU: policy narratives and advocacy coalitions’ (1999) 37 Journal of Common Market Studies 661–82. 97 Ramses A Wessel and Evisa Kica, ‘Political Economy and the Decisions of International Organizations: Choosing Governance Arrangements through Informality’ in Alberta Fabbricotti (ed), The Political Economy of International Law: A European Perspective (Edward Elgar Publishing 2016) 127–58. 98 Linda Senden, Soft Law in European Community Law (Hart Publishing 2004) 112. 99 See in particular on the use of institutional legal theory to define what belongs to a legal order also Ramses A Wessel, ‘Resisting Legal Facts: Are CFSP Norms as Soft as They Seem?’ (2015) 20 European Foreign Affairs Review 123–46. See for a description of other international arrangements also Dinah Shelton, ‘International Law and “Relative Normativity” ’ in Malcom D Evans (ed), International Law (4th edn, OUP 2014) 137, 159: ‘any international instrument other than a treaty containing principles, norms, standards, or other statements of expected behaviour’. 100 Sabine Saurugger and Fabien Terpan, ‘Studying Resistance to EU Norms in Foreign and Security Policy’ (2015) 20 European Foreign Affairs Review 1, 5. See also Fabien Terpan, ‘Soft Law in the European Union—The Changing Nature of EU Law’ (2015) 21 European Law Journal 68–96.

International Law and Policies on the EMU? 125 The absence of judicial control as well as, more generally, the absence of procedural rules, allegedly provides freedom to the actors to be more flexible as to what they agree on and how they arrange that. And, indeed, in principle international actors are free to choose their own means of committing themselves and in establishing the legal nature of an instrument.101 In international law, the potential problems caused by a move from hard to soft law have been highlighted,102 At the same time, it has however been pointed out that a ‘turn to informality’ should not per sé have negative consequences for, for instance, the legitimacy of norms when ‘thin State consent’ (the traditional basis for international agreements) is being replaced by ‘thick stakeholder consensus’ (resulting from the participation of not just governmental actors).103

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In the case of EMU, the ‘soft law’ standards seem to have allowed the EU to pick and choose what seemed to work best in a highly politicized policy area. Economic and Monetary Union turned twenty years old in 2019. As the contributions to the present Volume testify, it has been a great achievement for the European Union, but an incomplete construction that has been fought over, modified and expanded over time.104 As the EU has stumbled from one crisis to another since its establishment, the Eurozone in particular has adopted some of these standards and involved institutions according to a logic of political utility.105 Rather than technocratic expertise, which is what the international institutions and standards promote, the adoption procedure periodically selects or rejects these standards on the basis of political criteria.106 These sometimes reflect the priorities of the EU’s most powerful Member States—when adopting international standards or not is controversial—and sometimes a broad consensus that deviations are desirable. Notable is that some of these standards are now enshrined in treaties and funds (EFSF, ESM, and SRF) designed to buttress EMU financial stability, but from outside the EU legal framework, by virtue of international treaty and intergovernmental agreement (IGA), where they remain non-justiciable by the CJEU. This has been the result of a political demand from Germany, which sought to impose more stringent legal obligations on EU Member States and their EMU and related policy issues than those Member States would allow under EU voting rules. The result is that each national government is responsible for promoting financial stability, that private investors are forced to pay as well for financial collapses alongside sovereigns, and that the EU’s fiscal capacity remains severely constrained. The legal instruments to ensure responsible sovereignty of the Member States is anchored in these non-EU instruments.

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The EU has selectively adopted international rules on financial stability. While in some cases EU rules are basically a copy of an international norm (a good example being Regulation 1060/2009, which clearly reflects the IOSCO Code of Conduct on CRA regulation107),

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101 Also the Court of Justice of the European Union is of the opinion that the intention of the parties ‘must in principle be the decisive criterion’. See Case C-233/02 France v Commission [2004] ECR I-2759, para 42. 102 See for instance Anne Peters, ‘Soft Law as a New Mode of Governance’ in Udo Diedrichs, Wulf Reiners, and Wolfgang Wessels (eds), The Dynamics of Change in EU Governance (Edgar Elgar Publishing 2011). 103 Pauwelyn, Wessels, and Wolters, Informal international lawmaking (n 5). 104 See additionally Michele Chang, Economic and monetary union (Palgrave Macmillan 2016). 105 Shawn Donnelly, ‘Explaining EMU reform’ (2005) 43 Journal of Common Market Studies 947–68; Martin Heipertz and Amy Verdun, Ruling Europe: The politics of the stability and growth pact (CUP 2010); Dermot Hodson, ‘Eurozone governance: From the Greek drama of 2015 to the five presidents’ report’ (2016) 54 Journal of Common Market Studies 150–66. 106 Donnelly, ‘ECB-Eurogroup conflicts and financial stability in the Eurozone’ (n 60); Shawn Donnelly, ‘Banking Union in Europe and Implications for Financial Stability’ (2014) 67(2) Studia Diplomatica 21–34. 107 See Fabian Amtenbrink and Jakob de Haan, ‘Credit Rating Agencies’ (2011) DNB Working Paper No 278.

126 THE INTERNATIONAL DIMENSION OF EMU counter examples may be found in the rejection of IMF and OECD advice on the provision a public backstop to EMU, the selective emulation of macroeconomic policy advice by the IMF in EMU Member State budget surveillance (European Semester and the Macroeconomic Imbalances Procedure) and in the selective use of Basel Committee banking standards and recommendations on capital adequacy (in the context of establishing banking union to stabilize EMU). In the case of Capital Markets Union, which is designed to stabilize EMU in ways that Banking Union did not, it remains to be seen how the EU will adopt (parts of) standards, recommendations and insight from IOSCO. The same selective adoption applies to standards brought forward by the FSB, which brings these microprudential standards together. 5.86

Some, but not all the standards and approaches have been used as blueprints for stabilizing EMU after the onset of the Eurozone crisis in 2010. In some cases, the EU has promoted the development of these standards, in others used them to resolve disputes over how to proceed. And in others, EU politics rejected the advice of these bodies to stabilize EMU with new innovations. In general, however, substantive influence of international (soft) law on EMU rules remains very limited.108 The following sub-sections will, nevertheless, briefly highlight some examples of institutional links in relation to some key policy areas.

B. EMU-GFSA links in macro-and microprudential surveillance 5.87

Certain European institutional initiatives in the area of surveillance are clearly influenced by global institutional developments. The European Systemic Risks Board (ESRB) and the European Financial Stability Facility (EFSF) were established in 2011 and mirror the Financial Stability Board, plus the main ISSBs: the BCBS, IOSCO and IAIS. The EFSF consists of three European Supervisory Authorities: the European Banking Authority (EBA: responsible for collectively recommending improvements to how the EU adopts and applies Basel Committee capital adequacy standards; conducting stress testing of banks; and working together with the ECB to develop and apply a Single Rulebook on banking supervision); the European Securities and Markets Authority (ESMA: responsible for collectively recommending improvements to how the EU adopts and applies law and regulation regarding securities markets); and the European Insurance and Occupational Pensions Authority (EIOPA: which does the same for insurance markets). The European Supervisory Authorities (ESAs) do not have formal lawmaking powers, but recommend to the Commission, which does.109 They have more formal powers in coordinating and supervising implementation by national authorities within the context of EU law.110

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The influence of developments at the global level is clearly visible on the ESAs having a mildly contractionary effect in the banking sector in the medium term as efforts continue to increase resilience. In the securities sector, the effect is currently accommodating, and 108 Mügge, ‘Europe’s regulatory role in post-crisis global finance’ (n 12); Elliot Posner and Nicolas Véron, ‘The EU and financial regulation: power without purpose?’ (2010) 17 Journal of European Public Policy 400–15; Newman and Bach, ‘The European Union as hardening agent’ (n 8). 109 Marta Simoncini, ‘Legal boundaries of European Supervisory Authorities in the financial markets: Tensions in the development of true regulatory agencies’ (2015) 34 Yearbook of European Law 319–50. 110 See also Chapter 34 (Part VIII) Volume on the EFSF and the ESAs.

International Law and Policies on the EMU? 127 intended to lay the groundwork for future expansion, but is also working on measures to increase safety and resilience. This can be seen in both the EU’s Capital Markets Union (CMU) project,111 and the 2012 regulation of Central Counterparties,112 as the infrastructural backbone of financial stability in the derivatives trading sector. In this area, the EU is fully in line with the GFSA’s proposals, but not in a way that provides cohesiveness to the Eurozone itself. The ESRB both mirrors the FSB and works somewhat differently from it. Like the FSB’s relationship to the BIS, the ESRB is hosted by the ECB. Decisions are adopted by the General Board, consisting of the ECB’s President and Vice President, the heads of the EU’s national central banks, representatives of the Commission and ESAs, and representatives from two ESRB committees: the Advisory Technical Committee and the Advisory Scientific Committee. Unlike the FSB, it provides a wider range of overarching advice to EU institutions regarding state of the art in financial stability research and policy learning, future challenges, and best practice in macroeconomic and microeconomic developments, supervision and regulation.113 As an overview body, it shares with the ECB a mission to work on the linkages between macroeconomic and microeconomic parts of the regulatory and policy puzzle, and to map possible strategies forward.

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In this context, the ESRB works together with the EFSF to bridge supervision, resolution, and deposit insurance, with the ultimate goal of enhancing financial stability and systemic resilience. The latter involves in particular ending a negative feedback loop between financially fragile sovereigns (national governments) and banks located within their jurisdictions. Unlike macro prudential bodies elsewhere at the national level, however, the ESRB is purely advisory. This applies as well to its academic advisory board. The European Supervisory Authorities (pensions, banks, financial markets) replicate the behavioural approach of their global counterparts even more strongly. This is visible in the compilation of financial stability risk dashboards in each of the authorities.114 This reflects a neutral approach to the issue of risk analysis that sidesteps disagreements within the Eurozone and across Europe over the relative importance of various factors in laying the groundwork for crises and engineering resilience.

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C. EMU-GFSA links in macroeconomic and monetary policy The ECB is responsible for price stability in the Eurozone, and for financial stability, particularly through the use of monetary policy. It also represents the EU at the FSB as the 111 Nicolas Véron, ‘Defining Europe’s capital markets union’ (2014) Bruegel Policy Contribution No 2014/12; David Howarth, Lucia Quaglia, and Moritz Liebe, ‘The political economy of European capital markets union’ (2016) 54 Journal of Common Market Studies 185–203; Lucia Quaglia and David Howarth, ‘The policy narratives of European capital markets union’ (2018) 25 Journal of European Public Policy 990–1009; 112 European Parliament and Council Regulation (EU) 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories Text with EEA relevance [2012] OJ L201/1. 113 European Parliament and Council Regulation (EU) 1092/2010 of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board [2010] OJ L331/1; Council Regulation (EU) 1096/2010 of 17 November 2010 conferring specific tasks upon the European Central Bank concerning the functioning of the European Systemic Risk Board [2010] OJ L331/162. 114 Anat Keller, ‘Collecting Data: How Will the ESRB Overcome the First Hurdle towards Effective Macro- Prudential Supervision’ (2013) 24 European Business Law Review 487.

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128 THE INTERNATIONAL DIMENSION OF EMU competent authority for monetary policy in the Eurozone. Overall, the ECB’s thinking and behaviour has been close to that of its counterparts in the GFSA, and has pushed that view on the Eurozone where the Eurogroup has not been able to steer its countries out of the EZC. The Eurogroup contests this, and continues a strong narrative of how their efforts to impose austerity (fiscal contraction) are bearing fruit through economic growth and will continue to do so (expansionary contraction),115 Europe’s flat economic growth and anaemic price developments suggest otherwise. 5.92

The ECB’s willingness to engage in Outright Monetary Transactions (OMT) in 2012 (whatever it takes to save the euro) and its later foray into quantitative easing therefore meant a rift between itself and the Eurogroup over monetary policy. Whereas the Maastricht Treaty explicitly forbids the ECB from purchasing treasury bills directly from Member States, the (OMT) announcement of June 2012 threatened to do just that, to which plaintiffs at the German Federal Constitutional Court objected.116

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ECB attempts to convince the Eurogroup to sequence a package of growth-inducing measures, followed by structural adjustments, and then finally some austerity,117 have fallen on deaf ears. The ECB has the independence to determine its own policy course and has expanded that room since the EZC, but also has no means to force the Council to do what it prefers. The result is that the Council and the ECB are at odds in an extended stalemate. While the ECB seeks to keep the Eurozone afloat and inject liquidity into the economy, the Council is determined to ratchet that liquidity down, both through more limited government borrowing and spending, and through pressure to reduce domestic credit creation (through the MIP). A linking of monetary, fiscal, structural adjustment and strategic investment policies as recommended by the ECB therefore seems to be a more promising, if politically unlikely course of action for the Council to follow.

D. EMU-GFSA links in relation to Banking Union 5.94

EMU’s greatest problem extended beyond the solvency of national governments to include national banking systems by 2012.118 This demonstrated the failure of the EBA to properly ensure supervision in the EU, so that a further step was taken to give some of those tasks to the ECB. The ECB accordingly has a second seat at the FSB in its role as supervisor for the Eurozone’s largest systemically important banks. In 2012, Spain received financial assistance from its fellow Eurozone members through the European Stability Mechanism (ESM) to help recapitalize some of its banks, particularly local savings and cooperative banks that had lent aggressively before the crisis and suffered badly due to extended recession.119 115 Klaus Regling, ‘The ESM after 5 years: successes, challenges and perspectives’ (The Bridge Forum Dialogue, Luxembourg, 30 November 2017); Guy Chazan, Jim Brunsden, and Mehreen Khan, ‘Wolfgang Schäuble feels vindicated by tough bailout policies’ Financial Times (8 October 2017). 116 See on the Gauweiler case, Chapter 41. 117 Mario Draghi, ‘Introductory remarks by Mario Draghi’ (Portuguese Council of State, Lisbon, 7 April 2016). 118 David Howarth and Lucia Quaglia, ‘Banking union as holy grail: Rebuilding the single market in financial services, stabilizing Europe’s banks and “completing” economic and monetary union’ (2013) 51 Journal of Common Market Studies 103–23; Rachel A Epstein, Banking on Markets: The Transformation of Bank-State Ties in Europe and Beyond (OUP 2017). 119 Richard Deeg and Shawn Donnelly, ‘Banking union and the future of alternative banks: revival, stagnation or decline?’ (2016) 39 West European Politics 585–604; Rachel A Epstein and Martin Rhodes, ‘The political dynamics behind Europe’s new banking union’ (2016) 39 West European Politics 415–37; David Howarth and Lucia Quaglia,

International Law and Policies on the EMU? 129 A quid pro quo from Germany was the improvement of supervision. The need to provide some kind of means for stopping financial contagion throughout the Eurozone without instituting an EMU-wide budget with cross-border transfers meant imposing controls on banks (supervision) to reduce local risks, limiting national bailouts to reduce the risk of banking problems spreading to the public sector (where they became relevant to EMU) through resolution and bail-ins of private creditors, and by providing emergency finance as a means of preventing contagion across national borders. Banking supervision has since that time been the Eurozone’s biggest institutional and 5.95 policy success,120 and it has been moving Europe closer to global expectations as for instance laid down by the Basel Committee and IADI. It has a significant contractionary effect on the economy as banks raise capital and devote attention to dealing with existing stocks of non-performing loans rather than issuing new credit. The SSM (Single Supervisory Mechanism) was added to the European Banking Authority (EBA) in November 2014—at which point the ECB became direct supervisor to 128 Systemically- Important Banks (SIBs) (now 117), and took over the tasks of carrying out a regular Asset Quality Review, directing banks on how much capital to raise in accordance with the EU’s Capital Requirement Directives, and in some cases indicating insolvency to the Single Resolution Board (below). The EU also instituted at resolution system in 2016—the Single Resolution Mechanism (SRM).121 Within the SRM, the Single Resolution Board coordinates resolution plans for E-SIBs and recommends resolution to the Commission if the ECB announces the bank is insolvent. The SRM also incorporates a bail-in mechanism that reduces what banks owe to creditors in the event of insolvency and is supposed to reduce the input of public funds into failed banks (bail-out). Although the powers of the SRM to move banks toward resolution have proved disappointing, and an agreement on any sort of deposit insurance for EMU remains elusive for political reasons, the rule structure itself regarding resolution reflects standards set out by IADI. What it lacks is truly independent powers by the SRB to act swiftly and without legal recourse to dispute as IADI suggests. It also lacks any meaningfully large resolution fund, or any deposit insurance fund.

5.96

The SRM has attached to it a small (55 billion euro), ex ante, bank-funded fund knowns as the Single Resolution Fund (SRF). As with the ESM, a key legal feature of the SRF is that it is based on an intergovernmental agreement under international law, outside of EU law. This means that decisions are made according to the decision-making procedures of the SRF. While the SRB may make a recommendation or what amount of money should be deployed during a resolution, the Fund retains the right to decide for itself if this is appropriate. As an extra-EU entity, the Fund is not justiciable under EU law and cannot be forced to act in ways other than its shareholders wish.

5.97

‘Internationalised banking, alternative banks and the Single Supervisory Mechanism’ (2016) 39 West European Politics 438–61. 120 Stefaan De Rynck, ‘Banking on a union: the politics of changing eurozone banking supervision’ (2016) 23 Journal of European Public Policy 119–35. 121 David Howarth and Lucia Quaglia, ‘The steep road to European banking union: Constructing the single resolution mechanism’ (2014) 52 Journal of Common Market Studies 125–40.

130 THE INTERNATIONAL DIMENSION OF EMU

E. EMU-GFSA links in securing the financial market 5.98

The European Securities and Markets Authority (ESMA) reflects its global counterpart IOSCO, and is responsible for payments systems and futures markets where asset bubbles are an issue. It is also responsible for credit rating agencies, hedge funds and other shadow banking institutions where liquidity is strong, but unconnected to the real economy. Its General Board consists of national securities regulators of EU Member States, plus an Executive Board, like the other ESAs. Unlike the others, however, it is a de facto independent supervisory authority. As with the others, the rules it applies are legislated through the ordinary legislative procedure. Rules are generally in line with, and often based on, international standards emanating from IOSCO.

5.99

In the context of financial stability, and the potential for macroeconomic effects, ESMA is key in the development of regulations regarding central counterparties (CCPs), which are seen as a missing link.122 In the medium term, EU law prevents the Eurozone from ensuring that CCP clearing services take place within its territory, however. The ECB lost a key case on mandating that CCPs be located in the eurozone.123 The Court ruled that while ECB has jurisdiction over payments systems, it does not have automatic control over all clearing systems (such as derivatives). CCPs have to have access to both: payments and security transfer systems. This was controversial since the ECB provides liquidity backstop to CCP systems. At stake was not only whether UK financial institutions could operate for the eurozone, but whether financial stability would be further ensured.

F. EMU-GFSA links in macroeconomic surveillance 5.100

The EU’s mirror to the OECD, G20 and IMF on proper macroeconomic policy is found in its on budget and debt rules (Maastricht Treaty criteria on debt, deficits and inflation), but also in the Macroeconomic Imbalances Procedure introduced in 2011. Member States provide Stability Reports to the European Commission, which reviews them and proposes Country-Specific Recommendations (CSRs) to the Council. The CSRs are only final once adopted by the Council and as the title implies, not legally binding.

5.101

The monitoring of the Stability and Growth Pact was transformed by name into the European Semester in 2011. It was then extended into private economic behaviour in 2011 through the macroeconomic imbalances procedure (MIP).124 Like the European Semester, the MIP is designed to observe, analyse and provide country specific recommendations (CSRs), but on private sector price developments. These range from inflation rates, labour costs, asset prices (to capture unstable phenomena such as housing bubbles, which played a significant role in the 2008/2009 crashes of Ireland and Spain), but also capital account balances and private debt levels. The intent of the ES and the MIP is to restrict credit growth in such a way as to prevent future asset bubbles. CSRs are not legally binding, and in practice,

122 Heikki Marjosola, ‘Missing pieces in the patchwork of EU financial stability regime? The case of central counterparties’ (2015) 52 Common Market Law Review 1491–527. 123 Case T-496/11 United Kingdom v European Central Bank [2015] ECLI:EU:T:2015:133. 124 See further Chapter 29.

Conclusion 131 less than 10 per cent are actually followed up on. However, the trend toward fiscal retrenchment sets the Eurozone apart from other jurisdictions worldwide. Furthermore, in this area, the Eurozone has not taken on much of the GFSA recommendations. This can be seen in the IMF-Eurozone fight in 2015 over austerity and debt sustainability: IMF wanted more of Greece’s debt forgiven, so that the bills would be payable. Eurogroup disagreed and refused to talk further reductions in debt. It can also be seen in IMF support for a common public backstop for the Eurozone to ensure automatic stabilizers are in place. The biggest rift between the GFSA and the Eurozone is therefore between two macroeconomic visions: the GFSA has accommodated a more dovish view of macroeconomic policy—an accommodating monetary and fiscal policy—that the Eurogroup (with the exception of the ECB with regard to monetary policy) has rejected. This has nothing to do with milder economic circumstances in the Eurozone as a whole compared to elsewhere, given the severity of the Eurozone Crisis. Rather it has had to do with a division between national governments in the Eurozone. This division is partly on the issue of who should pay for financial stability, and how much. But more importantly, the debate between European countries has been characterized by a war of ideas over proper macroeconomic policy that Germany, the Netherlands, and Finland within the Eurogroup have decisively won over France and much of Southern Europe.125 The model institutionalized in the European Semester outlines a combination of budget retrenchment, debt reduction structural adjustment policies and further measures contributing to internal devaluation that help individual countries pull themselves back from the prospect of fiscal cliffs as happened in 2010–12. The features are strongest when countries hit that fiscal cliff and seek financial assistance from the European Stability Mechanism. At that point, the Troika, supplemented by the Eurogroup, sets out these forms of internal devaluation in contract form with programme countries, rather than relying on voluntary adoption in the normal ES procedure.

5.102

That this constitutes a breach with the GFSA’s interpretation of proper macroeconomic policy is signified by the IMF’s repeated conflicts with the Eurozone regarding demands made on programme countries. Debt sustainability reviews regarding Greece, in the absence of a common public backstop, particularly regarding the Eurozone demand that the Greek government run a 3.5 per cent budget surplus, are the most telling way to see that conflict. Another is the repeated call for a backstop itself.

5.103

V. Conclusion: An Interplay Between the GFSA and the EMU? The present chapter purported to assess the influence of the Global Financial Stability Architecture on the European Economic and Monetary Union. The GFSA is complex of ISSBs, with the FSB as an umbrella, with a highly behaviouralist (evidence-based) approach. It accommodates a dovish monetary and fiscal policy stance typical of neokeynesian monetary policy. In this sense, the Washington Consensus really does appear to be dead at the global level.126 It is alive and well in Europe 125 Geoffrey R Underhill, ‘Paved with good intentions: global financial integration and the eurozone’s response’ (2011) 10 European Political Science 366–74. 126 Susanne Lütz, ‘From Washington Consensus to Flexible Keynesianism? The International Monetary Fund after the Financial Crisis’ (2015) 6 Journal of International Organization Studies 85; Ban and Gallagher,

5.104

132 THE INTERNATIONAL DIMENSION OF EMU however,127 for political reasons that have intensified rather than moved toward compromise within the EU. German/Dutch demands to do this have resulted in a wide range of legal rules on budgetary policy, banking supervision and resolution, that have a contractionary impact on national economies rather than accommodative ones. 5.105

The global rules are characterized by an informal, ‘soft’, nature, and allowed the European Union to be quite selective in adopting them. The overall tendency seems to be to turn some of the softer international rules into hard EU law,128 which has made it harder for the EU bodies and the Member States to reach compromises. As—in most cases—the EU as such is not a formal member of the GFSA bodies, it has to rely on its Member States, that are often not in agreement on the course to follow. Where this is the case, the EU’s divisions lead it to have weaker influence on the global standards they promote.129

5.106

In a substantive sense, it hard to find clear examples of an influence of the GFSA on EMU rules. At the same time, it is clear that, institutionally, many of the global frameworks and their tasks, have been copied as EU bodies and play a similar role in relation to the Eurozone.

5.107

To what extent is the ‘disconnection’ between the GFSA and the EMU to be seen as problematic? Obviously, the aim of the GFSA is to enhance global financial stability and ‘cherry picking’ by the EU (mostly for political reasons related to varying views on further European integration) can not only harm the EU itself, but can also have an effect on global financial stability. The situation between the EU and the rest of the world resembles the failed macroeconomic coordination attempts of the late 1980s, when German insistence on macroeconomic prudence eventually forced its neighbours to follow, and entrenched a transatlantic rift.130 In the wake of the Eurozone Crisis (EZC), a split developed between the GFSA and EMU over proper macroeconomic policy, so that the GFSA’s impact must be considered contingent on EU and EMU approval. While the GFSA is driven by an accommodative monetary and financial stability policy in nearly all areas,131 EMU reforms have rendered it more restrictive—above all in the areas of fiscal policy, macroeconomic imbalances and banking regulation. This rupture, in turn, reflects power politics between groups of States within EMU that have more to do with who pays for providing financial stability and following a narrative of proper public policy at the national level132 than whether it provides optimal resilience. The most important of the EMU deviations has been the EMU focus on alleviating the sovereign default (‘bankruptcy’) of EMU Member States with prudential

‘Recalibrating Policy Orthodoxy’ (n 7) 131–46; Ben Clift, The IMF and the Politics of Austerity in the Wake of the Global Financial Crisis (OUP 2018); Ilene Grabel, When Things Don’t Fall Apart: Global Financial Governance and Developmental Finance in an Age of Productive Incoherence (MIT Press 2018). 127 Susanne Lütz and Matthias Kranke, ‘The European rescue of the Washington Consensus? EU and IMF lending to Central and Eastern European countries’ (2014) 21 Review of International Political Economy 310–38. 128 Lucia Quaglia, The European Union and global financial regulation (OUP 2014). 129 Quaglia, ‘The sources of European Union influence’ (n 12). 130 Michael C Webb, ‘International economic structures, government interests, and international co-ordination of macroeconomic adjustment policies’ (1991) 45 International Organization 309–42. 131 Claudio Brio, ‘The International Monetary and Financial System: Its Achilles Heel and What to do about it’ (2014) Globalization and Monetary Policy Institute Working Paper No 203; Donnelly, Power Politics, Banking Union and EMU (n 74). 132 Dermot Hodson and Lucia Quaglia, ‘European perspectives on the global financial crisis: introduction’ (2009) 47 Journal of Common Market Studies 939–53.

Conclusion 133 austerity measures at the national level, rather than approaching EMU instability with common financial backstops. The outcome of this break is a mixed picture. On the one hand, the Eurozone has introduced innovations in bank supervision and resolution that reduce the likelihood of a new financial crisis that threatens to take on systemic proportions coming from inside the banking system. On the other, robust public backstops constitute a critical component of the financial stability architecture that are clearly missing in the European case. This split between a European insistence on frugality and individual Member State responsibility for financial stability and growth is reflected in the Eurozone’s macroeconomic policy framework as well, which favours, though its tendency to reduce government consumption during economic downturns, a further weakening of its weakest members over time.

5.108

6

EXTERNAL RELATIONS OF THE EU AND EURO AREA IN THE FIELD OF EMU Marise Cremona and Päivi Leino-Sandberg*

I. Introduction II. Background III. Legal Framework

A. Competence and the external dimension of EMU B. EU external competence and IFIs

6.1 6.5 6.17 6.19 6.43

C. Representation

IV. Coherence, Coordination, and Cooperation V. Conclusion: Internal Power Struggle and External Power Projection

6.66 6.75 6.99

I. Introduction 6.1

This chapter will focus on the relations of the European Union (EU) and euro area with the main international financial institutions (IFIs) from the perspective of EU law. Among the IFIs the International Monetary Fund (IMF), the World Bank and the more informal groupings of the G20, the Organization for Economic Co-operation and Development (OECD) and the Financial Stability Board (FSB) will be highlighted. The aim, in a chapter of this length, is not to give an account of the activities of these bodies and the EU’s policy positions and priorities; rather it is to highlight, from the perspective of EU law, the legal- institutional questions and challenges that arise from EU participation.1 The unified representation of the euro area in the IFIs has surfaced repeatedly in the context of the on-going discussions concerning the development of the Economic Monetary Union (EMU) (see below in Section II). These discussions, however, primarily reflect the EU institutional interest (Commission, the European Central Bank (ECB)) to strengthen their institutional presence in the IFIs: something that is met with strong reluctance by the Member States. While the Member States ostensibly support increased EU influence in the IFIs, they are also concerned about preserving their own individual positions and status. In this regard, the issue of external representation in IFIs is not fundamentally different from the broader discussion concerning EU external representation in international fora—something that the Lisbon Treaty attempted to strengthen but which has proved to be a constant source of * Some parts of the chapter are based on Päivi Leino, ‘External Relations of the Euro-Zone—Participation of EU and EU Member States in the IMF’ in Marc Bungenberg and others (eds), European Yearbook of International Economic Law 2017 (vol 8, Springer 2017). 1 For EU participation in IFIs from the perspective of the IFIs themselves, see further Chapter 5 by Shawn Donnelly and Ramses A Wessel. Marise Cremona and Päivi Leino-Sandberg, 6 External Relations of the EU and Euro Area in the Field of EMU In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0008

Introduction 135 discord in various organizations, with an inevitable impact on EU influence. This, rather than lack of formal status, is ultimately the challenge in achieving unity in the international representation of the EU. In the context of recent debates, two cleavages immediately appear which create both prac- 6.2 tical complexities and legal challenges that have so far been subject to limited analysis. Their interaction forms a central theme for this chapter. The first is the cleavage between the EU and its Member States: while the EU has exclusive competence over monetary policy and exercises power in various other fields falling within the IFIs’ areas of action (including internal market matters such as financial market legislation or free movement of capital, as well as its soft coordination competence in economic and fiscal policy), it is not itself a member of the key IFIs such as the IMF and World Bank, financial institutions where national governments act as shareholders and which are often funded from national budgets. Yet, their actions influence various EU policy areas. In practice, IFI membership varies between those involving all EU Member States (IMF, World Bank) and those such as the OECD, G7, G20, or the FSB in which only a limited number of EU Member States are represented. The EU role and institutional presence also differs between IFIs. The institutional setting for external relations in the field of EMU is more complex than in other external relations sectors: the ECB is central in the external relations of monetary policy, while the roles of the EU High Representative and the European External Action Service (EEAS)— which generally operate as the fundamental tool of external policy coherence—are limited (see further in Section II). This gives rise to questions about how the EU is represented, not only by its own institutions but also by the Member State IFI members, and the relationship between their resulting EU law obligations and the working of the IFIs governed by their constituent instruments and international law (see Section III). Do the methods devised for bridging the gap work, and to what extent does the EU’s non-membership undermine its external identity (see Section IV)? What would be the benefits—and drawbacks—of pursuing EU membership, given the distinction between the EU and the euro area? The second cleavage is the distinction between the EU and the euro area: EMU is a prime example of differentiated integration. It is the EU that has legal personality and can conclude international agreements, and yet its exclusive competence in monetary policy applies only to those Member States whose currency is the euro. The distinction is well illustrated by the fact that Article 138 of the Treaty on the Functioning of the European Union (TFEU), which deals with relations with IFIs, is one of the provisions specific to Member States whose currency is the euro and is therefore concerned with the external representation of the euro area. Article 219 TFEU on the other hand, which establishes the procedure for the conclusion of international agreements concerning the euro, is among the general provisions on EU external action and the agreements are concluded by the EU; but what does ‘the EU’ in such cases refer to? The EU law obligations of states belonging to the euro area and those of states outside it have fundamental differences, not only as regards monetary policy, but also as regards economic policy and the banking union, where the obligations of euro states reach deeper.2 However, it is not entirely clear why the attempts to coordinate EU positions 2 Päivi Leino-Sandberg and Janne Salminen, ‘A Multi-Level Playing Field for Economic Policy-Making: Does EU Economic Governance Have Impact?’ in Thomas Beukers, Bruno de Witte, and Claire Kilpatrick (eds), Constitutional Change Through Euro-Crisis Law (CUP 2016) (hereafter Leino-Sandberg and Salminen, ‘A Multi- Level Playing Field’).

6.3

136 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU externally, and especially in IFIs, should be limited to euro area states only, even if this is the arrangement for which the Treaty specifies powers and that has been mostly promoted in institutional debates. This fragmentation poses challenges for the unity of the EU as an international actor: how can the EU represent the euro area, and what are the implications for Member States outside the euro area? 6.4

In what follows, after a brief description of the background to the debates over unified EU representation in IFIs and international fora more broadly, the legal framework for EU/ euro area external relations will be examined: the scope of EU competence in matters that fall under the IFIs’ areas of action, and the implications of the exclusive nature of monetary policy competence for the euro area (Article 3(1)(c) TFEU), the legal provision for representation and policy coordination within IFIs, and the consequences of EU non- membership of IFIs. It is argued that even if competence argumentation would speak for stronger EU coordination and position building than is today the case, adjusting the legal and institutional structures, those of the EU or of the IFIs, will not in itself solve the problems of EU representation or policy inconsistency. Thereafter, the practical and legal consequences of the fragmentation referred to above are turned to, especially between members and non-members of the euro area, but also the differentiated membership of Member States in IFIs. The conclusion will assess the degree to which these two cleavages impact the ability of the EU to operate effectively within IFIs and to conduct ‘external relations of the economic and monetary union’.

II. Background 6.5

The question of unified representation by the euro area in IFIs has been discussed more or less since the introduction of the common currency. In 1999, Jacqueline Dutheil de la Rochère predicted that ‘this question of the external representation of economic and monetary union will be one of the most difficult to face during the years to come’.3 The December 1997 and 1998 European Council conclusions specifically addressed the issue. The European Council placed responsibility for the external representation of the euro on the Council and the ECB,4 and encouraged the EU institutions and the Member States to ‘ensure a timely and effective preparation of common positions and common understandings that can be presented to third parties in international fora’.5 In 1998, the Commission presented a proposal for a Council decision on international representation relating to the EMU, but it was never adopted.6

6.6

In considering EU representation in the IFIs the objectives of more unified representation and its likely impact need to be born in mind. Institutional and academic concern on the EU side has been directed specifically at a perceived lack of EU influence in IFIs, stressing the discrepancy between the increasing relevance of EU policy decisions and economic 3 Jacqueline Dutheil de la Rochère, ‘EMU: Constitutional Aspects and External Representation’ (1999) 19 Yearbook of European Law 427, 445. 4 Luxembourg European Council, ‘Presidency Conclusions’ (Luxembourg, 12 and 13 December 1997) para 46. 5 Vienna European Council, ‘Presidency Conclusions’ (Vienna, 11 and 12 December 1998) para 15. 6 See Commission, ‘Proposal for a Council Decision on the Representation and Position Taking of the Community at International Level in the context of the Economic and Monetary Union’ COM (1998) 637 final.

Background 137 developments for the world economy and the fact that the EU and the euro area are still not represented as one: The situation of the EU and the Euro area at the IMF is characterised by an overrepresentation of European/EU Member States, a poor ex ante coordination of positions and, as a result, a weak identification and a limited influence of the euro area in the organs of the IMF.7

Discussion concerning the role of EU Member States in IFIs also takes place at global level but from a different perspective: the concern is rather that they have too much influence due to their fragmented representation and the perceived disproportionate weight of certain advanced countries including the EU Member States, as a result of which ‘[t]‌he institution’s major shareholders’ are seen to be ‘gambling, perhaps unwittingly, with the IMF’s legitimacy and credibility’.8 While the 2010 IMF governance reforms discussed below were aimed at diminishing the power of advanced economies—including the EU Member States—in the IMF, on the EU side they have been seen as providing increased momentum to create a unified EU voice at the IMF.9 Therefore, a key question arises as to whether the purpose of unifying EU representation in IFIs is in fact more about limiting EU power by limiting the number of EU seats around the negotiating table (the global discussion) or about strengthening EU power (the argument with which the EU Commission justifies its proposals).

6.7

As noted above, euro area representation in the IFIs returned to the discussion agenda with new force during and after the financial crisis. The Commission Blueprint for a deep and genuine EMU, adopted in 2012, argued that a ‘strengthened voice of the Economic and Monetary Union is an integral part of the current efforts to improve the economic governance of the euro area’. Further integration internally should be reflected externally, notably through progress towards united external economic representation of the EU and of the euro area, in particular in the IMF. The logic is that:

6.8

it is the size of the euro area that matters in influencing the type of policy responses that will be taken in international financial institutions and fora . . . However, because of the current fragmentation of its representation in international financial institutions and fora, the euro area does not have an influence and leadership commensurate to its economic weight.10

The Five Presidents’ Report, published in June 2015, also argues for a gradual process to- 6.9 wards increasingly unified external representation for the euro area, beginning in the short- term. For the Five Presidents:

7 Jean-Victor Louis, ‘The Euro Area and Multilateral Financial Institutions and Bodies’ in Inge Govaere, Erwan Lannon, Peter van Elsuwege, and Stanislas Adam (eds), The European Union in the World: Essays in Honour of Marc Maresceau (Brill 2013) 193. 8 International Monetary and Financial Committee of the IMF, ‘Statement by Guido Mantega, Minister of Finance Brazil’ (IMF, 20 April 2013) paras 14–16 accessed 3 February 2020 (hereafter International Monetary and Financial Committee of the IMF, ‘Statement by Guido Mantega’). 9 Jan Wouters and Sven Van Kerckhoven, ‘The International Monetary Fund’ in Knud Erik Jørgensen and Katie Verlin Laatikainen (eds), Routledge Handbook on the European Union and International Institutions: Performance, Policy, Power (Routledge 2013) 227 (hereafter Wouters and Van Kerckhoven, ‘The International Monetary Fund’). 10 Commission, ‘A blueprint for a deep and genuine economic and monetary union: Launching a European Debate Brussels’ COM (2012) 777 final.

138 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU this fragmented voice means the EU is punching below its political and economic weight as each euro area Member State speaks individually. This is particularly true in the case of the IMF despite the efforts made to coordinate European positions.11 6.10

The Five Presidents’ Report was followed by a Commission Communication adopted in October 2015 laying down a roadmap for moving towards a more consistent external representation of the euro area in international fora,12 as well as a proposal for a Council decision laying down measures in view of progressively establishing unified representation of the euro area in the IMF.13 In December 2015, the European Council adopted conclusions, where it established that work towards the completion of the EMU was to advance rapidly, in particular as regards the euro area’s external representation, ‘to better reflect its weight in the world economy’.14 Notwithstanding these high-level statements, the lack of progress in the Council to date reflects the general reluctance of governments to engage in the matter.

6.11

From a broader EU perspective, ensuring the consistency of multifaceted EU action has been a ‘recurring concern in the EU external relations narrative’.15 The Laeken Declaration on the Future of Europe adopted in 2001 specifically raised questions on how the coherence of European foreign policy could be enhanced and whether the external representation of the Union in international fora should be extended further.16 The Lisbon Treaty provisions on developing EU external representation were one of the most prominent rationales for the Treaty.17 The Commission argued that: the EU’s impact falls short when there are unresolved tensions or a lack of coherence between different policies. There is a need for strong and permanent efforts to enhance the complementary interaction of various policy actions and to reconcile different objectives . . . For the EU, there is the additional challenge in ensuring coherence between EU and national actions. Unsatisfactory co-ordination between different actors and policies means that the EU loses potential leverage internationally, both politically and economically.18

11 Jean-Claude Juncker and others, ‘The Five Presidents’ Report: Completing Europe’s Economic and Monetary Union’ (Brussels, 22 June 2015). 12 Commission, ‘A roadmap for moving towards a more consistent external representation of the euro area in the international fora’ COM (2015) 602 final. 13 Commission, ‘Proposal for a Council Decision laying down measures in view of progressively establishing unified representation of the euro area in the International Monetary Fund’ COM (2015) 603 final. 14 European Council, ‘European Council Meeting— Conclusions’ (EUCO 28/ 15, 17– 18 December 2015) para 14. 15 See Christophe Hillion, ‘Tous pour un, un pour tous! Coherence in the External Relation of the European Union’ in Marise Cremona (ed), Developments in EU External Relations Law (OUP 2008). 16 The Convention drafting the provisions also discussed specifically the issue of European representation in IFIs. See The European Convention Praesidium, ‘EU External Action’ (CONV 161/02, 3 July 2002) accessed 3 February 2020 (hereafter The European Convention Praesidium, ‘EU External Action’). The Treaty included Article 111(4) of the Treaty establishing the European Community (TEC), which enabled the Council to decide on a joint position ‘at international level as regards issues of particular relevance to economic and monetary union and on its representation, in compliance with the allocation of powers laid down in Articles 99 and 105’. No measures were adopted on that legal basis. 17 The European Convention Praesidium, ‘EU External Action’ (n 17) discusses how ‘[t]‌here is widespread acknowledgement amongst Europe’s citizens of the potential benefits to be gained when the European Union acts collectively on the global stage. At the same time, there is criticism that the Union’s international impact currently falls short of what might reasonably be expected given its economic weight, its high degree of internal integration and the resources collectively at its disposal’. 18 Commission, ‘Europe in the World—Some Practical Proposals for Greater Coherence, Effectiveness and Visibility’ COM (2006) 278 final.

Background 139 Several post-Lisbon Treaty provisions stress the need to ensure consistency between the different areas of Union external action and between these policy areas and other Union policies (Article 21(3) of the Treaty on European Union (TEU)). The responsibility for ensuring this consistency is placed on the Council and the Commission, assisted by the High Representative of the Union for Foreign Affairs and Security Policy (Article 18 TEU), who acts as one of the Vice-Presidents of the Commission with a special responsibility for consistency in Union external action. The establishment of the EEAS under Article 27(3) TEU is also intended to contribute to this objective through assisting the High Representative to fulfil her mandate.19 These provisions, however, focus on consistency between different EU policies, not consistency between EU policies and Member State policies.20 Policy consistency between EU and Member States falls under the principle of sincere co-operation in Article 4(3) TEU—a provision which will be returned to.21

6.12

But the new strengthened coherence framework has yet to prove itself. In fact, in the immediate post-Lisbon period it led to serious inter-institutional conflicts between the Member States and the Commission in international institutions covering areas of shared or mixed competence, as the different actors sought to influence the new balance of power.22 While the Lisbon Treaty has ‘probably improved the Union’s institutional structures, these structures alone will not ensure coherence of foreign policy or the unity of the Union as an international actor’.23 Problems of coherence and unity in the IFIs are often linked to the complex division of competences between the EU and its Member States, which is seen as hindering the EU from fully taking over and thereby diminishing its relevance as an international actor.24 However, the presence or absence of legal rules cannot alone explain why Member States are reluctant to hand over powers to, or their unwillingness to be represented by, the EU institutions.25 The fact that the discussion of euro area representation in IFIs has not really advanced in the last twenty years might be more connected to such considerations than to any lack of formal procedures for position-building or questions of principle relating to coherence or competence. A move towards joint external representation is unlikely to settle problems in position-building or remove the reluctance to allow the EU to take

6.13

19 Article 2 of Council Decision 2010/427/EU of 26 July 2010 establishing the organisation and functioning of the European External Action Service [2010] OJ L201/30. 20 See, however, Articles 208 and 212 TFEU relating to development cooperation and technical assistance, which specifically refer to how the ‘Union’s development cooperation policy and that of the Member States complement and reinforce each other’ and how the ‘Union’s operations and those of the Member States shall complement and reinforce each other’. 21 On this, see Marise Cremona, ‘Defending the Community Interest: the Duties of Cooperation and Compliance’ in Marise Cremona and Bruno De Witte (eds), EU Foreign Relations Law— Constitutional Fundamentals (Hart Publishing 2008) (hereafter Cremona and De Witte, ‘Defending the Community Interest’); Joni Heliskoski, ‘Internal Struggle for International Presence: The Exercise of Voting Rights within the FAO’ in Alan Dashwood and Christophe Hillion (eds), The General Law of EC External Relations (Sweet & Maxwell 2000) (hereafter Heliskoski, ‘Internal Struggle for International Presence’); Joris Larik, ‘Pars pro toto: The Member States’ Obligations of Sincere Cooperation, Solidarity and Unity’ in Marise Cremona (ed), Structural Principles in EU External Relations Law (Hart Publishing 2018). 22 Knud Erik Jørgensen, Sebastian Oberthür, and Jamal Shahin, ‘Introduction: Assessing the EU’s Performance in International Institutions— Conceptual Framework and Core Findings’ (2011) 33 Journal of European Integration 599, 612. 23 Marise Cremona, ‘Coherence in EU Foreign Relations Law’ in Panos Koutrakos (ed), European Foreign Policy: Legal and Political Perspectives (Edward Elgar Publishing 2011) 58. 24 Ramses A Wessel, ‘The Legal Framework for the Participation of the European Union in International Institutions’ (2011) 33 Journal of European Integration 621, 633 (hereafter Wessel, ‘The Legal Framework for the Participation of the European Union’). 25 Ibid.

140 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU over matters that have so far been dealt with by the Member States. The EEAS has also noted that the ‘situation has in general been more challenging in multilateral delegations given the greater complexity of legal and competence issues’.26 While the EU Treaties already allow the EU to engage with international institutions and become a full member of them, the possibilities for doing so are often hampered either by the rules of the institution or by the reluctance of EU Member States to allow the EU to act on their behalf.27 While, in principle, Member States should aim at enabling EU participation in international organizations and agreements in its own name, in practice they are often reluctant to do so. 6.14

In 2011, the Council adopted a number of General Arrangements relating to EU Statements to be presented in multilateral organizations, which reflect the post-Lisbon difficulties experienced: The Treaty of Lisbon enables the EU to achieve coherent, comprehensive and unified external representation. The EU Treaties provide for close and sincere cooperation between the Member States and the Union. Given the sensitivity of representation and potential expectations of third parties, it is essential that, in conformity with current practice, the preparation of statements relating to the sensitive area of competences of the EU and its Member States should remain internal and consensual.28

6.15

Unified representation is used in particular in strategically important matters, irrespective of whether they fall under EU or national competence but—especially in the latter case— decision-making concerning the substance of the statements takes place by consensus. While national statements repeating an identical message are avoided, such statements can be added after the delivery of the EU statement, in a manner that does not challenge the substance of the common position. Who then presents the common statement depends on the rules of the international organization in question: it can be the Head of the EU Delegation, but it can also be the rotating EU Presidency, or, especially if the latter is not a member of that organization, the representative of another EU Member State.29 While action in international organizations is to be coordinated ‘to the fullest extent possible’, ‘ensuring that there is adequate and timely prior consultation’, under the General Arrangements the ball is to a large extent with the Member States who ‘agree on a case by case basis whether and how to coordinate and be represented externally’. And when the General Arrangements were adopted, several key Member States stressed that the Member States were still fully entitled to ‘continue to exercise their rights in International Organisations, including by making national statements, participating in statements with other states, or representing 26 European External Action Service, ‘Report by the High Representative to the European Parliament, the Council and the Commission’ (2011) para 17 accessed 3 February 2020. 27 Wessel, ‘The Legal Framework for the Participation of the European Union’ (n 25) 633. 28 Council of the European Union, ‘EU Statements in multilateral organisations—General Arrangements’ (15901/11, 24 October 2011) para 2 (hereafter Council of the European Union, ‘EU Statements in multilateral organisations—General Arrangements’). 29 Pre-Lisbon, the Member State holding the rotating Presidency would often speak for both EU and Member States. The Lisbon Treaty does not give an external representation role to the rotating Presidency; instead, this role is shared between the President of the European Council, the High Representative and the President of the Commission. As a result, the arrangements for representing the collectivity of Member States in external negotiations and fora have been contested, the 2011 Statement being designed to bring an end to case-by-case disputes; see eg Tom Delreux, ‘The Rotating Presidency and the EU’s External Representation in Environmental Affairs: the Case of Climate Change and Biodiversity Negotiations’ (2012) 8 Journal of Contemporary European Research 210.

Legal Framework 141 EU positions’.30 The General Arrangements further stress the importance of competence. First, the ‘EU can only make a statement in those cases where it is competent and there is a position which has been agreed in accordance with the relevant Treaty provisions’. Second, ‘[e]‌xternal representation and internal coordination does not affect the distribution of competences under the Treaties nor can it be invoked to claim new forms of competences’.31 Member States often see the legal issue of competence as more decisive than their commitment to pursue joint representation. Therefore, the matter of competence will now be turned to.

6.16

III. Legal Framework The discussion above points to a first finding, namely that adjusting the legal and institutional structures, those of the EU or of the IFIs, will not in itself solve the problems of EU representation or policy consistency. The political dimension, in particular the willingness of Member States to be represented by the EU institutions, is crucial and something that the 2012 and 2015 EMU Reports, with their focus on new procedures, do not openly discuss. At the same time, this political dimension is itself influenced by the underpinning legal framework and, in particular, the quintessentially legal question of EU competence, an issue on which these recent EMU Reports are generally also weak. In short, the unified representation of the EU and the Member States is not simply about getting an agreement on presenting a unified voice; it raises questions as to the implications of formulating a common position and possible repercussions on the division of competences. Certainly, representation is not the same as competence, and unified representation through the EU institutions or a Member State acting in the name of the Union can be pursued even in the absence of full EU competence; in various international organizations this is common practice. However, the largely symbolic question of who delivers a speech in a particular IMF session or which name plate is to be used is less significant than the question of how the substance of that speech is to be decided. Competence affects the degree to which Member States are bound to establish, and then be bound by, a common position.

6.17

The attempt to move to position-building that would be more or less binding on the euro area states, and the justifications provided in support of this agenda, thus raise a number of key considerations relating to the extent and nature of EU competence in matters falling within the scope of the IFIs. In brief, legal competences matter,32 and attempting to advance a discussion of representation while ignoring the broader framework of EU competence would be difficult. For this reason, the discussion needs to start with the issue of competence in matters falling under the IFIs areas of action, something, which has so far received limited attention.

6.18

30 See the UK Statement, Council of the European Union, ‘EU Statements in multilateral organisations— General Arrangements—United Kingdom Statement’ (15855/11 ADD2, 21 October 2011). See also the statement by Germany, Council of the European Union, ‘EU Statements in multilateral organisations—General Arrangements—German Statement’ (15855/11 ADD3, 22 October 2011). 31 Council of the European Union, ‘EU Statements in multilateral organisations—General Arrangements’ (n 29) para 3. 32 See Wessel, ‘The Legal Framework for the Participation of the European Union’ (n 25).

142 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU

A. Competence and the external dimension of EMU 6.19

There are a number of reasons why EMU and EMU-related matters discussed in IFIs pose particular challenges from the perspective of competence. EU competence in these areas varies from exclusive competence in monetary policy, shared competence in internal market matters (such as financial market legislation or free movement of capital) to soft coordination competence in economic and fiscal policy, which remains primarily a national competence.33 Moreover, in financial terms, IMF actions are funded from national budgets, and the EU (including funding from both the EU budget and from individual Member States) is one of the World Bank’s largest donors.34

6.20

EU external competence may be granted expressly by the Treaties, in fields such as trade, development co- operation, or the conclusion of co- operation or Association agreements. It may also be implied in other competence fields, where—in the words of Article 216(1) TFEU: [It is] necessary in order to achieve, within the framework of the Union’s policies, one of the objectives referred to in the Treaties, or is provided for in a legally binding Union act or is likely to affect common rules or alter their scope.

6.21

There are examples of each of these sources of external competence in the external relations of the EMU. Most obviously, Article 219 TFEU provides an express external competence to conclude ‘agreements concerning monetary or foreign exchange regime matters’ with third countries and IFIs as well as ‘formal agreements on an exchange-rate system for the euro in relation to the currencies of third states’.35 Other than the conclusion of international agreements, external action in the field of the EMU tends to be focused on participation in the IFIs, including policy-making and potentially significant decisions on (for example) budgetary support. Article 220 TFEU provides that the Union is to ‘establish all appropriate forms of cooperation with [inter alia] the Organisation for Economic Cooperation and Development’ and ‘appropriate relations’ with other international organizations. Article 138(1) TFEU assumes that the euro area will be active within IFIs, providing that common positions of the euro area are to be established by Council decisions ‘in order to secure the euro’s place in the international monetary system’. The ECB Statute includes a specific provision on international co-operation in Article 6, which empowers the ECB to decide how the European System of Central Banks (ESCB) is to be represented in the field of international co-operation involving the tasks entrusted to the ESCB, and participates in international monetary institutions, without prejudice to Article 138 TFEU.36 33 Leino-Sandberg and Salminen, ‘A Multi-Level Playing Field’ (n 3). 34 Eugenia Baroncelli, ‘The World Bank’ in Knud Erik Jørgensen and Katie Verlin Laatikainen (eds), Routledge Handbook on the European Union and International Institutions: Performance, Policy, Power (Routledge 2013) 205 (hereafter Baroncelli, ‘The World Bank’); The World Bank Group, ‘The World Bank Group Modified Cash Basis Trust Funds: Report on Internal Control over External Financial Reporting & Combined Statements of Receipts, Disbursements and Fund Balance’ (World Bank, 30 June 2017) 12 accessed 3 February 2020 (hereafter The World Bank Group, ‘The World Bank Group Modified Cash Basis Trust Funds’). 35 See further Chapter 7. 36 In fact, some authors have promoted the membership of the ECB in the IMF—a somewhat odd suggestion considering that it is not an organization for central banks but States. See Der-Chin Horng, ‘The ECB’s Membership in the IMF: Legal Approaches to Constitutional Challenges’ (2005) 11 European Law Journal 802.

Legal Framework 143 The power to ‘adopt appropriate measures to ensure unified representation within the international financial institutions and conferences’, granted by Article 138(2) TFEU, would include the power not only to adopt internal decisions on mechanisms for external representation but also, impliedly, the power to enter into an agreement with an IFI if this is necessary to achieve the objective of unified representation. The adoption of economic policy guidelines for the Union as a whole,37 or for euro area Member States,38 creates external as well as internal obligations for the Member States;39 it is also arguable that these are ‘common rules’ in the sense of Article 216(1) TFEU, capable of founding an EU external competence (albeit not superseding that of the Member States).40 The work of IFIs also falls within the scope of the EU’s internal market rules, including capital movements and financial services legislation. Here again the competence to engage in external action and commitments may be implied: in the case of capital movements, as action necessary to achieve EU Treaty objectives; in the case of financial services based on the existence of ‘common rules’ which may be affected. Discussion and action related to the regulation and liberalization of direct investment will fall within the common commercial policy, an express external competence.41

6.22

To what extent does this external competence affect the powers of the Member States? Article 3(1) TFEU provides that for the Member States whose currency is the euro, the EU has exclusive competence in the field of monetary policy.42 Certain policy fields, such as this,43 have been deemed to require exclusive competence by their nature; they are therefore a priori exclusive competences, in the sense that exclusivity does not depend on action by the EU or the existence of EU legislation.44 Any action—internal or external—by a euro area Member State in the field of monetary policy will thus require EU authorization,45 and the Member States are required to act externally via common positions, where necessary (for example where the EU does not have full membership) representing the EU and acting on its behalf.46

6.23

For other policy fields, exclusivity is determined not a priori but case-by-case according to criteria originally developed by the Court of Justice and now contained in Article 3(2) TFEU. There are two broad rationales for this type of exclusive external competence.47 The first is based on the existence of internal legislation whether or not adopted within

6.24

37 Article 121(2) TFEU. 38 Article 136(1) TFEU. 39 See further below, Section 6.27. 40 The concept of ‘common rules’ does not require a fully common or unified policy, but is generally based on the existence of legislation. 41 Article 207 TFEU. 42 The position of non-euro area Member States is considered later in this chapter. 43 Other examples are the common commercial (trade) policy and the customs union. 44 Alan Dashwood, ‘The Relationship between the Member States and the European Union/European Community’ (2004) 41 Common Market Law Review 355, 369; Robert Schütze, ‘Dual Federalism Constitutionalised: The Emergence of Exclusive Competences in the EC legal order’ (2007) 32 European Law Review 3, 5. 45 For examples of such authorization, see Chapter 7. 46 Case C-45/07 Commission v Greece [2009] ECR I-701 (hereafter Commission v Greece). 47 See further Marise Cremona, ‘EU External Competence—Rationales for Exclusivity’ in Sacha Garben and Inge Govaere (eds), The Division of Competences between the EU and the Member States: Reflections on the Past, the Present and the Future (Hart Publishing 2017).

144 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU the framework of a common policy,48 and is founded on pre-emption, the ‘occupation of the field’ by existing Union law, which would be ‘affected’ by unilateral Member State action.49 The second, more rarely relied on in practice, is based on the identification of an objective established by the Treaties, for the attainment of which external action is required to complement or make possible the exercise of Treaty-based internal powers. This rationale is based on the principle of effet utile, the implication of powers necessary to achieve an expressly-defined objective. 6.25

Article 3(2) TFEU reflects these rationales. It establishes that: The Union shall also have exclusive competence for the conclusion of an international agreement when its conclusion is provided for in a legislative act of the Union or is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope.

6.26

This basis for exclusive competence is of a different nature to that established in Article 3(1) TFEU; it is not sectorally determined but depends on the complementarity between internal and external powers, the link between these powers and the purpose for which the Union has been given a policy competence, and the specific character of the ‘common rules’ already adopted. It will require an assessment in each case. The criteria set out in Article 3(2) TFEU have all been developed through the case law of the Court of Justice, and although they are now enshrined in the Treaties the Court still refers to its earlier case law in interpreting the Treaty provisions.50

6.27

The external relations of the EU and euro area in the field of EMU is not governed by a single policy competence, but by a number of different competences, including the a priori exclusive competence over monetary policy, but also including policy fields which are prima facie matters of shared competence. In the latter case, external action is subject to the possibility of a determination of exclusivity on the basis of Article 3(2) TFEU; among these are the liberalization of capital movements (explicit); and the regulation of financial services providers such as banks (implicit).51 However, the EU’s competence to coordinate economic policy also needs to be considered. According to Article 5(1) TFEU:

48 Case 22/70 Commission v Council (ERTA) [1971] ECR 263 (hereafter ERTA); Opinion 2/91 Convention No 170 of the International Labour Organization concerning safety in the use of chemicals at work [1993] ECR I-1061 (hereafter Opinion  2/91). 49 Pre-emption in fields of shared competence is mentioned in Article 2(2) TFEU: Member States ‘shall exercise their competence to the extent that the Union has not exercised its competence’. The precise relation between this provision and Article 3(2) TFEU is not spelled out in the Treaties, however it appears that when dealing with exclusivity in the context of external action, the Court will turn to Article 3(2) rather than Article 2(2): Case C-114/12 Commission v Council [2014] ECLI:EU:C:2014:2151 (hereafter Commission v Council). 50 For example, in Commission v Council (n 50) paras 66–67, the Court held that ‘the words used in [the] last clause [of Article 3(2) TFEU] correspond to those by which the Court, in para 22 of the judgment in ERTA (n 49), defined the nature of the international commitments which Member States cannot enter into outside the framework of the EU institutions, where common EU rules have been promulgated for the attainment of the objectives of the Treaty. Those words must therefore be interpreted in the light of the Court’s explanation with regard to them in the judgment in ERTA (n 49) and in the case-law developed as from that judgment.’ 51 The internal market is an area of shared competence: Article 4(2)(a) TFEU.

Legal Framework 145 The Member States shall coordinate their economic policies within the Union. To this end, the Council shall adopt measures, in particular broad guidelines for these policies. Specific provisions shall apply to those Member States whose currency is the euro.

This is a competence of a particular nature: it is referred to separately from both exclusive 6.28 and shared competences;52 it is neither explicitly excluded from pre-emption,53 nor explicitly listed among those competences which are designated ‘supporting, coordinating or supplementary’ while being defined in the Treaties as a coordination task.54 Under Article 2(5) TFEU, Union competence to coordinate does not entail superseding Member State competence, nor does it give powers to harmonize national legislation.55 Therefore, although pre-emption might not be excluded as a matter of principle, the Council’s power— to take measures to ensure coordination of Member States’ economic policy—would not normally result in acts with pre-emptive effect (although the latter finding can be increasingly questioned as far as the effects of the current economic governance framework are concerned56). What does the existence of an exclusive EU competence imply for euro area Member States belonging to IFIs, such as the IMF or World Bank, where the EU as such is not a member? In such cases, the Member States are under an obligation to act within the IFI on matters of exclusive EU competence in the interests of, and on behalf of, the EU. In other words, the EU will exercise its powers through its Member States. The fact that the EU is not:

6.29

a member of an international organisation in no way authorises a Member State, acting individually in the context of its participation in an international organisation, to assume obligations likely to affect Community rules promulgated for the attainment of the objectives of the Treaty. Moreover, the fact that the Community is not a member of an international organisation does not prevent its external competence from being in fact exercised, in particular through the Member States acting jointly in the Community’s interest.57

As now expressed in Article 2(1) TFEU, in matters of exclusive EU competence the Member States may only adopt legally binding acts ‘if so empowered by the Union or for the implementation of Union acts’. There is, in other words, not only an obligation to support an EU common position, but an obligation to act only through a common position. In the case here cited, which concerned the International Maritime Organization (IMO), the Court held that Greece was in breach of its obligations by submitting to the IMO a proposal, which, if 52 Article 2(3) TFEU. 53 The exercise of EU competence in research, technological development and space, and in development co- operation and humanitarian aid, ‘shall not result in Member States being prevented from exercising theirs’: Article 4(3) and (4) TFEU. 54 Article 4(1) TFEU provides that: ‘The Union shall share competence with the Member States where the Treaties confer on it a competence which does not relate to the areas referred to in Articles 3 and 6.’ Economic policy coordination is governed by Article 5. Article 3, as has been seen, refers to exclusive competences, and Article 6 refers to a number of supporting, coordinating or supplementary competences, such as health, education, and culture. 55 Although Article 2(5) TFEU seems designed to refer to the supporting, coordinating or supplementary competences listed in Article 6 TFEU, its explanation of what coordination implies would presumably also apply to the coordination of economic policies referred to in Article 5 TFEU. 56 See, eg Päivi Leino-Sandberg and Tuomas Saarenheimo, ‘Sovereignty and Subordination. On the Limits of EU Economic Policy Coordination’ (2017) 2 European Law Review 166 (hereafter Leino-Sandberg and Saarenheimo, ‘Sovereignty and Subordination’). 57 Commission v Greece (n 47) paras 30–31.

6.30

146 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU accepted, would have led to the adoption of rules which the EU was committed to enforce. Even this preliminary act was a breach of the EU’s exclusive competence. As far as the euro area Member States are concerned, Article 138(1) TFEU provides the procedure for the adoption of common positions: In order to secure the euro’s place in the international monetary system, the Council, on a proposal from the Commission, shall adopt a decision establishing common positions on matters of particular interest for economic and monetary union within the competent international financial institutions and conferences. The Council shall act after consulting the European Central Bank. 6.31

A similar power to adopt positions for the EU as a whole exists in Article 218(9) TFEU for the purposes of ‘establishing the positions to be adopted on the Union’s behalf in a body set up by an agreement, when that body is called upon to adopt acts having legal effects’. The Council adopts such positions on the proposal of the Commission or the High Representative.

6.32

The same principles apply to the conclusion of international agreements where participation is not open to the EU; the Member States may be authorized to conclude the agreement on behalf of, and in the interests of, the European Union.58 In such cases the international agreement, although not concluded by the EU, will create EU-law obligations (as well as international law obligations) for the Member State parties.59 Care is needed here, however: not all international agreements of the Member States in a field, which now falls within EU competence, can be regarded as ‘quasi-EU agreements’ creating obligations under EU law. It is not enough that all Member States are parties to the international agreement; nor that the EU has taken steps to implement the agreement in EU law; it is also necessary for there to have been ‘a full transfer of the powers previously exercised by the Member States’ to the Union.60 The matters covered by the agreement must, in other words, fall within exclusive EU competence, by virtue of either Article 3(1) or (2) TFEU.

6.33

The existence (or absence) of exclusive competence under Articles 3(1) or (2) TFEU is not however the whole story. In fields of shared competence, where the Member States continue to act externally, they are constrained in their action and policy choices by their obligations under EU law. These obligations are both specific (ie when EU law imposes a specific obligation through the Treaties or secondary legislation) and more general (ie the obligation of sincere co-operation articulated in Article 4(3) TEU). Importantly, the obligation of sincere co-operation attaches also to common positions or agreed strategies which are not formally binding in EU law but which nevertheless create legal effects for the Member States. A common position which represents ‘a concerted [Union] action at international level’ will entail ‘if not a duty of abstention on the part of the Member States, at the very least a duty of close cooperation between the latter and the [Union] institutions in order to facilitate the achievement of the [Union] tasks and to ensure the coherence and consistency of the action and its international representation’.61 58 Opinion 2/91 (n 49). 59 See Opinion 1/13 Convention on the civil aspects of international child abduction [2014] ECLI:EU:C:2014:2303. Agreements concluded by the EU are binding on the Member States as a matter of EU law, whether or not they themselves are parties: Article 216(2) TFEU. 60 Case C-308/06 Intertanko and Others v Secretary of State for Transport [2008] ECR I-4057, para 49. 61 Case C-246/07 Commission v Sweden [2010] ECR I-3317, para 75.

Legal Framework 147 The reference here to ‘international representation’ is significant. In the same case, which involved joint EU and Member State participation in a multilateral agreement, the Court refers to ‘the requirement of unity in the international representation’ of the Union, which underpins the obligation to co-operate. By acting unilaterally the Member State ‘dissociated itself from a concerted common strategy within the Council’ and ‘compromise[d]‌the principle of unity in the international representation of the Union and its Member States’.62 These are obligations which apply irrespective of whether competence is exclusive or shared.63

6.34

A final consideration regarding competence relates to the nature of IFIs as financial institutions in which States act as shareholders and sources of funding; as a result a Member State’s IFI obligations impinge on its budgetary powers. Opinion 1/78 addressed the division of competence in concluding an agreement where its execution involved the finances of the Member States: the Court held that such undertakings could not be entered into without their participation.64 The Commission had argued that the ‘question of competence precedes that of financing and that the question of Community powers cannot therefore be made dependent on the choice of financial arrangements’. The Court rejected this argument on the ground that the financing of the arrangement in question constituted an essential element of the agreement; therefore:

6.35

If the financing of the agreement is a matter for the Community the necessary decisions will be taken according to the appropriate Community procedures. If on the other hand the financing is to be by the Member States that will imply the participation of those States in the decision-making machinery or, at least, their agreement with regard to the arrangements for financing envisaged and consequently their participation in the agreement together with the Community. The exclusive competence of the Community could not be envisaged in such a case.65

The relevance of this finding in the IFI context is clear. Insofar as the financial institutions are funded by the Member States, the Member States should not be excluded from the relevant decision-making procedures.66

6.36

These then are the general principles, which govern the nature and exercise of competence. 6.37 In the Commission proposal for a Council decision on unified representation in the IMF, the competence dimension is explained only in broad terms, with reference to the increased political relevance of the euro area and the combined effect of the European Semester, ‘six- pack’ and ‘two-pack’ legislation as well as the Fiscal Compact,67 which ‘have integrated, 62 Ibid, paras 91 and 104. 63 Ibid, para 71. 64 Opinion 1/78 International Agreement on Natural Rubber [1979] ECR 2871. 65 Ibid, para 60. 66 A study on the ‘External representation of the Euro Area’ commissioned in 2012 by the European Parliament proposes that the ESM could be used in the longer run as the institution channelling the fiscal aspects of euro states’ relations with the IMF, for example, by merging their quotas in the ESM and through representation at the IMF by its Managing Director. Alessandro Giovannini and others, ‘External Representation of the Euro Area’ (IP/A/ECON/FWC/2010_19, May 2012) 30 accessed 3 February 2020 (hereafter Giovannini and others, ‘External Representation of the Euro Area’). 67 Treaty on the Stability, Coordination and Governance in the Economic and Monetary Union of 2 March 2012 (not published in the Official Journal).

148 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU strengthened and broadened EU-level surveillance of Member State policies in essential areas of macroeconomic and budgetary relevance’. The draft Council decision points out that the IMF has: played a key role, together with the Commission and the ECB, in shaping the programmes aimed at rescuing Member States hit by the sovereign debt crises. In addition, the strengthened governance framework for economic policy coordination and strong convergence of financial sector regulation and supervision in the context of the Banking Union mean that, in the future, the IMF will need to go well beyond a national perspective in its assessment of supervision and crisis management in the euro area.68 6.38

The Commission also refers to the establishment of the European Stability Mechanism (ESM), and the decision to put in place a Banking Union with centralized supervision and resolution for banks in the euro area. In the Commission’s view, external representation has not kept up with those developments, which limits the effectiveness of the euro area voice in IFIs.69 In the argumentation of the ECB, which concurs with the Commission analysis, these developments have also been seen as ‘transfer of competences’, which must have implications for representation in international fora.70 The Court’s case law in Opinion 2/91 on the management of shared external competences has been invoked as a further justification. In this Opinion the Court established that: when it appears that the subject-matter of an agreement or contract falls in part within the competence of the Community and in part within that of the Member States, it is important to ensure that there is a close association between the institutions of the Community and the Member States both in the process of negotiation and conclusion and in the fulfilment of the obligations entered into. This duty of cooperation . . . results from the requirement of unity in the international representation of the Community.71

6.39

This jurisprudence—which largely relates to mixed agreements—indicates that there is a duty for the Member States and EU institutions to orchestrate their performance on the international scene.72

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The explanation of Union competence and its effects on IFI participation in the Commission and ECB argumentation is however somewhat underdeveloped; in what follows we attempt to give a more detailed picture of the legal position. First, despite the suggestion in the Commission’s argumentation, a full sectoral transfer of competence can only take place through a Treaty amendment; apart from the limited amendment to Article 136(3) TFEU confirming Member State competence to conclude the ESM Agreement, no Treaty amendments have taken place widening EU competence in the policy areas where the IFIs are active. Instead, since the crisis the EU has used its shared competences, in particular in the area of the internal market, which—as we have seen—can give rise to exclusive external 68 European Commission, ‘Proposal for a Council Decision laying down measures in view of progressively establishing unified representation of the euro area in the International Monetary Fund’, COM (2015) 603 final. 69 Ibid. 70 See, eg ECB, ‘The external representation of the EU and EMU’ (Monthly Bulletin, May 2011). 71 See Opinion 2/91 (n 49) para 36. 72 See text to n 62. See also Christophe Hillion, ‘Mixity and Coherence in EU External Relations: The Significance of the Duty of Cooperation’ (2009) CLEER Working Paper 2009/2 (hereafter Hillion, ‘Mixity and Coherence in EU External Relations’).

Legal Framework 149 competence on the basis of Article 3(2) TFEU: the new instruments relating to financial supervision and the Banking Union may give rise to exclusive external competence on the basis of creating internal ‘common rules’ which may be affected by external action, thereby also affecting the division of responsibilities in IFIs such as the IMF. Second, the case law invoked as a justification for the new arrangements largely relates to the determination of exclusive EU external competence and to the operation of mixed agreements where competence to conclude the agreement is shared by the EU and the Member States. Based on this case law, the starting point would be that in matters falling under EU competence—exclusive or shared—common positions can and should be formed following the EU decision-making structures based on Article 218(9) TFEU, or in the case of IFIs and the euro area, Article 138(2) TFEU. This conclusion is supported by the Court’s judgment on the application of Article 218(9) TFEU in the OIV case. The Court confirmed that, insofar as an area of law falls within the competence of the European Union, Article 218(9) TFEU was indeed the correct legal basis for adopting an EU position; its application does not depend on the EU being a party to the relevant agreement (or a member of the relevant organization).73 Even though the OIV case concerns the application of Article 218(9) TFEU rather than Article 138 TFEU, it is reasonable to assume that Member States are also required to act via Article 138 TFEU when its conditions are fulfilled.

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When addressing the EU’s external relations in the context of EMU, a range of bases for and types of competence are concerned, and the precise obligations on the Member States depend not only on the abstract categorization of competence in the Treaties but also on the ways in which the EU has exercised its powers internally and the implications of that action for external representation and action. For this reason, the precise position can only be decided case-by-case, and in the following paragraphs an initial assessment as regards the most important IFIs for the Union is offered.

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B. EU external competence and IFIs 1. The International Monetary Fund The IMF exists to ensure the stability of the international monetary system. Its purposes are enumerated in Article 1 of the IMF Articles of Agreement (AoA) and include promoting international monetary co-operation, facilitating the expansion and growth of international trade, promoting exchange stability and making resources available to members under adequate safeguards.74 The IMF pursues its goal of stability through four primary mechanisms: surveillance, financial assistance, technical assistance and Special Drawing Rights (SDRs). The potential impact of these powers on affected States means that the scope of EU competence is a significant issue for Member States. Membership in the IMF is based on the concept of a quota subscription, which is meant to reflect an individual country’s position within the world economy and also settles the power 73 Case C-399/12 Germany v Council [2014] ECLI:EU:C:2014:2258 (hereafter Germany v Council). 74 The expansive wording of these purposes has enabled the IMF to weather challenges posed by ‘diverse economic circumstances’, see Rosa M Lastra, ‘The International Monetary Fund in Historical Perspective’ (2000) 3 Journal of International Economic Law 507, 512.

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150 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU (voting rights), financial liability and ability to borrow of those countries within the IMF. All Member States are members of the IMF; the EU is not a member since IMF membership is limited to States.75 There has been limited discussion about the need to amend the AoA to enable EU membership. The ECB opinion concerning the Commission proposal on representation in the IMF indicates its support for a ‘fully unified representation of the euro area in the IMF’, but points out that this would ultimately require full EU membership, which is not currently on the Commission agenda.76 6.45

Substantial governance reforms were instigated in the IMF in 2010. In the background was the acknowledgement that the economically powerful countries in 1944 when the IMF was created, notably the USA and various European countries, had a distinct overrepresentation in the IMF as compared to modern economic powers, for example China and Russia, or developing economies. The reforms introduced in 2010 were primarily aimed at curing these disproportionate representation issues: to diminish the power of those member countries seen as overrepresented,77 and to increase the power of the underrepresented developing countries.78 Following a lengthy period of inactivity,79 the rollout of the 2010 reforms officially began in January 2016.80

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Article IV AoA, Section 1, establishes the General Obligations of Members: each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall: (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances; (ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions; (iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and (iv) follow exchange policies compatible with the undertakings under this Section.

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As discussed above in Section III.A, these provisions fall partly under Member State competence, partly under shared competence and partly under Union exclusive competence 75 Article II, Section 2 of the AoA. 76 ECB Opinion of 6 April 2016 on a proposal for a Council Decision laying down measures in view of progressively establishing unified representation of the euro area in the International Monetary Fund (CON/2016/22) [2016] OJ C216/1. For the Commission proposal, see COM (2015) 603 final. The issue of Member State funding for the IMF would also need to be addressed: see text to n 67. 77 Lorenzo Bini Smaghi, ‘A Single EU Seat in the IMF’ (2004) 42 Journal of Common Market Studies 229, 230 (hereafter Smaghi, ‘A Single EU Seat in the IMF’) regarding comments about Europe being overrepresented. 78 For a full list of voting shares post-2010 reform see IMF, ‘Quota and voting shares before and after implementation of reforms agreed in 2008 and 2010 (In percentage shares of total IMF quota)’ accessed 3 February  2020. 79 For example, the US Congress did not approve the reforms until December 2015. See IMF, ‘IMF Managing Director Christine Lagarde welcomes US congressional approval of the 2010 quota and governance reforms’ (Press Release No 15/573, 18 December 2015) accessed 3 February 2020. 80 See IMF, ‘Historic quota and governance reforms become effective’ (Press Release No 16/25, 27 January 2016) accessed 3 February  2020.

Legal Framework 151 in respect of monetary policy for euro area states. But even in areas falling under shared competence, Article 3(2) TFEU quoted above indicates that the EU might have exclusive external competence in questions that affect ‘common rules or alter their scope’. This finding is also relevant for Article VIII AoA, which includes further general obligations on Members, including obligations relating to restrictions on capital movements, which falls under shared EU competence.81 An important function of the IMF is to engage in the surveillance of financial systems. This surveillance takes two different forms: overseeing the international monetary system (multilateral surveillance), and monitoring the economic and financial policies of its member countries (bilateral surveillance).82 Multilateral surveillance takes the form of monitoring international and regional economies as well as analysing the impact of individual member country financial policies on the greater global economy. Bilateral surveillance involves IMF economists visiting member countries, usually annually, to discuss financial issues with that country’s government and central bank in what is known as an Article IV consultation; IMF staff then prepares a report, which forms the basis for discussion by the Executive Board. Article IV is formulated as a ‘best endeavours’ clause, which primarily commits the contracting parties to listen and make their best efforts to follow the advice of the IMF, which are in effect recommendations addressed to the member countries. There is no formal follow-up on the reports.

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As far as the EU states are concerned, the IMF also holds consultations annually for the euro area as a whole, whereby it exchanges views with the ECB and the Commission relating to monetary and exchange rate policies and regional fiscal policies, financial sector supervision and stability, trade and cross-border capital flows, as well as structural policies. A separate report concerning the entire euro area is ultimately produced.83 Since 2013, the Financial Sector Assessment Program (FSAP) analysis, which provides a comprehensive assessment of a country’s financial sector, has also been carried out on an EU wide basis.84

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Currently EU positions with respect to the euro area reports are coordinated (see below, Section IV), while the positions with respect to individual EU Member State Article IV consultations are not. This builds on the presumption that the IMF, when preparing the reports, takes into account the relevant competence division. However, for example, the recent IMF Staff Concluding Statement of the 2016 Article IV Mission concerning Finland takes up several issues that are relevant for EU legislation, including a need to strengthen banking supervision and expand the macroprudential toolkit as well as the compatibility of the current state of affairs with the EU Stability and Growth Pact (SGP), including progress on structural reforms and the need to make structural fiscal adjustments.85 Initiating

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81 Opinion 2/15 Free Trade Agreement with Singapore [2017] ECLI:EU:C:2017:376, paras 227–42. 82 The IMF is tasked with surveillance responsibilities and member countries with compliance responsibilities pursuant to Article IV, Section 3 AoA. 83 For the most recent one concerning the euro area, see IMF, ‘2016 Article IV consultation—Press Release; Staff report; and statement by the Executive Director for the euro area’ (IMF Country Report No 16/219, July 2016) accessed 3 February  2020. 84 IMF, ‘IMF Assessment of financial stability in Europe: Much achieved to address the crisis but vulnerabilities remain and intensified efforts needed’ (Press Release No 13/79, 15 March 2013) accessed 3 February 2020. 85 IMF, ‘Finland: Staff Concluding Statement of the 2016 Article IV Mission’ (4 October 2016) accessed 3 February 2020.

152 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU an amendment of EU legislation is naturally an EU Commission prerogative, as is monitoring the implementation of the Stability and Growth Pact and taking measures to ensure Member State compliance. From a competence point-of-view, the extent to which a provision ultimately creates directly binding outcomes—a matter that is always relative in international law—might not be decisive. In the recent OIV case, for example, the CJEU found that recommendations of an international organization, while not directly binding, were still ‘capable of influencing the content of the legislation adopted by the EU legislature’ and that a Union position, adopted according to EU Treaty procedures, was required.86 6.51

Financial assistance is arguably the most prominent and most politically charged of the IMF’s functions, which was clearly visible during the financial crisis when several euro area states benefitted from its funding. The IMF can provide loans to member countries suffering real or potential balance of payment problems. IMF loans are conditional upon the effective implementation of economic policies and measures agreed with the country involving a series of measures designed to correct the relevant member country’s balance-of-payments imbalances. The IMF also provides technical assistance and training to member countries with respect to the development of their institutions, laws and policies to enable greater economic stability and growth. As far as non-euro area states are concerned, obligations relating to monetary policy tend to be a part of the programme, including provisions on a currency regime, foreign exchange reserves and possible limitations of capital movements. In the case of euro area states however, such requirements have not in practice been set for individual Member States, on the understanding that such measures would fall under EU competence.87 The IMF has traditionally not had a specific policy on currency unions88 but has operated on a case-by-case basis. The IMF’s Independent Evaluation Office has recently taken up the issue and urged the Fund to define a clear framework for designing Fund- supported programmes and conditionality in currency union members. Discussions on the matter are pending, with a focus on the extent to which the Fund can expect conditionality- related measures to be adopted at the level of the currency union.89 In the case of the EU, the issue is complicated by the fact that various policies discussed in this context are not in fact a part of the currency union, but are part of the banking union or linked to the Commission’s role as state aid authority, and so impact both euro and non-euro area Member States.

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The IMF programmes have generally also included provisions on measures in the financial sector, the relevant legislation and supervision, all of which are increasingly governed by EU legislation and even—as far as the euro area states are concerned—by joint supervision at EU level. The relevant question from a competence perspective is not so much the existence of EU competence in these fields, which is clear, but the extent to which the EU legislation will give rise to exclusive external competence under Article 3(2) TFEU. Although minimum harmonization at EU level may not necessarily give rise to exclusive 86 Germany v Council (n 74) para 63. 87 This conclusion is founded on data that can be found in the IMF Monitoring of Fund Arrangements (MONA) Database accessed 3 February 2020. Since 2000 there have been altogether 170 programs funded by the IMF. 88 Such as, in addition to the EMU, the Central African Economic and Monetary Union CEMAC, the West African Economic and Monetary Union WAEMU, and the Eastern Caribbean Currency Union ECCU. 89 On this, see eg Ling Hui Tan, ‘IMF Engagement with the Euro Area versus Other Currency Unions’ (2016) IEO Background Paper BP/16-02/09; IMF Executive Board, ‘Summary Report of IMF Executive Board Meeting’ (19 July 2016).

Legal Framework 153 external competence,90 EU legislation on financial services is increasingly moving beyond minimum harmonization and it seems likely that the Article 3(2) TFEU conditions (specifically the effect on common rules) are fulfilled. This analysis indicates that if the IMF Articles of Agreement were to be concluded now, enabling participation of the EU as a contracting party, the agreement would be concluded as a mixed agreement that would also take account of funding arrangements. It contains significant provisions that fall under EU competence and which are liable to affect common rules,91 or at least are ‘capable of decisively influencing the content of the legislation adopted by the EU legislature’.92 Since the IMF AoA predates the existence of the EU, the exact competence division has never been opened to a thorough discussion. However, even if the AoA had been formally concluded as a mixed agreement, it is unlikely that it would have drawn any systematic distinction between exclusive or non-exclusive EU competence.93 International agreements seldom engage in such discussion, especially since the exact division of competence changes with developments in EU legislation.94 As far as the implementation of the IMF AoA is concerned, the distribution of competence is currently generally observed, based on a gentleman’s agreement within the IMF that matters falling under EU competence are to be discussed separately in the reports prepared for the euro area and for which coordination mechanisms exist (see below, Section IV). However, as the Finnish example shows, the division between the two is, in practice, difficult to draw. There might also be some room for a debate on whether the IMF reports on Member States in fact have the capacity to ‘decisively influence the content of the legislation adopted by the EU legislature’, and thus to require binding position-building in EU bodies. A positive answer to this question would have direct implications for the Member States’ duties of coordination: this point will be returned to in light of the Commission’s proposals for unified representation of the euro area in the IMF in Section IV below.

2. The World Bank Headquartered in Washington DC, the World Bank is an international financial institution, which actually consists of two separate organizations: The International Bank for Reconstruction and Development (IBRD), and The International Development Association (IDA).95 As noted above, the EU together with its Member States form the largest donor to World Bank activities.96 That the relationship is to be one of cooperation rather than full membership is established by the IBRD and IDA Articles of Agreement. While the IDA Articles of Agreement are concluded between governments, they provide that the 90 Opinion 2/91 (n 49) paras 18–21. 91 Article 3(2) TFEU. 92 Germany v Council (n 74) para 63. 93 On this, see Heliskoski, ‘Internal Struggle for International Presence’ (n 22) 150. 94 Declarations of competence are sometimes attached to EU conclusion of an agreement, but these typically consist of general statements and lists of current EU legislation rather than defining competence clause by clause; they also fall rapidly out of date. See further Andrés Delgado Casteleiro, ‘EU Declarations of Competence to Multilateral Agreements: A Useful Reference Base?’ (2012) 17 European Foreign Affairs Review 491. 95 The broader World Bank Group consists of IBRD and IDA, as well as the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). Both IBRD and IDA are owned by the governments of the Bank’s Member Countries as shareholders, however each consists of different numbers of Member Countries: 189 Member Countries in the case of the IBRD and 173 in the case of the IDA. 96 The World Bank Group, ‘The World Bank Group Modified Cash Basis Trust Funds’ (n 35) 12.

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154 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU Association is to co-operate with public international organizations that ‘provide financial and technical assistance to the less-developed areas of the world’.97 IBRD Membership is limited to selected IMF Members, but it operates ‘with any general international organization and with public international organizations having specialized responsibilities in related fields.98 Consequently, the EU is not itself a member of the Bank, but all Member States are members of the IBRD99 and collectively hold approximately one quarter of all votes in the institution,100 substantially more than the just over 16 per cent held by the USA, the largest shareholder at the IBRD. The World Bank’s goal is to end extreme poverty and foster income growth in the lower socio-economic area.101 The World Bank is inherently connected to the IMF, both existing within the UN system framework and created at the Bretton Woods conference of 1944, and membership of the IBRD is dependent upon a country’s membership of the IMF;102 however whereas the IMF’s focus is on macroeconomic issues, the focus of the World Bank is on long-term economic development and poverty reduction in general. There is hence also a clear link to EU development policy objectives and funding. This focus is evident in the specific goals of the IBRD: (i) To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peacetime needs and the encouragement of the development of productive facilities and resources in less developed countries. (ii) To promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources. (iii) To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labour in their territories. (iv) To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, will be dealt with first. (v) To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and, in the immediate postwar years, to assist in bringing about a smooth transition from a wartime to a peacetime economy. The Bank shall be guided in all its decisions by the purposes set forth above.103

97

Article V, Section IV. Article V, Section 8 IBRD Articles of Agreement. 99 Interestingly, whereas most Member States are also members of the IDA, Bulgaria and Malta are not. 100 Although note that this number will decrease with the UK’s exit from the Union. 101 See Articles 1 of both the IBRD and IDA Articles of Agreement. 102 Article II IBRD Articles of Agreement. 103 Article I IBRD Articles of Agreement. 98

Legal Framework 155 In pursuing these goals, the day-to-day work of the IBRD is to provide ‘loans, guarantees, 6.55 risk management products, and advisory services to middle-income and creditworthy low- income countries’ as well as to coordinate ‘responses to regional and global challenges’. The work of the IBRD is therefore highly country, and also project, specific, and spans all potential sectors.104 Its relations with the EU include projects in individual EU Member States,105 as well as partnerships on extra-EU activities, and so internal as well as external EU competences are relevant. As far as external activities are concerned, the World Bank’s activities are linked to the EU’s development cooperation (shared, non-pre-emptive) competence.106 In practice, grants from the EU budget, the European Development Fund (EDF) and Member States are used to leverage loans from financial institutions and regional development banks, which requires joint programming and coordination between funders, and joint efforts also in combating corruption and fraud.107 Since 2001, the European Union (previously the European Community) has had a Framework Agreement with the World Bank,108 which structures their cooperative relationship and in particular the establishment of co-financed funds. The most recent agreement was signed by the European Commission (for the EU) in 2016.109 Cooperation with the World Bank involves EU funds, and for this reason its absence from among the shareholders—while being stipulated by the relevant constitutional documents of these institutions—is perhaps more noteworthy.

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3. The G7/G20, OECD, and the Financial Stability Board Created by the G7 Finance Minister’s meeting in 1999 in the aftermath of the Asian Financial 6.57 Crisis, the G20 began its life as a forum for the finance ministers and central bankers of twenty of the most economically significant countries in the world to coordinate global economic policies.110 In 2008 this forum was elevated to include the level of Heads of State or Government of the member countries in an effort to deal with the globally devastating financial crisis.111 The G20 was subsequently proclaimed by its members in 2009 as the ‘premier forum for our international economic cooperation’,112 effectively taking the place of the G7/ G8.113 The basic function of the G20 is to act as a forum for international cooperation on 104 World Bank, ‘International Bank for Reconstruction and Development’ (The World Bank, 2007) accessed 3 February  2020. 105 Poland, Romania, Bulgaria, and Croatia have Country Partnership Frameworks with the World Bank (including lending and guarantees). Other EU Member States use the World Bank’s technical advisory services. 106 Articles 4(4) and 212 TFEU. 107 See, eg the Cooperation Agreement between the European Anti-Fraud Office and the World Bank’s Integrity Vice-Presidency of 8 November 2011. 108 For the 2001 agreement, see accessed 3 February  2020. 109 Commission, ‘European Commission and World Bank sign agreement to boost development cooperation’ (Commission Press Release, 15 April 2016) accessed 3 February 2020. 110 Fabian Amtenbrink and others, ‘The European Union’s Role in International Economic Fora—Paper 1: The G20’ (IP/A/ECON/2014-15, April 2015) 12 accessed 3 February 2020 (hereafter Amtenbrink and others, ‘Paper 1: The G20’). 111 Ibid. 112 G20, ‘G20 Leaders Statement: The Pittsburgh Summit’ (Pittsburgh, 24–25 September 2009) para 19 accessed 3 February 2020. 113 Amtenbrink and others, ‘Paper 1: The G20’ (n 111) 12.

156 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU financial and economic issues, with the aim of strengthening the global financial system and improving the regulation and supervision of financial institutions. However, G20 meetings may well range more widely over issues of global concern. The result of the G20 meetings— the most significant of which is the leaders’ Summit, but which also include specialized meetings on G20 issues prior to the Summit—is generally the publishing of a ‘communiqué’, a ‘declaration’ or a ‘statement’ as well as other strategic documents.114 6.58

The G20 is not, in legal terms, an international organization: it does not have legal personality, stable procedural rules or any permanent body or secretariat to support its actions. Rather, it is an informal gathering of world leaders—in the nature of a club or network— who make decisions through mutual agreement, ‘using diplomatic means in a culture of reciprocity and trust’.115 All decisions made at G20 meetings must subsequently be put into action through formal institutions, such as national parliaments or international economic institutions, including the IMF and the FSB. The members of the Group include, in addition to the EU Member States France, Germany, Italy, the UK, and the EU itself, Australia, Canada, Saudi Arabia, the US, India, Russia, South Africa, Turkey, Argentina, Brazil, Mexico, China, Indonesia, Japan, and South Korea; additionally, Spain is a ‘permanent guest’ of the G20. As well as the official members of the G20 forum, five additional guests— either countries or regional organizations, such as ASEAN—are generally invited each year, the choice of which is at the discretion of the presiding country, although two of the invitees necessarily have to come from Africa. Further, regular attendees at G20 meetings also include leaders from important international organizations, such as the IMF, the World Bank, the FSB, the World Trade Organization (WTO), and the International Labour Organization (ILO).116 In effect, the G20 currently has thirty-two or thirty-three ‘members’.117

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The OECD has a broad mandate to promote policies that will improve the economic and social well-being of people by providing a forum for discussion. It provides independent and evidence-based expertise, analysis and sets international standards. The current status of the EU at the OECD is one of ‘quasi-membership’: it has a right to participate and attend meetings, but not to vote. However, the EU enjoys effectively full membership in certain committees, because the committees have a relatively wide discretion in deciding their own compositions.118 Over 60 per cent of the OECD’s membership consists of the twenty-two participating EU Member States.119 The EU is represented by the Commission, while the ECB and the EEAS have no role in the OECD framework.120 OECD activities effectively 114 Ibid, 29. 115 Jan Wouters and Thomas Ramopoulos, ‘The G20 and Global Economic Governance: Lessons from Multi- Level European Governance?’ (2012) 15 Journal of International Economic Law 751, 764. 116 Amtenbrink and others, ‘Paper 1: The G20’ (n 111) 18. 117 Ibid. 118 Joren Verschaeve and Tamara Takács, ‘The EU’s International Identity: The Curious Case of the OECD’ in Henri de Waele and Jan-Jap Kuipers (eds), The European Union’s Emerging International Identity: Views from the Global Arena (Martinus Nijhoff Publishers 2013) 195 (hereafter Verschaeve and Takács, ‘The Curious Case of the OECD’). 119 The following EU Member States are members of the organization: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Luxembourg, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, and the UK (for now). 120 Eli Hadzhieva, ‘The European Union’s Role in International Economic Fora—Paper 3: The OECD’ (IP/A/ ECON/2015-14, June 2015) 35 accessed 13 May 2019 (hereafter Hadzhieva, ‘Paper 3: The OECD’).

Legal Framework 157 span the whole breadth of Union competences but also stretch to Member State competence.121 However, many OECD actions are merely of an information-sharing nature, rather than position-forming.122 For this reason, competence considerations might seem less relevant. The Financial Stability Board (FSB) is an international body concerned with the stability of the global financial system, composed of ‘jurisdictions’ of countries—most notably all countries of the G20—represented through their central banks or ministries of finance international financial institutions, and various other bodies, including international standard setting bodies (SSBs), such as the Basel Committee on Banking Supervision.123 The EU is a member jurisdiction and is represented by the Commission and the ECB. The FSB came into being in April 2009, taking the place of its predecessor institution the Financial Stability Forum, and is the first such creation of the renewed G20, built out of the ashes of the Global Financial Crisis.124 The FSB has subsequently come to be considered the ‘fourth pillar’ of global economic governance, together with the IMF, the World Bank, and the WTO.125

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Unlike the other three pillars of international economic governance the FSB is an informal association whose charter remains an international non-binding agreement between its members.126 Indeed, Article 23 of the Charter of the FSB provides that, ‘[t]‌his charter is not intended to create any legal rights or obligations’. The FSB is instead a registered association under Swiss Law.127 This is in contrast to the other three pillars whose existence derives from international treaties and who have been granted international legal personality.128

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With respect to the actual function of the FSB, its overarching objective is, pursuant to Article 1 of the Charter of the FSB:

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[T]‌o coordinate at the international level the work of national financial authorities and international standard setting bodies (SSBs) in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. In collaboration with the international financial institutions, the FSB will address vulnerabilities affecting financial systems in the interest of global financial stability.

121 Verschaeve and Takács, ‘The Curious Case of the OECD’ (n 119) 195. 122 Ibid, 196. 123 For a full list of member countries, financial institutions and other bodies, see FSB, ‘FSB Members’ (Financial Stability Board, 2017) accessed 3 February 2020. The eligibility criteria for members can be found in the Charter of the FSB, Article 5, which provides that eligibility stems from authorities from jurisdictions responsible for maintaining financial stability, IFIs and international standard setting, regulatory, supervisory and central bank bodies. 124 Eric Helleiner, ‘What Role for the New Financial Stability Board? The Politics of International Standards after the Crisis’ (2010) 1 Global Policy 282, 282. 125 See eg Jan Wouters and Jed Odermatt, ‘Comparing the “Four Pillars” of Global Economic Governance: A Critical Analysis of the Institutional Design of the FSB, IMF, World Bank, and WTO’ (2014) 17 Journal of International Economic Law 49 (hereafter Wouters and Odermatt, ‘Comparing the “Four Pillars” ’). 126 Ibid, 55. 127 See the Articles of Association of the FSB of 28 January 2013 accessed 3 February 2020. 128 Wouters and Odermatt, ‘Comparing the “Four Pillars” ’ (n 126) 55.

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To achieve this objective, the FSB is granted, as part of its mandate, the ability to: (a) assess vulnerabilities affecting the global financial system and identify and review on a timely and ongoing basis within a macroprudential perspective, the regulatory, supervisory and related actions needed to address them, and their outcomes; (b) promote coordination and information exchange among authorities responsible for financial stability; (c) monitor and advise on market developments and their implications for regulatory policy; (d) advise on and monitor best practice in meeting regulatory standards; (e) undertake joint strategic reviews of and coordinate the policy development work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities and addressing gaps; (f) set guidelines for and support the establishment of supervisory colleges; (g) support contingency planning for cross-border crisis management, particularly with respect to systemically important firms; (h) collaborate with the International Monetary Fund (IMF) to conduct Early Warning Exercises; (i) promote member jurisdictions’ implementation of agreed commitments, standards and policy recommendations through monitoring of implementation, peer review and disclosure; and (j) undertake any other tasks agreed by its Members in the course of its activities and within the framework of this Charter.129

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Pursuant to their overarching objective and mandate, the FSB conducts its coordination of financial sector policies between its members in a three-stage process that first identifies systemic risk in the financial sector; second, frames the financial sector policy actions to address these risks; and finally oversees implementation of those responses. In addition to these activities that (largely) concern the FSB member countries, the FSB also engages in ‘outreach activities’ with respect to non-member countries.

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The work of the G20, OECD, and the FSB falls within the fields and categories of EU competence already discussed in relation to the IMF, in particular economic governance and financial regulation. Aspects of their work are undoubtedly covered by exclusive EU competence, but equally aspects are clearly still dominated by the Member States, albeit acting within a framework of coordination. Competence is, however, seldom discussed in this context, since their work does not formally or directly result in binding standards. However, many of the recommendations of the FSB, for example, are turned into EU legislation without substantive modification in the EU legislative procedure, as a result of being based on previous agreement within the FSB.130 The work of these bodies is thus not entirely competence neutral: it can prove highly influential for future EU legislation.

129 Article 2(1) Charter of the FSB. 130 See eg Commission, ‘Regulation on transparency of securities financing transactions and of reuse: Frequently Asked Questions’ (Brussels, 29 October 2015) accessed 3 February 2020.

Legal Framework 159

C. Representation As the preceding sections have demonstrated, the activity of IFIs and in particular the IMF, the World Bank, the G20, and FSB involve a mix of EU and Member State competence. This in itself gives rise to obligations of cooperation, an issue addressed in the next section. Here, the question of the representation of the EU within the IFIs is considered, which itself raises a number of issues. First, issues of external fragmentation: whether the organization permits membership by the EU, how the EU is represented where this is not the case, and the consequences of simultaneous participation of (some of) the Member States. And second, issues of internal fragmentation: the internal EU provisions on external representation and the different representation roles of specific actors, including the Commission, the Presidency of the European Council, the President of the Eurogroup, the ECB, and the High Representative; as well as the difficulty of combining external representation of the euro area with that of the EU. In practice, as shall be seen, the external and internal dimensions are closely interconnected, as attempts are made to counter the EU’s external fragmentation by ensuring greater internal integration. Somewhat paradoxically, these attempts, by focussing to a great extent on the euro area, have the effect of accentuating the divide between the euro area and non-euro Member States—externally as well as internally.

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Within the IMF, EU representation is currently fragmented in eight different constituencies. Each constituency is headed by an Executive Director who—even though an official of the IMF—acts as the voice of their constituency, wielding the combined voting power of all of the constituency’s member countries.131 The IMF Articles of Agreement include no provision for replacing an Executive Director during his or her two years in office, and Directors continue in office until their successor is elected. This means that while the Executive Director is elected by a constituency, the latter has limited means to control the Executive Director if s/he fails to follow instructions. The Executive Board is also responsible for nominating a Managing Director who acts as the head of IMF staff as well as chairing meetings of the Executive Board.

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Currently two of the euro area Member States—France and Germany—elect their own 6.68 Executive Directors,132 while the other euro area Member States are spread over six multi- country constituencies, with some being represented through constituencies with non-EU Executive Directors. In addition, the ECB has observer status at the twenty-four-member Executive Board,133 where it is permitted to speak on matters pertaining to the ECB’s mandate. Under the 2010 governance reforms, advanced European nations committed to giving up two of their IMF Executive Director seats to transitioning, developing and emerging market member countries. The political agreement on the issue was reached outside the IMF governing bodies in a G20 meeting but the question of which EU Member States would give up their Executive Director chairs was not addressed.134 In 2012, Belgium agreed to 131 IMF Finance Department, Financial Organization and Operations of the IMF (5th edn, IMF Pamphlet Series No 45 1998) 4. 132 As does one non-euro area Member State, the UK. 133 See Decision No 11875-(99/1), 21 December 1998, substituted by Decision No 12925-(03/1), 27 December 2002, as amended by Decisions No 13414-(05/01), 23 December 2004, 13612-(05/108), 22 December 2005, and 14517-(10/1), 5 January 2010. See also Wouters and Van Kerckhoven, ‘The International Monetary Fund’ (n 10) 224. 134 See Wouters and Van Kerckhoven, ‘The International Monetary Fund’ (n 10) 227.

160 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU move into the Netherlands’ constituency group and share its Executive Director seat.135 The seat formerly controlled by Belgium is currently controlled by Turkey. Switzerland agreed to share its seat with Poland, and the Nordic countries agreed to include the Baltic countries in their seat rotation. The fact that much of the change has been achieved by shifting representation to EU countries that do not (or did not, at the time of the agreement) fall into the category of ‘advanced’ has been criticized by some: The modest reshuffling announced so far indicates that this reduction will be effected mostly by cosmetic changes, namely by upgrading ‘emerging markets’ of the European Union. This of course fails to correct the overrepresentation of Europe in the board, sending yet another negative signal to the outside world.136

It is evident that if the actual size of the Executive Board was indeed diminished to twenty seats, this would necessitate a serious round of musical chairs. 6.69

In Europe, the problems relating to mixed constituencies have been seen as one of the key factors for Europe ‘punching below its weight’ in the IMF;137 a single EU constituency, it is believed, would enable EU Member States to have a stronger impact on IMF policies.138 Through the reforms the previous ceiling for constituency size was abolished,139 which in principle would make it possible for all euro area (or all EU) Member States to form one constituency.

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In 2015, the Commission adopted a proposal for a Council decision laying down measures with a view to progressively establishing unified representation of the euro area in the IMF.140 In the draft Council decision, the Commission argues that a more coherent representation is not only a matter of maximizing EU influence; instead, it is a win-win scenario that also benefits third countries, ‘in particular by a stronger and more consistent euro area contribution to global economic and financial stability’.141 In the short-++term, attempts should be made to secure observer status for the euro area in the Executive Board, and representation of the euro area through the appointment of a euro area Member State Executive Director. Attempts should also be made to secure a right to address the International Monetary and Financial Committee for the President of the Eurogroup, the Commission and the ECB ‘as appropriate’. All questions relating to constituency arrangements are to be ‘fully coordinated and agreed in advance’, and ‘consistent with the objective of increasing coherence’. Finally, euro area Member States are to ‘closely coordinate and agree on common positions on all matters of euro area relevance for the IMF Executive Board and Board of Governors meetings and shall use common statements on those issues’. In the long-term (by 2025), 135 See DNBulletin, ‘IMF Governance reform: Open economies have a place at the table’ (De Nederlandsche Bank, 17 October 2012) accessed 3 February 2020. This group now contains seven EU Member States. 136 International Monetary and Financial Committee of the IMF, ‘Statement by Guido Mantega’ (n 9). 137 See Jan Wouters, Sven Van Kerckhoven, and Thomas Ramopoulos, ‘The EU and the Euro Area in International Economic Governance: the Case of the IMF’ in Dimitry Kochenov and Fabian Amtenbrink (eds), The European Union’s Shaping of the International Legal Order (CUP 2013). 138 See Smaghi, ‘A Single EU Seat in the IMF?’ (n 78) 247. 139 The AoA previously included a provision prohibiting the election of Executive Directors representing more than 9 per cent, see Peter Brandner and Harald Grech, ‘Unifying EU Representation at the IMF—A Voting Power Analysis’ (2009) Austrian Federal Ministry of Finance Working Paper 2/2009, 9. 140 COM (2015) 603 final. 141 Ibid.

Legal Framework 161 the scope of coordination would expand beyond matters that are of euro area relevance to ‘all positions to be taken, orally or through written statements, within IMF organs’, which ‘shall be fully coordinated in advance’ in the relevant EU bodies. The euro area Member States, supported by the Commission and the ECB, should ‘take all necessary actions for the establishment, by 2025 at the latest, of a unified representation of the euro area within the IMF’. This includes in particular the presentation of a unified view by the President of the Eurogroup in the Board of Governors. In the Executive Board, the euro area should be represented by its own Executive Director representing one or several constituencies consisting of euro states. While discussions concerning the proposal have not advanced in the Council, the ECB issued an opinion concerning the proposal in April 2016, giving its broad support to strengthening euro area policy coordination but making a number of proposals for amendments, primarily relating to its own position in the envisaged mechanisms.142 The proposal raises a number of questions that are more political than legal in nature, such as the willingness of the Member States to create euro area constituencies, and whether forming one constituency is in fact beneficial in terms of power projection given that Member States would no longer have the ability to influence discussions in several constituencies. The next section will return to these matters.

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Similar considerations arise in relation to the World Bank. As in the IMF, EU Member States are not within a single EU constituency. Within the IBRD, the Member States—with the exceptions of France, Germany, and the UK—are divided into seven different constituencies of varying size and make-up, out of which five currently have an EU Member State Executive Director (Belgium, Spain, the Netherlands, Italy, and Denmark). Although it can be argued that this dilutes EU influence, the result is that, although actually holding only approximately one quarter of the votes in the IBRD, EU Member States have the possibility of mobilizing over 30 per cent of all votes. The lack of EU influence is however also a recurring theme in discussions concerning the World Bank.143

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The EU is a member of the G20, and is represented at the leaders’ summit by the Presidents of the European Council and the President of the European Commission—and by the ECB, Commission, and rotating Council Presidency with respect to finance minister and central bank meetings.144 Further, four EU Member States (France, Germany, Italy, and the UK) are members of the G20, with Spain acting as a permanent guest member of the Group. The relative power of the EU bloc is, therefore, sizeable, making up a quarter—or more, if one takes Spain into account—of total G20 membership. G20 countries also dominate the Financial Stability Board, with the Netherlands and Spain as additional EU members. As with the G20, the EU is represented by the Commission and the ECB.

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It has been suggested that European overrepresentation actually diminishes the weight of everything that European nations say,145 as this quote from Pascal Lamy, former

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142 ECB Opinion (CON/2016/22). 143 Baroncelli, ‘The World Bank’ (n 35) 209. 144 Peter Debaere, ‘The Output and Input Dimension of the European Representation in the G20’ (2010) 63(2) Studia Diplomatica 141, 149. 145 See eg Jan Wouters, Sven Van Kerckhoven, and Jed Odermatt, ‘The EU at the G20 and the G20’s Impact on the EU’ (2012) Leuven Centre for Global Governance Studies Working Paper No 93, 6 (hereafter Wouters, Van Kerckhoven, and Odermatt, ‘The EU at the G20 and the G20’s impact on the EU’).

162 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU Director-General of the WTO, demonstrates. His concerns feel familiar from the IMF context: If one European takes the floor on one topic, and then another European takes the floor on the same topic, nobody listens. Nobody listens because either it’s the same thing and it gets boring, or it’s not the same thing and it will not influence the result at the end of the day . . . So the right solution, if I may, is at least to make sure that they speak with one mouth. Not one voice—one mouth—on each topic on the agenda. That would be a great improvement.146

It is not, however, evident that this is in fact so. The conclusion returns to this question.

IV. Coherence, Coordination, and Cooperation 6.75

Given the complexity of EU representation just outlined, exacerbated by the institutional rules of these organizations where full EU membership is excluded, coordination of policy and ensuring the coherence of EU and (euro and non-euro) Member States’ positions in the IFIs present a challenge. This section will first outline the existing coordination mechanisms and then discuss current proposals for reform in the light of both the extent of EU competence and the legal obligation of sincere cooperation.

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Coordination mechanisms are most highly developed in relation to the IMF. The two primary bodies for EU coordination are the Brussels-based Subcommittee on IMF-Related Issues (SCIMF), which falls under the Economic and Financial Committee (EFC), the ECOFIN preparatory body, and the Washington-based EU Representatives to the IMF (EURIMF). All EU Member States currently participate in these bodies, irrespective of whether they belong to the euro area or not.

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SCIMF is made up of two representatives from each EU Member State—a representative from the Ministry of Finance and from the central bank—two representatives from the Commission DG ECFIN and two representatives from the ECB. The Commission is in charge of running the Secretariat. SCIMF meets eight to ten times per year and operates on a general consensus basis.147 Euro area states agreed in 2007 to prepare common euro area statements on issues that relate directly and exclusively to euro area common policy.148 SCIMF prepares the EU statements delivered by the EU Presidency at certain meetings of the IMFC, prepares the common response (the Buff) in the context of the Article IV review of the euro area, issues formal joint positions and may draft common policy papers called ‘common understandings’ reflecting long-term and broad strategies for the EU at the IMF.149 Documents agreed to at SCIMF are sent to the EFC for endorsement and then sent to the European Executive Directors at the IMF for use at EURIMF meetings, or at 146 The Economist, ‘World to Europe: If you must hog G20 seats, could you at least talk less?’ (The Economist, 28 March 2010) accessed 3 February 2020. 147 See Eurodad, ‘European Coordination at the World Bank and International Monetary Fund: A Question of Harmony?’ (2006) 1–2 accessed 3 February 2020 (hereafter Eurodad, ‘European Coordination’). 148 For a reference to the earlier practices, see COM (2015) 602 final, para 4.1(a). 149 Eurodad, ‘European Coordination’ (n 148) 12.

Coherence, Coordination, and Cooperation 163 IMF Executive Board meetings generally. Executive Directors are not, however, formally obliged to comply with the contents of these documents.150 This links to the broader question raised above of the extent to which Executive Directors in fact effectively represent their constituencies and can be controlled by them, but it is not a question that can be further explored here. EURIMF is the EU’s primary day-to-day IMF-based coordination vehicle and meets approximately three times per week. It consists of EU Executive Directors and various other EU IMF representatives, as well as an observer from the ECB and the Commission delegation to Washington. The Commission has no formal coordination role, which is seen to reflect its competence limitations with respect to issues dealt with at the IMF.151 The same limitations, logically, apply to the ECB, which can only speak on issues within the realm of its competence. The purpose of EURIMF is to act as an informal information exchange between concerned EU parties about the current IMF agenda, with the aim of facilitating EU position coordination.152 EURIMF is chaired by one of the EU Executive Directors for periods of two years at a time.153 Due to the large size of EURIMF, a ‘mini-EURIMF’ has been set-up, which consists only of EU Executive Directors and their alternates and meets on an ad-hoc basis.154 EURIMF also coordinates EU Executive Director opinions regarding Article IV Consultations. Prior to an IMF Executive Board meeting, the primary Member States of their constituency prepare what is known as a ‘grey’ paper, which reflects the positions of their constituency regarding the Executive Board agenda and serves as the basis of discussion at EURIMF.155 There is no formal voting at EURIMF meetings,156 which in practice indicates the use of consensus as the decision-making rule. The EU Presidency also prepares European ‘grey’ papers to be discussed at EURIMF on matters of relevance to the EU.157

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Despite the institutionalized character of IMF coordination, the success of these bodies in coordinating common EU positions has been seen as modest. The capacity of SCIMF to form strong common positions on matters relevant to the EU at the IMF has proved limited.158 In practice, the EU Presidency statement prepared in SCIMF is complemented by Member States offering statements reflecting their national agendas.159 This also points to some difficulties in establishing what exactly should be coordinated. The IMF discusses some issues that are clearly ‘relevant for the euro area’ for the purposes of Article 138 TFEU. However, many highly contentious issues—such as the future lending framework involving questions relating to debt restructuring for states—are matters that divide EU Member States in a fundamental manner, beyond the euro-non-euro divide. While there is currently no EU legislation on the matter, it would be difficult to treat them as matters that are not at all ‘relevant for the euro area’. These divergences are undoubtedly among those that have

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150

Ibid,  11–12. Ibid, 10. 152 Ibid,  8–9. 153 Wouters and Van Kerckhoven, ‘The International Monetary Fund’ (n 10) 225. 154 Eurodad, ‘European Coordination’ (n 148) 9. 155 Wouters and Van Kerckhoven, ‘The International Monetary Fund’ (n 10) 225. 156 Eurodad, ‘European Coordination’ (n 148) 9. 157 Ibid. 158 Giovannini and others, ‘External Representation of the Euro Area’ (n 67) 36. 159 Eurodad, ‘European Coordination’ (n 148) 12. 151

164 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU provoked the Commission to act with respect to unified representation. And yet divergences in Member State positions are unlikely to be overcome in the short-term, no matter how the EU coordination regime is designed and enforced. 6.80

Whereas a relatively thorough formal coordination system has developed with respect to the IMF, coordination at the World Bank has remained more informal and primarily Washington-based, limited to meetings of European representatives in Washington, with the Commission as an observer. These meetings occur approximately once a week. In addition to acting as a forum for the exchange of information, these meetings are used by the relevant participants to reach coordinated or joint statements.160

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EU coordination at the G20 is organized along the lines of the finance and Sherpa tracks of the G20 itself. With respect to finance track issues, the coordination of EU positions is primarily a matter for the EFC, however coordination work also takes place in its subcommittees (SCIMF and the Financial Services Committee (FSC)).161 Coordination within the EFC mainly concerns macroeconomic issues and exchange rates, whereas meetings of the FSC logically concern financial regulation and international financial institutions.162 The discussions are based upon Commission background papers, the drafting of which occurs somewhat in tandem with the rotating Council Presidency.163 The resulting Terms of Reference are then forwarded to the ECOFIN Council, where they are approved and serve as base-line EU positions in the G20 finance ministers meeting.164 Regarding the Sherpa track, the EU coordination process is more clearly driven by the Commission as the EU Sherpa.165 The main opportunity for Member States to influence the common positions is at a COREPER meeting where the EU Sherpa—a Commission official—delivers a briefing on the policy lines.166 Coordination with respect to the sectoral ministerial meetings is delegated by the EU Sherpa to the relevant—that is, by sectoral area—Council committee, which then works upon developing a common position based upon documents drafted by the Commission and the rotating Council Presidency. The result of these Council committee meetings are ‘guidelines for EU participation’, which are a shorter and more general version of the finance track Terms of Reference.167 As the example concerning IMF governance reforms demonstrates, the IMF is often faced with a fait accompli settled in G20, where only large Member States (UK, Germany, Italy, France, and the EU) are represented.168 This 160 See Baroncelli, ‘The World Bank’ (n 35) 2–12; Sieglinde Gstöhl, ‘EU Diplomacy after Lisbon: More Effective Multilateralism’ (2011) 17(2) The Brown Journal of World Affairs 181, 184; Eurodad, ‘European Coordination’ (n 148) 1–5. 161 Peter Debaere and Jan Orbie, ‘The European Union in the Gx system’ in Knud Erik Jørgensen, and Katie Verlin Laatikainen (eds), Routledge Handbook on the European Union and International Institutions: Performance, Policy, Power (Routledge 2012) 319 (hereafter Debaere and Orbie, ‘The European Union in the Gx system’). 162 Skander Nasra and Peter Debaere, ‘The European Union in the G20: what role for small states?’ (2012) 29 Cambridge Review of International Affairs 209, 213–14 (hereafter Nasra and Debaere, ‘The European Union in the G20’). 163 Amtenbrink and others, ‘Paper 1: The G20’ (n 111) 45; Debaere and Orbie, ‘The European Union in the Gx system’ (n 162) 319. 164 Amtenbrink and others, ‘Paper 1: The G20’ (n 111) 45; Debaere and Orbie, ‘The European Union in the Gx system’ (n 162) 319. 165 Amtenbrink and others, ‘Paper 1: The G20’ (n 111) 45; Debaere and Orbie, ‘The European Union in the Gx system’ (n 162) 320. 166 Nasra and Debaere, ‘The European Union in the G20’ (n 163) 214. 167 Amtenbrink and others, ‘Paper 1: The G20’ (n 111) 45. 168 At the heads of state level the EU is represented in the G20 by the President of the Commission and the President of the Council, whereas at the finance ministers level the EU is represented by the Commissioner for

Coherence, Coordination, and Cooperation 165 setting provokes complaints from other EU Member States regarding the perceived power of the ‘Big 4’.169 As far as the OECD is concerned, Union coordination occurs both in Brussels and in the EU Delegation in Paris. The former takes place within the Council’s Trade Policy Committee (TPC) even for matters that formally fall outside of the Committee’s scope.170 The EEAS serves as the consultative body with respect to the particularly ‘political’ issues dealt with at the OECD, such as ‘accession, relations with non-members, relations with the G20 or discussions that involve “specific issues, themes related to countries or regions” ’.171 The EU Delegation to the OECD serves as the focal point for EU coordination at the OECD headquarters in Paris, which arranges meetings regarding issues falling under both shared and exclusive competences at the request of the Delegation, the Commission or one of the Member States, and take place at the level of ambassadors, deputies and committees. Monthly lunch meetings are also held at ambassador and deputy level with respect to information sharing and the identification of common positions. The EU Delegation is also responsible—or at least takes on the role—of representing those Member States who are not members of the OECD.172 Statements and declarations are now issued by this EU Delegation on issues falling within areas of exclusive or shared competence,173 but these statements may be followed by Member State statements.174

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There is no formal EU coordination in place with respect to FSB activities as between the Commission, EU Member States and the ECB. This occasionally results in differing opinions being presented.175 Due to the presence of strong EU Member State economies in a jurisdiction member capacity, the Commission in practice often takes on the role of representative of the Member States who do not have a position at the FSB table;176 however, no formal mechanism exists for coordinating the EU position among all EU States. Informal coordination is limited to the relevant EU FSB participants. However, representatives from all relevant EU bodies at the FSB also present upcoming issues for discussion before FSB meetings in either the EFC or the FSC.177 Even in this context, it has been argued that a stronger coordination of EU positions would enhance overall EU influence.178

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So far, formal Council decisions based on Article 138 TFEU (or Article 218(9) TFEU) have not been used in the IFIs. Unlike in the OIV situation quoted above, however, the Commission has not put forward proposals for the adoption of such positions, apart from

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Economic and Monetary Affairs, the rotating Council presidency and the Head of the ECB. See also Wouters, Van Kerckhoven, and Odermatt, ‘The EU at the G20 and the G20’s impact on the EU’ (n 146) 5. 169 Debaere and Orbie, ‘The European Union in the Gx system’ (n 162) 316. Wouters, Van Kerckhoven, and Odermatt, ‘The EU at the G20 and the G20’s impact on the EU’ (n 146) 5. 170 Hadzhieva, ‘Paper 3: The OECD’ (n 121) 52; Verschaeve and Takács, ‘The Curious Case of the OECD’ (n 119) 197. 171 Verschaeve and Takács, ‘The Curious Case of the OECD’ (n 119) 197. 172 Ibid, 197–98. 173 Ibid, 199. 174 Ibid. 175 ECONOPOLIS Strategy NV, ‘The European Union’s Role in International Economic Fora—Paper 2: The FSB’ (IP/A/ECON/2014-15, June 2015) 15 accessed 3 February 2020. 176 Ibid, 15. 177 Ibid, 16. 178 Ibid, 34.

166 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU the recent proposal concerning coordination in the IMF. The 2012 Commission Blueprint included a separate Annex 2 on ‘External representation of the euro area’,179 arguing for a more active role, which ‘should result in delivering a single message on issues such as economic and fiscal policy, macroeconomic surveillance, exchange rate policies, and financial stability’. The Commission focus has been on the IMF. In its view, euro area coordination infrastructure in Brussels and in Washington ‘should be improved, and Member States should follow common messages on a compulsory basis’. 6.85

In the Five Presidents’ Report, and the 2015 Commission Communication and proposal for a Council decision,180 this argumentation is further developed. Somewhat curiously, the latter does not directly refer to the adoption of Council decisions on coordination, although these instruments are mentioned in Article 138(1) TFEU and would provide the formal legally-binding effect the Commission is aiming at. Article 138(1) TFEU itself seems to require that such decisions be adopted by its use of the term ‘shall’. However, the Commission proposal instead refers more generally to taking common positions and coordinating them fully. The draft decision is limited to euro area representation; it applies to ‘all positions taken, orally or through written statements, within IMF organs’, and requires that these are to be ‘fully coordinated in advance within the Council, the Eurogroup, the EFC and/or the Euro Working Group (EWG) as appropriate’, but without defining the instrument or the decision-making procedure to be used. Article 138(3) TFEU however establishes qualified majority voting of euro area Member States as the voting pattern in the Council. Moreover, the proposal includes no suggestions concerning the EU Member States outside the euro area. How are their obligations of coordination to be achieved?

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Competence considerations receive no direct acknowledgment; yet they are highly relevant for the objectives that the draft Council decision aims to achieve. As far as the IMF and the World Bank are concerned, their founding agreements are formally not mixed agreements, but agreements where the Member States continue as contracting parties and shareholders. However, in this capacity they are bound by an obligation to act in accordance with their EU law obligations, which, where a matter falls within EU competence, entails a duty to follow agreed EU positions irrespective of how EU external representation is organized. Article 138 TFEU refers to an obligation to coordinate matters that are ‘relevant for the EMU’, and even if there is no jurisprudence concerning Article 138 TFEU as such, the existing case law does demonstrate that there is a duty to achieve an EU position in matters falling under exclusive EU competence. The duty of coordination in these cases is linked to the fact that the EU is not a member of the IMF and therefore cannot express the position itself but needs to be represented through the Member States. As discussed above, to the extent that ‘the matter falls either wholly or in part within the Union’s exclusive competence, the position adopted must be one of the Union’.181 The existence of Union exclusive competence ‘does not preclude the Member States from actively participating’ in the international organization, ‘provided that the positions adopted by those States within that international organization are coordinated at [Union] level beforehand’.182 This case law is of relevance for

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COM (2012) 777 final. COM (2015) 602 final; COM (2015) 603 final. 181 See Heliskoski, ‘Internal Struggle for International Presence’ (n 22) 159 (emphasis in original). 182 Commission v Greece (n 47) para 28. 180

Coherence, Coordination, and Cooperation 167 questions relating to areas of exclusive competence: monetary policy or the possible exclusive external powers relating to internal market legislation, including the Banking Union, in cases where the IFI measures in question may be capable of affecting EU legislation. In such cases, where matters fall under EU exclusive competence, the absence of a common position does not in principle entitle the Member States to speak on their own account, and the Commission may bring infringement proceedings against Member States that act without EU authorization. That this has so far not taken place indicates both that the Commission has some understanding of political realities, but also that this might not be the best way to strengthen EU influence in the IMF. Moreover, shared and even Member State competence should be exercised in a manner that is compatible with EU law and in compliance with the duty of sincere cooperation. Case law points to obligations of consultation, coordination or even abstention from acting that fall primarily on the Member States in the name of a duty of sincere cooperation.183 However, the Court has left open the degree to which, in cases of shared competence, there is an obligation to establish a common position or an obligation to attempt to do so, or the legal position if coordination fails. The duty of sincere cooperation would suggest that the Member States and the institutions are under, at least, a ‘best endeavours’ obligation to reach a common position; however the Court’s jurisprudence has not placed the Member States and the EU institutions under an obligation of result.184 Advocate General Tesauro has suggested, in the context of an agreement concluded under shared competence, that obligations might extend beyond the process of negotiation and conclusion to the fulfilment of the commitments it contains: the Member States and the EU institutions ‘must endeavour to adopt a common position’.185 For AG Tesauro:

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the absence of close cooperation between Community institutions and Member States—in view of the ineffectiveness that would inevitably result from a failure to speak with one voice and, above all, from a lack of common rules of conduct and common procedures— would certainly be a considerable drawback in any future negotiations . . .186

So while in areas of exclusive competence ‘no EU position’ means ‘no position’, in areas falling under shared competence the law does not require Member States in the Council to actually agree on a common position; instead, the Council also has the possibility of not forming one,187 and leaving the Member States the possibility to adopt their own positions. The key principle seems to be that in matters where EU competence is shared and has not been exercised, the Member States have the freedom to exercise their competence either collectively or individually.188 Where it is decided to exercise EU competence by taking an EU position, then the OIV case demonstrates that EU decision-making procedures must

183 Leonard den Hertog and Simon Stroß, ‘Coherence in EU External Relations: Concepts and Legal Rooting of an Ambiguous Term’ (2013) 18 European Foreign Affairs Review 373, 388. 184 Cremona and De Witte, ‘Defending the Community Interest’ (n 22); Hillion, ‘Mixity and Coherence in EU External Relations’ (n 73) 20. 185 Case C-53/96 Hermès International v FHT Marketing Choice BV [1997] ECR I-3606, Opinion of AG Tesauro, para 21. 186 See ibid, fn 33, referring to the WTO context and matters governed by the TRIPS Agreement. 187 See Heliskoski, ‘Internal Struggle for International Presence’ (n 22). 188 Ibid, 154.

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168 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU be applied, and the Member States will be under an obligation not to undermine the EU’s ‘unity of international representation’ by departing from it.189 6.89

This would also apply to development-related matters falling under the World Bank’s regime, where EU competence does not replace Member States’ competence. Although World Bank rules mean that the EU is not a full member, there is close collaboration with the World Bank and direct EU funding involved. There should at least be an EU position on how EU funds are to be used, even if development competence is parallel in nature. In the case of the World Bank it is also clear that the scope of coordination mechanisms should not be limited to euro area States only, since development policy is a general EU competence. However, many of the matters dealt with in the IMF, G20 and FSB are equally relevant for those EU Member States that are outside the euro area. Formal coordination mechanisms in such cases cannot be based on Article 138 TFEU, but instead Article 218(9) TFEU could be invoked as a legal basis.190

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If there is a wish to coordinate matters falling under national competence, a decision by Member State representatives is needed, to be adopted by consensus. As far as national competence is concerned the Member States ultimately have the right to decide,191 however they are subject to their obligations under EU law, including the duty of sincere cooperation which requires them to refrain from jeopardizing Union objectives.192 For example, both the ESM and the Fiscal Compact Treaty are international agreements concluded under national competence, albeit closely linked to EU law. And while the Commission and the ECB have—together with the IMF—played a core role in crisis management in the euro area, they have done so under the special mandate of the ESM, thus involving no direct exercise of EU competence.193

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Falling between these categories—exclusive competence where the position must be an EU one; shared competence where the Member States have a choice but are constrained once it is decided to adopt a Union position; and national competence where the Member States act subject to duties of sincere cooperation—is the area of economic policy. It is not on the Treaty list of exclusive or shared competences, and by definition is sui generis in nature.194 Economic policy competence continues to rest with the Member States, even if its exercise is affected by the requirements of the EU coordination framework.195 There is need to consider how that coordination competence translates to international fora, to what extent the duty of cooperation and the principle of unity of international representation act as a constraint on Member State behaviour, and whether those obligations are positive or negative in character. It is unlikely that EU positions could be used to replace Member State action in

189 See text to n 62. 190 Germany v Council (n 74). 191 Further on this, see Heliskoski, ‘Internal Struggle for International Presence’ (n 22). 192 Article 4(3) TEU. 193 See Case C-370/12 Thomas Pringle v Government of Ireland and Others [2012] ECLI:EU:C:2012:756; and more recently, Joined Cases C-8/15 P to C-10/15 P Ledra Advertising Ltd and Others v Commission and ECB [2016] ECLI:EU:C:2016:701, para 52. 194 Article 2(3) TFEU. 195 On this, see eg Leino-Sandberg and Saarenheimo, ‘Sovereignty and Subordination’ (n 57). There is no case law on whether economic policy competence is capable of creating EU exclusive external competence by way of Article 3(2) TFEU. Although, as noted above, this might not be excluded as a matter of principle, in practice coordination measures are unlikely to produce pre-emptive effects.

Coherence, Coordination, and Cooperation 169 matters involving Member State budgetary or fiscal powers, and insofar as the Commission proposal is concerned with such matters it would appear to go beyond what is currently required under the Treaties. However, IMF measures may affect Commission prerogatives in monitoring and reporting on Member State polices and making recommendations concerning their development. And the need to comply with EU law and the duty of sincere cooperation will require at least that Member States ‘collaborate and consult with the institutions (that is, in practice the Commission) before they establish a national position or otherwise take action’.196 To return to the Commission proposal, while a legal justification (indeed, a mandate) certainly exists for a degree of coordination, such justification does not extend to the whole spectrum of proposals on the table, in particular as regards the binding coordination of positions, decided by qualified majority, on matters falling under Member State competence.

6.92

What in the IMF context seems particularly problematic is that there appears to be no internal EU mechanism for determining the relevant spheres of competence. Instead, the matter seems to have primarily been settled through having Article IV consultations separately for the euro area and involving the EU institutions in these discussions; and by excluding elements that fall under EU competence from IMF conditionality. By default, therefore, the authors of IMF reports have to make the determination themselves. Legally this is an unorthodox solution—also because the EU and national spheres are often rather fundamentally intertwined, for example through the implementation of EU legislation in national systems—but one that has been enabled by the IMF decision-making structures. The question concerning currency unions is on the IMF agenda, but again, it is a policy to be adopted by the IMF itself.

6.93

Internal EU mechanisms for settling spheres of competence do, however, exist in the context of other international organizations, and case law suggests that such internal coordination arrangements may be binding on the institutions. In the Food and Agriculture Organization (FAO), for example, a Council and Commission ‘arrangement’ exists ‘regarding preparation for FAO meetings, statements and voting’. The arrangement establishes a coordination procedure between the Commission and the Council for the purpose of deciding, based on the division of competence, on the exercise of responsibilities with respect to points on the FAO agenda. In a ruling on this internal arrangement the Court recalled the obligation to cooperate: the ‘institutions and the Member States must take all necessary steps to ensure the best possible cooperation in that regard’. The Court noted that the Arrangement represented the fulfilment of that duty of cooperation, and that the two institutions had intended to enter into a binding commitment towards each other.197

6.94

196 Heliskoski, ‘Internal Struggle for International Presence’ (n 22) 159. 197 Case C-25/94 Commission v Council [1996] ECR I-1469. Under Section 2.3 of the arrangement, ‘Where an agenda item deals with matters containing elements both of national and of Community competence, the aim will be to achieve a common position by consensus. If a common position can be achieved: – the Presidency shall express the common position when the thrust of the issue lies in an area outside the exclusive competence of the Community. Member States and the Commission may speak to support and/or to add to the Presidency statement. Member States will vote in accordance with the common position; – the Commission shall express the common position when the thrust of the issue lies in an area within the exclusive competence of the Community. Member States may speak to support and/or add to the Commission’s statement. The Commission will vote in accordance with the common position.

170 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU 6.95

The precise way in which the EU is represented—through a single Executive Director, through individual Member States, through the President of the Eurogroup or occasionally by the Commission or the ECB—is of less relevance from a competence point of view, and is also affected by the rules of the international organization in question. It is not evident how responsibility for Member State positions can be concretized, in particular whether the Executive Directors—who in fact take all the relevant decisions in the IMF—can be seen to effectively represent the Member States so that their action or non-action can be traced back to the states forming their constituency and as such be subjected to infringement proceedings. The ECB has pointed out that in a majority of euro area states the Governor of the national central bank operates as the Governor or Alternate Governor in the IMF Board of Governors, and it therefore proposes to add the President of the ECB to those representing the euro area in the IMF Governance bodies. Moreover, the ECB is concerned that the proposed coordination mechanisms may affect the independence of the Eurosystem as operated by the ECB. As the ECB points out, unified representation must be achieved by taking into account the EU allocation of competences and the mandates of each institution.198 Whether this in fact contributes to a further extension of the role of the ECB itself is another matter.

6.96

While the focus of recent institutional initiatives has been on the IMF, the World Bank, G20, and FSB also deal with issues where EU competence is arguably even stronger than in the IMF. The output from these IFIs may be in the form of recommendations, but these ‘soft’ instruments may nonetheless have a direct impact on the development of EU legislation— legislation, which is then capable of providing a legal basis for exclusive external competence. This raises the question of an effective ‘outsourcing’ of regulatory initiative to fora in which not all Member States are represented and the European Parliament has no role. In the absence of prior coordination, Member States that are members of the IFI will act on national positions and other Member States are restricted to seeking to influence the Commission. In these circumstances, prior coordination may increase transparency and ensure the representation of wider interests.

6.97

Article 138 TFEU empowers the Council to ‘adopt appropriate measures to ensure unified representation within the international financial institutions and conferences’. It is left to the Commission to propose, and the Council to decide what is ‘appropriate’ and which IFIs require such measures. In the Commission proposal on IMF representation, the key role would be allocated to the President of the Eurogroup, simultaneously allocating a key role in position-building to the Eurogroup. In addition to getting rid of mixed constituencies, the Commission emphasis is on the presentation of a unified view by the President of the Eurogroup in the Board of Governors. This probably refers to the Eurogroup chair— presuming that the chair acts as the designated IMF Governor for his or her own country— issuing an annual meeting speech on behalf of all euro area countries, since in the Board of Governors each contracting party is represented by its own Governor, who also exercises its right to vote. As long as the EU is not a full member, Member State Governors will remain For further discussion concerning the FAO case, see Heliskoski, ‘Internal Struggle for International Presence’ (n 22). 198 ECB Opinion (CON/2016/22). On institutional competences, see also the Court’s ruling in Case C-660/13 Council v Commission [2016] ECLI:EU:C:2016:616.

Conclusion 171 the channel of true influence. The Court of Justice has recently recalled the fact that the Eurogroup consists of the ministers of those Member States whose currency is the euro who meet informally to discuss questions related to the specific responsibilities they share with regard to the single currency. It is therefore not a decision-making body, and cannot be equated with a configuration of the Council or be classified as an EU body, office or agency.199 Therefore, while the Eurogroup could certainly be used for informal and even factual position-building, it could not be used to adopt EU positions under Article 138(2) TFEU, which empowers the Council to adopt decisions on coordination. The role of the Eurogroup relates to the broader question of whether ensuring tighter co- 6.98 ordination in the IMF should apply to the euro area states or to all EU Member States. True, the existence of Article 138 TFEU does suggest that tighter coordination of euro area state positions may be justified. However, based on the jurisprudence discussed above, there is no reason why non-euro area states should escape such coordination, and in fact they do participate in the currently existing coordination mechanisms. To take the recent Article IV Staff Report on Finland discussed above as an example, it is difficult to see why the EU- relevant matters raised in the Report, such as the need to tighten the macroprudential toolkit or to ensure compliance with the Stability and Growth Pact, would not be equally relevant for, say, Sweden, a non-euro area member, and coordination therefore equally justified. Thus, if full coordination of EU positions is the objective, three separate decisions might in fact be needed: one coordinating the euro area position based on Article 138 TFEU; another decision establishing the position of the EU as a whole based on Article 218(9) TFEU, adopted by qualified majority—presuming that the decision to be adopted in the IMF can in fact be said to have legal effects—and a third decision by the Representatives of the Governments of the Member States meeting within the Council to coordinate matters falling under national competence, adopted unanimously. It is now clear that these decisions could not be combined into a single ‘hybrid’ decision.200 The Commission’s 2017 reflection paper on the deepening of EMU only has one very brief mention of the external dimension, which is to say that its 2015 proposal should be adopted.201 This seems to indicate that the Commission is not really leading on these issues, and that its agenda is formed by a great deal of pragmatism.

V. Conclusion: Internal Power Struggle and External Power Projection Several of the choices made by the Commission in presenting its 2015 proposal on unified representation in the IMF are interesting with a view to both the applicable legal framework and political realities. It would seem that the Commission proposal goes too far in proposing binding coordination on all matters. At the same time, the proposal is in some respects too narrow in scope, since it leaves both the other IFIs and the non-euro 199 Joined Cases C-105/15 P to C-109/15 P Mallis and Others v Commission and ECB [2016] ECLI:EU:C:2016:702, paras 46–48, 61. 200 See Case C-28/12 Commission v Council [2015] ECLI:EU:C:2015:282. 201 Commission, ‘Reflection Paper on the Deepening of the Economic and Monetary Union’ COM (2017) 291 final.

6.99

172 EXTERNAL RELATIONS OF EU AND EURO AREA: EMU area states out of consideration. Indeed, by focusing on euro area coordination externally, it has the effect of accentuating the internal fragmentation between euro and non- euro states. It is arguably not inevitable that greater external unity should be built upon internal differentiation. There are certainly instances where more effective coordination would be justified so as to maximize the Member States’ ability to influence IFI positions and, indirectly, the future direction of EU legislation. This is the case in particular with the FSB. 6.100

In the EU debates, the key issue relates to power and influence. However, there is little agreement on what counts as ‘influence’ and how it can be maximized. More particularly, does the current way in which euro area states are divided in different constituencies in fact diminish EU power? Would joint EU representation in fact strengthen it? Do Executive Directors effectively represent their constituencies in a manner that would secure the presentation of EU positions in all circumstances?

6.101

There is, in fact, little empirical evidence that would support the ‘one-mouth conclusion’ promoted by Pascal Lamy and quoted above. Instead, the question might be more about the lack of a common EU position. Blaming the difficulties in finding agreement on too many mouths or the complex division of competences is an attempt to find a legal explanation to a problem that is fundamentally political in nature, and can only be solved through political means. The real problems, as far as influence is concerned, emerge in the situations where Member State views are divided and they are effectively arguing for opposite positions. In these cases, deciding that the ‘EU should take over’ is unlikely to solve the actual problem; the formal creation of procedures does not solve the political question. While a decision- making procedure based on qualified majority voting concerning matters falling under EU competence could formally be created, the EU tradition is still to settle sensitive matters by consensus. Consensus is also an absolute requirement for matters falling under national competence and, as has been seen, within the IFIs EU and national competence are very closely entwined. This would tend to minimize the EU common position to the smallest common denominator, which is unlikely to influence the negotiations much. It is specifically in this sort of situation that euro area Executive Directors will feel tempted to distance themselves from the ‘common position’ by formally supporting it, but simultaneously providing a few additional remarks containing the substantive comments. In questions that fall under national competence—and more especially those close to Member State sovereignty such as economic, fiscal and structural policies—the question becomes whether it is realistic to expect a common position. Finding common positions becomes even more difficult in broad questions relating to the global system as a whole.

6.102

In matters where the EU states have a common position, the way in which competence is divided is unlikely to constitute a problem, and consequently, has not hindered the efficient influencing of discussions in the IFIs. And if the same position is repeated in discussions several times, and also influences discussions in mixed constituencies, it is unlikely that this will really reduce EU influence. Instead, it might simply count as efficient repeat- playing. As the Commission noted ten years ago, the success of EU external action depends first and foremost on political agreement among Member States, ‘a strong partnership between the EU institutions and a clear focus on a limited number of strategic priorities where Europe can make the difference, rather than dispersing efforts across the board. This is the

Conclusion 173 condition sine qua non’.202 This realism is also reflected in the 2011 General Arrangements, which make reference to common statements being used in matters in which the EU is competent and in fact has a common position.203 The draft Council decision includes no provisions relating to the (realistic) situation when 6.103 no EU common position is reached, which might—in cases of exclusive EU competence— ultimately prevent the Member States from acting, or—in other cases—result in the Member States going their own way. In such cases, EU coordination is not likely to improve effective influence over international debate. And the deeper into national competence ‘binding’ EU coordination reaches, the less likely it is that Member States will be willing to comply with common positions they substantively disagree with. While there is of course no harm in EU-level coordination, a coordination mechanism should be built on a realistic understanding that a common position may not always be possible—or even, sometimes, desirable.

202 COM (2006) 278 final. 203 See Council of the European Union, ‘EU Statements in multilateral organisations—General Arrangements’ (n 29).

7

INTERNATIONAL AGREEMENTS OF THE EU IN THE FIELD OF EMU Marise Cremona and Päivi Leino-Sandberg

I. Introduction II. Competence to Conclude External EMU Agreements III. Procedure IV. EMU Agreements in Practice

A. Arrangements for the adoption of the euro by the overseas territories of the Member States

7.1 7.4 7.16 7.24

B. Exchange rate agreements with third countries whose currencies are pegged to the euro C. Agreements with small European countries which use the euro

V. Conclusions

7.27 7.29 7.33

7.25

I. Introduction 7.1

This chapter is concerned with international agreements of the European Union (EU) in the field of Economic Monetary Union (EMU) (which for simplicity will be referred to as ‘external EMU agreements’). What treaty-making competence does the EU have in this field, how are such external agreements negotiated and concluded, and what types of agreement does the EU conclude? The focus of this chapter is thus a specific aspect of the external relations of the EU as regards EMU. And whereas the external policy-making within (formal and informal) international financial institutions, which was discussed in the previous chapter, ranges across a multiplicity of EU policy fields and competences, EMU-related treaty-making practice relates more specifically to the use of the euro as a common currency. And whereas economic policy is still primarily a Member State competence subject to EU-level coordination, monetary policy, with which these agreements are concerned, is an exclusive EU competence by virtue of Article 3(1) of the Treaty on the Functioning of the European Union (TFEU).

7.2

Article 219 TFEU grants the EU express treaty-making powers to conclude exchange rate and monetary agreements with respect to the euro. This provision was introduced by the Treaty of Maastricht (as Article 109 EC), then became Article 111 EC, and was preserved with little change as Article 219 TFEU. It can be seen as the external equivalent to Article 136 TFEU, which grants the power to adopt internal measures specific to those Member States whose currency is the euro. Within the external relations of the EMU, Article 219 TFEU is also a companion to Article 138 TFEU which, it will be recalled, provides for the Marise Cremona and Päivi Leino-Sandberg, 7 International Agreements of the EU in the Field of EMU In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0009

Competence to Conclude External EMU Agreements 175 establishment of ‘common positions on matters of particular interest’ for EMU and for the adoption of measures ‘to ensure unified representation’ within the relevant IFIs.1 In practice, the EU’s external EMU agreements fall into three categories. First, arrangements for the adoption of the euro by overseas territories of the Member States. Second, exchange rate agreements with third countries whose currencies are pegged to the euro. And third, agreements with small European countries which use the euro (Andorra, Monaco, San Marino, and Vatican City).2 These different types of agreement are discussed in Section IV below, but first the EU’s competence to conclude external EMU agreements (Section II) and the relevant procedural rules (Section III) will be outlined. From an external relations point of view, of most interest are the examples of authorization granted to enable a Member State to conclude a monetary agreement with a third state or states with which it has close historical links.3 In addition, examples of a different type of authorization can be found: not to enable a Member State to conclude an agreement on its own behalf, but an authorization to a Member State to negotiate and sometimes also conclude an agreement with a third state on behalf of the EU.4

7.3

II. Competence to Conclude External EMU Agreements Article 219 TFEU must clearly be the starting point when defining the EU’s competence to 7.4 conclude external agreements in the field of the EMU. Within the current EU Treaty structure it is unusual, in that it combines the conferral of substantive policy competence with procedural provisions. The Lisbon Treaty brought the procedural rules for almost all EU external treaty-making together into Article 218 TFEU, thereby separating them from the provisions granting substantive policy competences. Article 219 TFEU, however, operates as a procedural derogation from Article 218 and so its substantive scope of application— and the consequent scope of the derogation—is also defined. The provision envisages three types of external action, two of which involve the conclusion of international agreements. First, Article 219(1) TFEU envisages the possibility of concluding ‘formal agreements on an 7.5 exchange-rate system for the euro in relation to the currencies of third States’. There is also a provision for the ongoing management of such an agreement, establishing a procedure for the Council to ‘adopt, adjust or abandon the central rates of the euro within the exchange- rate system’. Second, in the absence of such an exchange-rate system, Article 219(2) TFEU provides that the Council ‘may formulate general orientations for exchange-rate policy’ in relation to one or more third state currencies, subject to the European System of Central Banks’s 1 See further Chapter 6. 2 See further Chapter 21. 3 See, for example, Council Decision 98/744/EC of 21 December 1998 concerning exchange rate matters relating to the Cape Verde escudo [1998] OJ L358/111, authorizing Portugal to continue, after the introduction of the euro, its exchange rate agreement with Cape Verde. 4 See, for example, Monetary Agreement between the Italian Republic, on behalf of the European Community, and the Republic of San Marino (2001), authorized by Council Decision 1999/97/EC of 31 December 1998 on the position to be taken by the Community regarding an agreement concerning the monetary relations with the Republic of San Marino [1999] OJ L30/33.

7.6

176 INTERNATIONAL AGREEMENTS OF EU IN FIELD OF EMU (ESCB) primary objective of maintaining price stability. It will be noted that this power is externally-oriented in its reference to third state currencies, and forms in effect an alternative to the conclusion of a formal agreement under Article 219(1) TFEU. 7.7

Third, Article 219(3) TFEU provides a legal basis for ‘agreements concerning monetary or foreign exchange regime matters’ between the EU and third states or international organizations. The potential scope of this power is broader than Article 219(1), but the procedure set out here (see further Section III) applies also to Article 219(1) agreements. As a matter of practice, it is this paragraph, and its predecessors, which have been used as the legal basis for external agreements concerning the euro.

7.8

Other competence legal bases could also be used to conclude international agreements in the field of EMU in addition to the express power given in Article 219 TFEU. There are two possibilities here. First, as explained in Chapter 6, external powers may be implied from internal competences on the basis of Article 216(1) TFEU, in particular where the external power is ‘necessary in order to achieve, within the framework of the Union’s policies, one of the objectives referred to in the Treaties’. Thus it could be argued that although Article 138(2) TFEU does not refer explicitly to the conclusion of international agreements, this provision may nevertheless provide a legal basis for concluding an agreement with an IFI on the participation of the EU in the institution, were such an agreement is deemed necessary to achieve the aims set out in the article, in particular ‘to secure the euro’s place in the international monetary system’ and ‘to ensure unified representation’ within the IFI.5 Other internal powers, for example on economic and fiscal policy, taxation, and the internal market, might also be used as the basis for EMU-relevant international agreements. In such cases, the general procedural provision (Article 218 TFEU) would apply; exclusivity would not flow automatically from Article 3(1) TFEU; it might arise on the basis of Article 3(2) TFEU and would need to be determined case-by-case.

7.9

The second possibility would be to include provisions related to economic or monetary policy in an international agreement with a different external legal basis. For example, an association agreement based on Article 217 TFEU may include commitments ‘in all the fields covered by the Treat[ies]’,6 which could in principle include monetary policy. The Cotonou Convention, an association agreement with the African, Caribbean, and Pacific (ACP) states, has among its objectives the economic, social, and cultural development of the ACP partners and ACP-EU cooperation strategy is aimed (inter alia) at ‘achieving rapid and sustained job-creating economic growth, developing the private sector, increasing employment, improving access to productive economic activities and resources’.7 As this example suggests, economic policy may also be included as a component of development cooperation agreements, based on Article 209 TFEU, and indeed of 5 Powers may also be implied from provisions of internal legislation; for example, the ECB entered into an executive agreement with INTERPOL on the basis of Article 3 Council Regulation (EC) 1338/2001 of 28 June 2001 laying down measures necessary for the protection of the euro against counterfeiting [2001] OJ L181/6, which provides that the ECB shall gather and store technical and statistical data relating to counterfeit euro banknotes and coins discovered in non-member countries: see ECB Cooperation Agreement between The European Central Bank and The International Criminal Police Organization [2004] OJ C134/6. 6 Case C-12/86 Meryem Demirel v Stadt Schwäbisch Gmünd [1987] ECR 3719. 7 Article 20(1)(a) of the Cotonou Convention (Partnership Agreement between the members of the African, Caribbean, and Pacific Group of States of the one part, and the European Community and its Member States, of the other part, signed in Cotonou on 23 June 2000 [2000] OJ L317/3).

Competence to Conclude External EMU Agreements 177 economic and financial cooperation agreements with non-developing countries based on Article 212 TFEU. These two possibilities are different in terms of their policy framework and therefore their 7.10 ultimate objectives. Agreements based upon ‘internal’ powers will serve the objectives for which the power was granted; thus from the power of the Council to take internal coordination decisions under Article 138 TFEU a power to enter into an international agreement may be inferred as long as that agreement serves the coordination and representation objectives of Article 138 TFEU.8 Such agreements will thus be linked to achieving EU EMU- related objectives. However association, development, or cooperation agreements, and the economic policy clauses they contain, naturally serve the EU’s external objectives towards the particular third state or states concerned (such as the economic development of those states) rather than the objectives of the EU’s own economic and monetary union. Although it is useful to be aware of the above possibilities, Article 219 TFEU represents both the sole explicit legal basis for external agreements in the field of EMU and the legal basis which has actually been used in practice; this chapter will therefore focus on this key provision. With that in mind, two further aspects of EU external competence need to be considered: first, the exclusive nature of EU competence; and second, the implications of the distinction between the EU and the euro area.

7.11

As already discussed in Chapter 6, monetary policy is an exclusive competence for the Member States whose currency is the euro.9 This is an a priori exclusivity derived directly from the Treaties and not dependant on prior legislation or action by the EU. The euro area Member States may in consequence act in this field only where ‘empowered’ or authorized to do so by the Union.10 As far as the conclusion of international agreements is concerned, authorization is granted by the Council, acting under the same legal basis as for the agreement, that is, Article 219 TFEU. In such cases the Council authorization decision will also contain the Union’s position as to the terms of the agreement. Therefore, the same phenomenon that was identified in Chapter 6 can be found: despite exclusive EU competence, the Member States are still very much involved with the conduct of external relations concerning the euro. Here, though, where international agreements are concerned, the control over Member State action through Council decisions is more direct and specific.

7.12

In other fields where the technique of authorizing Member States to conclude international agreements in fields of exclusive EU competence has been used—a recognized but rather exceptional practice—general Regulations have been adopted establishing the conditions under which the specific competence may be exercised.11 Perhaps because the number of

7.13

8 On Article 138 TFEU, see further Chapter 6. See also Article 6 Statute of the ESCB and ECB. 9 Article 3(1)(c) TFEU. 10 Article 2(1) TFEU. 11 This has been done in three instances: air transport services (European Parliament and Council Regulation (EC) 847/2004 of 29 April 2004 on the negotiation and implementation of air service agreements between Member States and third countries [2004] OJ L157/7); private international law (European Parliament and Council Regulation (EC) 662/2009 of 13 July 2009 establishing a procedure for the negotiation and conclusion of agreements between Member States and third countries on particular matters concerning the law applicable to contractual and non-contractual obligations [2009] OJ L200/25; Council Regulation (EC) 664/2009 of 7 July 2009 establishing a procedure for the negotiation and conclusion of agreements between Member States and third countries concerning jurisdiction, recognition and enforcement of judgments and decisions in matrimonial matters, matters of parental responsibility and matters relating to maintenance obligations, and the law applicable to matters relating to maintenance obligations [2009] OJ L200/46); and foreign direct investment (European Parliament

178 INTERNATIONAL AGREEMENTS OF EU IN FIELD OF EMU EMU agreements is small, these authorizations are granted case-by-case. Nevertheless, the practice is a striking feature of treaty-making in this field. 7.14

A further dimension to the EU’s exclusive competence needs to be considered. According to Article 219(4) TFEU: Without prejudice to Union competence and Union agreements as regards economic and monetary union, Member States may negotiate in international bodies and conclude international agreements.

The wording of this provision, which was inherited from Article 111 EC (the predecessor to Article 219 TFEU) is unusual, and its legal impact unclear. On the one hand, it seems to state the obvious: as long as they act ‘without prejudice’ to EU competence, Member States are free to conclude international agreements; this flows from their sovereign status. On the other hand, as a matter of EU law, in cases of exclusive EU external competence Member States are not simply constrained to ensure that their international agreements do not conflict with EU agreements or EU law; they are precluded from concluding agreements at all.12 In this light paragraph 4 seems to take away with one hand what it grants with the other: ‘without prejudice to Union competence’ would appear to require the Member States not to conclude agreements in the absence of EU authorization. One reading would be to see this provision as affirming that the Council may indeed authorize the Member States to act, and this is supported by the fact that this paragraph has been cited in the preambles to such authorization decisions.13 An alternative approach would be to read this provision as referring not to agreements which fall within the a priori exclusive competence over monetary policy, but those which relate to other aspects of the economic and monetary union: macroeconomic or financial policy, for example. These agreements would be subject to the possibility of exclusivity based on Article 3(2) TFEU, as discussed in Chapter 6, in particular where common rules have been adopted at EU level. The Member States’ ability to act internationally in these fields would thus be retained, ‘without prejudice’ to such EU competence. 7.15

Returning to the treaty-making power granted to the EU in Article 219 TFEU, it is noticeable that despite the ‘variable geometry’ of the EMU the agreements are concluded by the Union. This is inevitable: it is the Union (not the Eurogroup) which has legal personality and the capacity to conclude international agreements.14 Agreements concluded by the Union on the basis of Article 219 TFEU are in principle binding on the EU institutions and the Member States.15 However, non-euro Member States (‘States with a derogation’) are and Council Regulation (EU) 1219/2012 of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries [2012] OJ L351/40). 12 Case C-114/12 Commission v Council [2014] ECLI:EU:C:2014:2151, para 71; Opinion 2/91 [1993] ECR I- 1061, paras 25–26. 13 See, for example, paragraph 12 Preamble Council Decision 98/744/EC. 14 Article 47 TEU. Cf Joined Cases C-105/15 P to C-109/15 P Mallis and Others v Commission and ECB [2016] ECLI:EU:C:2016:702, paras 46–48, 61. 15 Article 216(2) TFEU, which provides that: ‘Agreements concluded by the Union are binding upon the institutions of the Union and on its Member States’. Article 111 EC, the predecessor of Article 219 TFEU, contained a statement in para 3 that agreements ‘concluded in accordance with this paragraph shall be binding on the institutions of the Community, on the ECB and on Member States’. Since the ECB is now an institution of the EU (Article 13(1) TEU) it does not need to be specified individually.

Procedure 179 not bound by agreements concluded under Article 219 TFEU, by virtue of Article 139(2) (g) TFEU.16 This is not to say that these agreements have no legal effects at all on non-euro Member States; they are part of EU law and as such all Member States, even those Member States that are not themselves bound by them, will be under a duty of sincere cooperation, based on Article 4(3) of the Treaty on European Union (TEU), not to obstruct the achievement of their objectives.

III. Procedure Article 219(1) and (3) TFEU establish a procedure for the conclusion of monetary and ex- 7.16 change rate agreements ‘by way of derogation’ from the general procedural rules for treaty- making contained in Article 218 TFEU. This arrangement is a reflection of the history of the provision. At the time of its original introduction by the Treaty of Maastricht a number of sectoral provisions granting treaty-making powers to the then Community contained their own procedural provisions.17 The revision of the general procedural provision (then Article 228 EC, now Article 218 TFEU) by the Treaty of Maastricht started a process of consolidation of the treaty-making procedures in the Treaties, a process largely completed by the Lisbon Treaty. According to the Court of Justice: following the entry into force of the Treaty of Lisbon, in order to satisfy the requirements of clarity, consistency and rationalisation, [Article 218] now lays down a single procedure of general application concerning the negotiation and conclusion of international agreements which the European Union is competent to conclude in the fields of its activity . . . except where the Treaties lay down special procedures.18

Although it would have been perfectly possible to accommodate within Article 218 TFEU the derogations deemed appropriate for EMU, as was done for the Common Foreign and Security Policy, clearly Article 219 TFEU does lay down ‘special procedures’ for external EMU agreements. But the status of Article 218 TFEU as the ‘default’, the ‘procedure of general application’ as the Court of Justice puts it, means that it will apply unless there is a specific derogation. Article 219 TFEU derogates from Article 218 TFEU as regards the procedure for negotiation and conclusion of agreements, but there is no reason why the provisions of Article 218 TFEU dealing with other aspects of treaty-making cannot apply. For example, under Article 218(11) TFEU a Member State, the European Parliament, the Council, or the Commission ‘may obtain the opinion of the Court of Justice as to whether an agreement envisaged is compatible with the Treaties’. An agreement under negotiation based on Article 219 TFEU could be subject to this process of prior legality control,19 just as it would be possible for the Council decision concluding the agreement to be subject to normal judicial review. Similarly, Article 218(9) TFEU stipulates a procedure for 16 This includes Denmark, which is treated as a state with a derogation under Protocol No 16, and the UK, which is not bound by Article 219 TFEU as a result of Article 4 Protocol No 15. 17 See for example Article 238 EEC on association agreements. 18 Case C-658/11 European Parliament v Council [2014] ECLI:EU:C:2014:2025, para 52 (hereafter European Parliament v Council). 19 Article 218(11) TFEU can only be used for an ‘envisaged’ agreement, ie before the agreement is concluded. Note that the ECB is not given this right to ask for an opinion; however, it plays a part in the procedure for negotiation of the agreement.

7.17

180 INTERNATIONAL AGREEMENTS OF EU IN FIELD OF EMU establishing the positions to be adopted on the Union’s behalf in a body set up by an agreement ‘when that body is called upon to adopt acts having legal effects’. This too would apply to the ongoing management of agreements concluded under Article 219 TFEU, which set up decision-making bodies, although as has already been noted a specific procedure is established by Article 219(1) TFEU for changes to the central rate of the euro were the EU to enter into a formal exchange-rate agreement. 7.18

The procedure for negotiating and concluding agreements is established in Article 219(1) and (3) TFEU. The Article 219(3) TFEU procedure is subject to some variation for exchange-rate agreements based on Article 219(1) TFEU. The procedure is initiated by a Commission recommendation, after consulting the ECB; in the case of Article 219(1) TFEU the recommendation may alternatively be initiated by the ECB. The Council is then to ‘decide the arrangements for the negotiation and for the conclusion of such agreements’. This gives the Council a great deal of flexibility, subject however to two constraints: the arrangements must ensure that the Union ‘expresses a single position’ and the Commission is to be ‘fully associated’ with the negotiations. A further procedural constraint is added in the case of agreements on a formal exchange-rate system for the euro based on Article 219(1) TFEU: these are to be concluded by the Council acting unanimously after consulting the European Parliament. According to Article 139(2) and (4) TFEU, ‘Member States with a derogation’ (as well as Denmark and the UK20) do not have a vote in the Council when they are taking these decisions.

7.19

The flexibility provided by Article 219(3) TFEU has allowed the Council to authorize a single Member State to negotiate and even conclude an agreement on the Union’s behalf, the single position of the Union being expressed in a Council decision binding on that Member State. This was the procedure initially established for the adoption of the euro by third countries. For example, Decision 1999/97/EC,21 addressed to Italy, provided that Italy was to inform San Marino, which had been entitled to use the Italian Lira, of the need to negotiate a new agreement on monetary matters following the introduction of the euro. The Decision then set out the position of the Union in the negotiation (that is, the terms on which San Marino would be able to use and grant legal tender status to the euro). It provided that Italy was to conduct the negotiations and that the Commission and ECB were to be ‘fully associated’ with the negotiation; the draft agreement was to be submitted to the Economic and Financial Committee (EFC) for its opinion; Italy would then conclude the agreement on behalf of the Union ‘unless the Commission or the ECB or the Economic and Financial Committee are of the opinion that the agreement should be submitted to the Council’.22

7.20

When it was decided in 2009 to renegotiate the agreement with San Marino (as well as those with Vatican City and Monaco) the Council Decision establishing the procedural 20 For Denmark, see (n 16); for the UK, see Article 6 Protocol No 15. 21 Council Decision 1999/ 97/ EC (n 4). For the Commission Recommendation, see Commission, ‘Recommendation for a Council Decision on the position to be taken by the Community regarding an agreement concerning the monetary relations with the Principality of Monaco’ COM (1998) 789 final. Similar decisions were adopted as regards Vatican City (Council Decision 1999/98/EC of 31 December 1998 on the position to be taken by the Community regarding an agreement concerning the monetary relations with Vatican City [1999] OJ L30/35) and Monaco (Council Decision 1999/96/EC of 31 December 1998 on the position to be taken by the Community regarding an agreement concerning the monetary relations with the Principality of Monaco [1999] OJ L30/31). 22 Article 8 of Council Decision 1999/97/EC (n 4); the agreement was concluded by Italy.

Procedure 181 arrangements and the parameters of the new agreement provided that the negotiation would be conducted jointly by Italy and the Commission on behalf of the Community, that the ECB was to be ‘fully associated’ with the negotiation and that its agreement was required for issues falling within its competence, and that the draft should be submitted to the EFC for its opinion. Italy and the Commission were entitled to initial the text of the agreement on behalf of the Community, and the agreement was then to be concluded by the Commission, as long as neither the ECB nor the EFC were of the view that it should be concluded by the Council.23 These agreements were ultimately each concluded by the Commission for the Community (now EU),24 a departure from the position under Article 218 TFEU, which provides that international agreements are to be concluded by the Council. Indeed, the Commission decisions concluding these agreements cite, as well as the TFEU generally, the authorizing Council decision which was based on Article 219(3) TFEU, as their legal basis. The fact that Article 219(3) TFEU allows the Council to decide on the arrangements for the negotiation of external agreements gives rise to another striking departure from normal practice in EU treaty-making. These Council Decisions are formal acts, published in the Official Journal, addressed to the relevant Member State and the Commission. At the same time they contain what are effectively negotiating directives: instructions as to the terms of the agreement to be negotiated, in the form of a legally binding act. In contrast, the institutional balance in negotiating treaties created by Article 218 TFEU provides that the Council may give guidelines to the Commission negotiator, but does not allow the Council to remove all discretion from the Commission.25 The publication of the Council’s directives is unusual in another way. The negotiating directives issued to the Commission as negotiator have normally not been made public and their confidentiality has been jealously guarded.26 This practice is starting to change, since the publication of the negotiating directives for the Transatlantic Trade and Investment Partnership agreement (TTIP),27 but it is not standard practice to issue the guidelines in a formal Council Decision. The EMU practice is instructive in this regard, demonstrating that non-disclosure is not a sine qua non of effective treaty negotiation.

7.21

Article 219 TFEU puts the Council firmly in control of the procedure for negotiating and concluding external EMU agreements, with the Commission and ECB also playing

7.22

23 Council Decision 2009/904/EC of 26 November 2009 on the position to be taken by the European Community regarding the renegotiation of the Monetary Agreement with the Republic of San Marino [2009] OJ L322/12. See also Council Decision 2009/895/EC of 26 November 2009 on the position to be taken by the European Community regarding the renegotiation of the Monetary Agreement with the Vatican City State [2009] OJ L321/36; Council Decision 2011/190/EU of 25 February 2011 on the arrangements for the renegotiation of the Monetary Agreement between the Government of the French Republic, on behalf of the European Community, and the Government of His Serene Highness the Prince of Monaco [2011] OJ L81/3. 24 See further Section IV. 25 In Case C-425/13 Commission v Council [2015] ECLI:EU:C:2015:483, paras 85–92, the Court held that the imposition of detailed binding negotiating positions on the Commission was contrary to Article 218(4) TFEU and the principle of institutional balance. 26 See further Päivi Leino-Sandberg, ‘The Principle of Transparency in EU External Relations Law: Does Diplomatic Secrecy Stand a Chance of Surviving the Age of Twitter?’ in Marise Cremona (ed), Structural Principles in EU External Relations Law (Hart Publishing 2018). 27 See further Marise Cremona, ‘A Quiet Revolution: The Common Commercial Policy Six Years after the Treaty of Lisbon’ (2017) SIEPS Working Paper 2017:2, 45–50. In his State of the Union address of 13 September 2017 Commission President Jean-Claude Juncker declared that: ‘From now on, the Commission will publish in full all draft negotiating mandates we propose to the Council’ accessed 3 February 2020.

182 INTERNATIONAL AGREEMENTS OF EU IN FIELD OF EMU significant roles. This raises the question of the position of the European Parliament. As mentioned already, the Parliament is to be consulted before the conclusion of formal exchange-rate agreements for the euro, but otherwise it is not mentioned. This is in contrast to the centrality of its involvement in most EU external agreements post-Lisbon: in most cases, the Parliament’s consent is required—these include association agreements, as well as agreements in fields where the ordinary legislative procedure applies, including trade policy; in other cases, the Parliament must be consulted. The only exception, where the Parliament is given no formal role in the conclusion of the agreement, are agreements in the field of CFSP; however even here it has been held that the Parliament must be kept informed at all stages of the procedure, on the basis of Article 218(10) TFEU.28 Applying the argument proposed earlier, that the provisions of Article 218 TFEU may apply insofar as they are not displaced by the special procedures of Article 219 TFEU, it could be argued that Article 218(10) should also apply to external EMU agreements, and that the Parliament must be duly kept informed. However, the wording of Article 218(10) TFEU with its reference to ‘all stages of the procedure’ might suggest that it is intended to apply only to the procedure laid down in Article 218 TFEU itself. In addition, it could be argued that by referring specifically to the ‘close association’ of the Commission with the negotiations, Article 219(3) TFEU deliberately omits any reference to the Parliament. It is therefore not clear that the Parliament has a general right to be informed about the negotiation of Article 219 TFEU agreements in cases where it does not have a right to be consulted. 7.23

The European Central Bank (ECB) on the other hand is granted a specific role by Article 219 TFEU. If the agreement is not initiated by an ECB Recommendation, the ECB must be consulted, and its opinion is referred to in the final Decision and published.29 These opinions are not simply ‘rubber stamps’, and contain ECB legal opinion as to the drafting and scope of the draft Decisions, as well as the relevant institutional mechanisms, in particular the relationship of those institutions to the ESCB and ECB, which may well result in amendments to the draft. More recent Council decisions on the arrangements for negotiating agreements under Article 219(3) TFEU provide that the ECB’s agreement ‘shall be required on issues falling within its field of competence’.30

IV. EMU Agreements in Practice 7.24

The euro has an inherent external dimension since although it does not cover all Member States, it does extend beyond the territory of Europe31 and of the EU. It therefore concerns agreements with countries and territories external to the EU.32 Practice in external EMU 28 European Parliament v Council (n 18). Article 218(10) TFEU provides: ‘The European Parliament shall be immediately and fully informed at all stages of the procedure.’ 29 Cf Article 127(4) TFEU with respect to the adoption of internal legislation. For the ECB Opinion on the agreement with San Marino mentioned above (n 21), see [1999] OJ C127/4. 30 See, eg Article 3 Council Decision 2009/904/EC. 31 For example, the Canary Islands, which are part of Spain, the Azores and Madeira which are part of Portugal, and the French overseas departments Mayotte, Réunion, French Guiana, Guadeloupe, and Martinique are part of the EU, although outside Europe, and use the euro. We will not consider these cases further since they are not external to the EU. 32 According to the Commission, apart from the nineteen euro area Member States ‘[s]‌ixty other countries and territories around the world, home to 175 million people, have chosen to use the euro as their currency or to peg

EMU Agreements in Practice 183 agreements is not extensive, comprising a number of agreements providing, in essence, for the use of the euro in non-EU territories and countries. These agreements fall into three categories.

A. Arrangements for the adoption of the euro by the overseas territories of the Member States The French overseas collectivities (collectivité d’outre-mer or COM) have a variety of statuses as far as the EU and the euro are concerned. Some, such as French Polynesia, use the CFP franc (see below). Others, such as Saint-Barthélemy (in the Caribbean) and Saint-Pierre-et-Miquelon (off the coast of Canada), use the euro. As part of the preparation for the introduction of the euro, in 1999 the Council took a decision on the monetary arrangements for Saint-Pierre-et-Miquelon providing for the adoption of the euro as the official currency and for the ECB and the national central banks to carry out the functions and operations of the ESCB there.33 This was an internal EU decision addressed to France; however when Saint-Barthélemy, another COM which had separated from the French overseas department of Guadeloupe in 2007, moved from being an outermost region of the EU to an Overseas Country or Territory (OCT) governed by Part IV of the TFEU, a monetary agreement was concluded on maintaining the euro as its currency. This agreement between the EU and France ‘acting for the benefit of Saint-Barthélemy’, was based on Article 219(3) TFEU.34

7.25

Since France was acting for Saint-Barthélemy, a non-sovereign entity which is no longer part of the EU, it was able to conclude the agreement despite the exclusive nature of EU competence over monetary policy; as the preamble to the agreement points out, currency issues in relation to Saint-Barthélemy ‘fall within the field of competence of the French State’. So too do the laws applicable in the COM relating to EMU, banking and finance. Thus the agreement provides that France will continue to apply in Saint-Barthélemy ‘the European Union legal acts and rules necessary for the functioning of the Economic and Monetary Union’, including not only laws on euro notes and coins and counterfeiting but also banking and

7.26

their own currency to it’. See Commission, ‘Further Steps Towards Completing Europe’s Economic And Monetary Union: A Roadmap’ COM (2017) 821 final, 1. 33 Council Decision 1999/95/EC of 31 December 1998 concerning the monetary arrangements in the French territorial communities of Saint-Pierre-et-Miquelon and Mayotte [1999] OJ L30/29. This decision was based on Article 109l(4) EC (later Article 123(4) EC), which was the legal basis for the Council to take decisions on the introduction of the euro. See also ECB Opinion of 30 December 1998 at the request of the Council under Article 109l(4) of the Treaty establishing the European Community on a proposal for a Council Decision concerning the monetary arrangements in the French territorial communities of Saint-Pierre-et-Miquelon and Mayotte [1999] OJ C127/05. Mayotte, also referred to in this Council Decision, was a COM until 31 March 2011, when it became a French overseas department with the euro as its currency; since January 2014 it has been an outermost region of the EU (see Article 349 TFEU). 34 Council Decision 2011/433/EU of 12 July 2011 on the signing and conclusion of the Monetary Agreement between the European Union and the French Republic on keeping the euro in Saint-Barthélemy following the amendment of its status with regard to the European Union [2011] OJ L189/1. The change of status from outermost region to OCT, which under Article 355(6) TFEU takes place by decision of the European Council (European Council Decision 2010/718/EU of 29 October 2010 amending the status with regard to the European Union of the island of Saint-Barthélemy [2010] OJ L325/4), took effect on 1 January 2012. Saint-Martin, which also separated from Guadeloupe in 2007, has remained an outermost region of the EU, keeping the euro as its currency.

184 INTERNATIONAL AGREEMENTS OF EU IN FIELD OF EMU financial legislation and laws on money laundering.35 In addition, EU acts in these fields which are directly applicable in the Member States ‘shall apply automatically and under the same conditions in Saint-Barthélemy’,36 and the Court of Justice has exclusive competence to settle disputes between the parties (that is, between the EU and France).37 Henceforth, a monetary agreement of this nature, one which involves a territory or country outside the EU adopting the euro as its currency, will include extensive commitments to adopting the EU acquis—an issue which will be returned to below.

B. Exchange rate agreements with third countries whose currencies are pegged to the euro 7.27

The introduction of the euro also posed issues for those states which use currencies pegged to the pre-euro currencies of EU Member States, in particular the CFP and CFA franc. According to Protocol No 18, attached to the TEU and TFEU, France will keep the privilege of monetary emission in New Caledonia, French Polynesia and Wallis and Futuna under the terms established by its national laws, and will be solely entitled to determine the parity of the CFP franc’.38 In addition to these overseas territories of France, which use the CFP franc, a number of countries use currencies that are pegged to the euro, in particular the countries belonging to the Union économique et monétaire ouest-africaine (UEMOA),39 and the Communauté économique et monétaire de l’Afrique Centrale (CEMAC),40 both of which use the CFA franc; the Comores, which uses the Comorian franc; and Cape Verde, which uses the Cape Verde escudo.

7.28

In 1998 decisions were adopted by the Council, based on what is now Article 219(3) TFEU, authorizing France and Portugal respectively to maintain in force their agreements on these currencies.41 Under the French agreements, the convertibility of the CFA and Comorian franc at a fixed parity is guaranteed by the French Treasury; as the Council Decision states, the agreements ‘are unlikely to have any material effect on the monetary and exchange rate policy of the euro area’ and do not imply any obligations for the ECB.42 France is given authority to maintain the agreements after the introduction of the euro (so that the convertibility at fixed parity would apply to the euro) and to negotiate amendments, subject to an obligation to inform the Commission, the ECB and the Economic and Finance Committee of any changes to the parity rate.43 Any alteration to their scope or nature will ‘require the 35 Article 3 Monetary Agreement between the European Union and the French Republic on keeping the euro in Saint-Barthélemy [2011] OJ L189/3. 36 Ibid, Article 5. 37 Ibid, Article 9. 38 Protocol No 13, attached to the Treaty of Maastricht, was in similar terms: ‘France will keep the privilege of monetary emission in its overseas territories under the terms established by its national laws, and will be solely entitled to determine the parity of the CFP franc.’ 39 Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo; the UEMOA is a currency union and a regional bloc within ECOWAS. 40 Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon. 41 Council Decision 98/683/EC of 23 November 1998 concerning exchange rate matters relating to the CFA Franc and the Comorian Franc [1998] OJ L320/58; Council Decision 98/744/EC (n 3). Both decisions are based on Article 109(3) EC, which became Article 111(3) EC, and which is now Article 219(3) TFEU. 42 Preamble paragraph 7 Council Decision 98/683/EC (n 41). 43 Ibid, Article 4.

EMU Agreements in Practice 185 approval of the Council on the basis of a recommendation from the Commission and after consultation of the European Central Bank’—in other words, a new decision adopted according to Article 219(3) TFEU.44 The decision addressed to Portugal concerning the Cape Verde escudo is very similar. Here, then, Article 219(3) TFEU is used as a legal basis to authorize a Member State to maintain or conclude an agreement which falls within EU competence, subject to mechanisms and obligations designed to ensure ultimate EU control over the commitments entered into.

C. Agreements with small European countries which use the euro Declaration No 6 attached to the Treaty of Maastricht, on monetary relations with the Republic of San Marino, the Vatican City, and the Principality of Monaco, provides:

7.29

The Conference agrees that the existing monetary relations between Italy and San Marino and the Vatican City and between France and Monaco remain unaffected by the Treaty establishing the European Community until the introduction of the ECU [European Currency Unit] as the single currency of the Community. The Community undertakes to facilitate such renegotiations of existing arrangements as might become necessary as a result of the introduction of the ECU as a single currency.

The initial renegotiation of the pre-euro arrangements was carried out by Italy (for San Marino and Vatican City) and France (for Monaco) respectively, acting under authorization from the Council granted by decisions based on what is now Article 219(3) TFEU.45 As already discussed in Section III, these decisions established the procedural arrangements and the content of the envisaged agreements. Under the agreements the third countries were authorized to adopt the euro as their currency and legal tender; from 2002 they were authorized to issue euro coins up to a specific value; and they undertook to cooperate on counterfeiting and to apply ‘community rules on euro banknotes and coins’.46 At this stage, then, the link between the adoption of the euro and the acceptance of the EU acquis was restricted to rules relating specifically to the euro as a currency. This was to change. Following a reassessment in 2009,47 replacement agreements have been concluded on the basis of Article 219(3) TFEU with San Marino, Vatican City, and Monaco, this time by the EU itself, and a new agreement concluded with Andorra (which did not have a formal monetary agreement before).48 44 Ibid, Article 5. 45 Council Decision 1999/97/EC (n 4); Council Decision 1999/98/EC (n 21); Council Decision 1999/96/EC (n 21). 46 For the text of the agreements (no longer in force), see Monetary Agreement between the Italian Republic, on behalf of the European Community, and the Republic of San Marino [2001] OJ C209/1; Monetary Agreement between the Italian Republic, on behalf of the European Community, and the Vatican City State and, on its behalf, the Holy See [2001] OJ C299/1; Monetary Agreement between the Government of the French Republic, on behalf of the European Community, and the Government of His Serene Highness the Prince of Monaco [2002] OJ L142/ 59. The agreement with Monaco contained the additional requirement that Monaco should implement EU law on counterfeiting. 47 Commission, ‘Report on the functioning of the Monetary Agreements with Monaco, San Marino and Vatican’ COM (2009) 359 final. 48 Monetary Agreement between the European Union and the Vatican City State [2010] OJ C28/13; Monetary Agreement between the European Union and the Principality of Andorra [2011] OJ C369/1; Monetary Agreement between the European Union and the Principality of Monaco [2012] OJ C23/13; Monetary Agreement between the European Union and the Republic of San Marino [2012] OJ C317/3.

7.30

186 INTERNATIONAL AGREEMENTS OF EU IN FIELD OF EMU 7.31

The aim of the new agreements, negotiated and concluded between 2009 and 2012, was to adopt a unified approach towards all four states on the issuance of euro coins, and specifically to require these states whose credit institutions would henceforth be able to access interbank settlement and payment systems in the EU to align their anti-counterfeiting, money laundering, banking and financial sector legislation with that in operation within euro area Member States. An institutional structure in the form of a Joint Committee has been instituted as a vehicle to monitor implementation of the agreement and to agree a timetable for the implementation of relevant Union law. Jurisdiction over disputes between the parties and to adjudicate on compliance is granted to the Court of Justice,49 which also has exclusive competence over ‘questions concerning the validity of decisions of the institutions or bodies of the European Union implemented by virtue of [the Agreements]’.50 The legislation to be implemented is now contained in an Annex to each agreement, which can be amended via a simplified procedure, either by the Commission or by decision of the Joint Committee.51

7.32

Therefore, this is an example of the extension of substantial parts of the EU acquis, on an ongoing and dynamic basis, to third countries who wish to be able to use the euro as legal tender and for their credit institutions to benefit from the EU’s payment systems. Despite their titles the agreements are thus more than monetary agreements, the third states in question participating to a certain extent in EU structures of financial regulation. The agreements themselves, and the Council decisions authorising their negotiation, refer to ‘ensuring a more level playing field’52 and ‘establishing comparable and equitable conditions between financial institutions situated in the euro area and those located in [the third State]’.53 While the use of Article 219 TFEU as a legal basis for these provisions may be questioned, it can nevertheless be argued that they do not exceed the scope of Article 219 TFEU as a legal basis. They do not grant any rights of establishment or the provision of services to credit institutions of either party, and it can be argued that these extended regulatory obligations are necessary to ensure the stability of the euro system. As such they can be seen as ancillary to the predominant purpose of the agreements, which is certainly to allow the adoption of the euro by the third state in question and to provide the necessary supporting regulatory framework.

49 See, for example, Article 10(2) of the Monetary Agreement between the European Union and the Principality of Andorra: If the European Union, represented by the European Commission and acting on a recommendation by the EU delegation in the Joint Committee, or the Principality of Andorra considers that the other Party has not fulfilled an obligation under this Agreement, it may bring the matter before the Court of Justice. The judgment of the Court shall be binding on the Parties, which shall take the necessary measures to comply with the judgment within a period to be decided by the Court in its judgment and shall not be subject to an appeal procedure. 50 See, for example, Article 12 of the Monetary Agreement between the European Union and the Principality of Monaco. 51 For a recent example, see Commission Decision 2017/125/EU of 24 January 2017 on amending the Annex to the Monetary Agreement between the European Union and the Republic of San Marino [2017] OJ L19/71. 52 Preamble paragraph 4, Monetary Agreement between the European Union and the Principality of Andorra. 53 Preamble paragraph 10, Council Decision 2004/548/EC of 11 May 2004 on the position to be taken by the Community regarding an agreement concerning the monetary relations with the Principality of Andorra [2004] OJ L244/47.

Conclusions 187

V. Conclusions A limited but distinct practice has grown in relations between the EU and other countries and overseas territories which use either the euro or a currency which is pegged to the euro. These monetary agreements fall within exclusive EU competence, although the Member States in practice play an important role as a result of their close historical links with the territories and countries in question.

7.33

The procedure governing their negotiation and conclusion, contained in Article 219 TFEU, operates in derogation from the normal treaty-making rules laid down in Article 218 TFEU. The ECB is consulted and also has an ongoing role in the monitoring of the arrangements laid down in these agreements. Article 219 TFEU allows the Council to determine the procedure, and as a result Member States or the Commission have been authorized to negotiate and even to conclude monetary agreements, according to the terms laid down by the Council. In contrast to normal treaty-making practice, therefore, the EU’s position as to the terms of the envisaged agreement will be made public and is contained in a legally binding decision.

7.34

While the first agreements concluded immediately before, and in preparation for, the introduction of the euro were limited in scope, more recent agreements with San Marino, Andorra, Vatican City, and Monaco have required these states to comply with EU rules concerning euro coins and banknotes, as well as to adopt and implement EU banking and financial, counterfeiting, and money laundering legislation. The lists of legislation to be adopted are updated regularly and implementation is monitored by the Commission in the context of a Joint Committee; the Court of Justice is given jurisdiction, even over compliance by the third country. These monetary agreements therefore operate to extend the reach of EU monetary and financial law beyond the territory of the Union itself. Their scope raises the question—one which is also very relevant internally—as to the degree of harmonization necessary to the sharing of a common currency. At present, although much extended from the 1990s, the legislation to be adopted by the non-EU states using the euro is still limited in comparison to that being contemplated for the euro area. This might be workable given the very small size of the countries concerned, but suggests that there are inherent limits to such currency agreements for the EU.

7.35

8

THE ARCHITECTURE OF EMU Cornelia Manger-Nestler*

I. Introductory Remarks II. Guiding Principles A. Irreversibility B. Conditionality C. Asymmetric integration

III. Membership and Territorial Scope A. Development of the group of participating Member States B. Member States with a derogation (Pre-Ins)

8.1 8.3 8.4 8.7 8.8 8.15 8.16 8.22

C. Legal status of Out-Members (Outs) D. The Convergence Criteria and other conditions for access

IV. Termination of Membership A. Exit from the EMU B. Exclusion C. Exit from the European Union

V. Extraterritorial Scope: The Euro in a Third Country VI. Perspectives

8.28 8.31 8.57 8.58 8.60 8.63 8.65 8.70

I. Introductory Remarks Each description of an ‘architecture’ implies the analysis of the fundamental architect’s plan, leading principles and conditions of existence, which define the design and the shape of the ‘construction’. This applies specifically to the European Monetary Union (EMU), which is inscribed to the European Union (EU) as a kind of an inner circle, because of the intensified kind of union. Looking at the guiding principles in shape of irreversibility and conditionality, it soon becomes evident that, from its beginnings, the architecture of the EMU was a challenge. Owing to the asymmetry of the EMU, this finding has not changed in the past twenty years since the foundation of the EMU.

8.1

Starting with the guiding principles of the EMU (see Section II), this contribution thereafter focuses on the membership requirements of the monetary union (see Section III). In addition to the development of the group of participating Member States, it focuses the discussion on the condition-based structure of the convergence criteria. While the question of how to get in is clearly defined in primary law (and the application cases disclosed some problematic room for interpretation), the aspects of how to get out are much less clear. As there is no practical example for the latter constellation so far and as the call for ‘exit strategies’ (eg for Greece) arose as a result of the euro crisis, possible exit scenarios need to be examined (see Section IV). The internal view will then be complemented by the extraterritorial view dealing with aspects of the use of the euro in third

8.2

* The author thanks Ass. iur. Markus Gentzsch and Dr. iur. Ulrike Will for their invaluable comments and fruitful discussion. Cornelia Manger-Nestler, 8 The Architecture of EMU In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0011

192 THE ARCHITECTURE OF EMU countries (see Section V). Finally, perspectives will show future dimension of the EMU (see Section VI).

II. Guiding Principles 8.3

Before the requirements of membership in the EMU are elaborated, constitutive legal principles which significantly characterize the architecture of the EMU need to be described. These principles include the irreversibility, conditionality and asymmetry of the EMU.

A. Irreversibility 8.4

The principle of irreversibility of the EMU, leading to the irrevocable replacement of the euro Member States’ national currencies by the euro, is no longer explicitly mentioned in primary law;1 Article 140(3) of the Treaty on the Functioning of the European Union (TFEU) only indirectly refers to the irrevocable fixing of exchange rates but not of the monetary integration process at all. As part of the textual revision provided by the Treaty of Lisbon, expired requirements and such of the past were removed. The irreversibility of the EMU seemed to be editorially appropriate, as it was one decade after the community entered into the final stage of the EMU on 1 January 1999,2 with the deadlines of the various stages of the EMU previously included in primary law undergoing a similar process. However, the reformulation of Article 119(2) TFEU does not change the fact that the monetary union is an irreversible element of the level of integration that has once been achieved.3 In this respect, the Treaty of Lisbon has fixed the level of integration reached in monetary affairs explicitly since 1 January 1999.

8.5

Article 119(2) TFEU mentions a ‘single currency, the euro’ and thereby establishes the inviolability of the EMU in primary law by saying that the composition of the monetary area must be taken for granted and, at least, cannot be cancelled without changing the Treaties.4 Hence non-participation in the euro is only envisaged as a temporary, exceptional situation. This is confirmed by the transitional provisions which apply to ‘Member States with a 1 See Article 3a(2) of the Treaty establishing the European Community (TEC) (Maastricht version). 2 See paragraphs 8.4–8.6. 3 Christoph Herrmann in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (Mohr Siebeck 2017) Article 119 TFEU, para 52 (hereafter Herrmann in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV). 4 See Ulrich Häde in Christian Calliess and Matthias Ruffert (eds), Kommentar zum EUV und AEUV (5th edn, CH Beck 2016) Article 140 TFEU, para 52 (hereafter Häde in Callies and Ruffert (eds), Kommentar zum EUV und AEUV); Christoph Herrmann in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 139 TFEU, para 12 (hereafter Herrmann in Siekmann (ed), EWU); Christoph Herrmann and Corinna Dornacher, International and European Monetary Law (Springer 2017) 88 (hereafter Herrmann and Dornacher, International and European Monetary Law). The German Federal Constitutional Court (FCC) represents a contrary opinion that the transfer of sovereign powers is limited by the ‘responsibility with respect to integration’ of the German constitutional organs respecting the limits of the Constitution (Grundgesetz). However, the FCC sees the withdrawal from the monetary union or even the community, as a last resort if the stability course is not adhered to, BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13. For an interpretation of the FCC’s position in the current context, see Fabian Amtenbrink, ‘The Metamorphosis of European Economic and Monetary Union’ in Anthony Arnull and Damian Chalmers (eds), The Oxford Handbook of European Union Law (OUP 2015) 719, 738ff (hereafter Amtenbrink, ‘The Metamorphosis’).

Guiding Principles 193 derogation’ (Articles 139ff TFEU).5 The systematic position of Article 139, which regulates the specific legal situation, and Article 140 TFEU, which points the way to the euro area, result in the primary procedural obligation to irreversibly implement the single currency.6 Finally, irreversibility following the irrevocable fixing of exchange rates is supported by the fact that there is no restriction on maturity in primary law, as opposed to the European Coal and Steel Community (ECSC). This corresponds with the finding that primary law de lege lata does not provide for a regulation on the return to the derogation including a national currency.7 There is no standard for a separate, unilateral exit from the EMU like the corresponding Article 50 Treaty of the European Union (TEU) which provides for the exit from the EU.8 As part of the Treaties valid for an indefinite period of time (Article 53 TEU and Article 356 TFEU), the monetary union belongs to the core inventory of the acquis communautaire, which is a standard of integration law and must be adopted as part of the Copenhagen Criteria9 by all new members in the event of accession.

8.6

B. Conditionality The principle of conditionality describes another fundamental condition of existence of the EMU, meaning that the participation in the partial integration network (or as the German Federal Constitutional Court neologises, ‘Teilintegrationsverbund’) depends on certain entry requirements. Even if the primary law considers the EMU, and in particular the achievement of the third stage, as the normal state of integration policy today, the accession to the EMU is not automatism but—just as the accession to the EU (Articles 49 and 2 TEU)—depends on the fulfilment of specific conditions. In this respect, the convergence criteria in Article 140 TFEU formulate legal and economic conditions for a Member State’s implementation of the common currency and thus its accession to the euro area. Even if the binding effect of the convergence criteria is fixed in primary law, the scope of its legal binding force was and still is controversial.10 This was already the case before the implementation of the EMU’s final stage (1999) but gained notoriety for softening the criteria when Greece acceded to the euro area (2001). This is one of many reasons for the confidence crisis11 surrounding the common currency since 2010.

8.7

C. Asymmetric integration EU law contains various forms of graded depths of integration, including enhanced cooperation as well as asymmetric integration processes. The most pronounced form in the EMU 5 See paragraph 8.7. 6 For special cases (United Kingdom, Denmark, and Sweden), see paragraphs 8.22–8.26 and paragraphs 8.28–8.30. 7 Häde in Callies and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, para 50; Herrmann in Siekmann (ed), EWU (n 4) Article 139 TFEU, para 12. 8 See paragraphs 8.58–8.59 and paragraphs 8.63–8.64. 9 Christophe Hillion, ‘Accession and Withdrawal in the Law of the European Union’ in Anthony Arnull and Damian Chalmers (eds), The Oxford Handbook of European Union Law (OUP 2015) 126, 127ff. 10 See paragraphs 8.50–8.54. 11 See in detail, Part IX (Crisis and Future of EMU) of this work.

8.8

194 THE ARCHITECTURE OF EMU is the principle of asymmetric integration,12 understood as a lack of equality or equivalence between parts or aspects of a reference point. This lack of symmetry resulting from the conditionality of the convergence criteria leads to different levels of legal integration between the nineteen Member States of the EMU and the (remaining) twenty-seven Member States of the EU. As permanent economic convergence, which is one condition of access to the euro area, was not met by all Member States at the same time (principle of asymmetry and in so far also of asynchrony), the Member States whose currency is the euro form an inner union with an intensified depth of regulation called ‘Eurosystem’ (Article 282(1)(2) TFEU).13 Consequently, primary law distinguishes between Member States that have already introduced the euro (so-called ‘Ins’) and Member States with a derogation that can ignore most but not all of the EMU provisions and have limited voting rights in the Economic and Financial Affairs Council (ECOFIN Council, Article 139(2)–(4) TFEU).14

8.9

8.10

1. EMU as a part of the European Union As a result of the asymmetric integration, the Member States of the EMU and the remaining Member States of the EU form—figuratively speaking—two concentric circles:15 the members of the euro area form the inner circle, because they are in a denser union as regards the competences,16 whereas the remaining EU-27 countries form the outer integration circle of the whole Union. In this respect, the EMU represents the first far-reaching application case of differentiated integration, which has been codified in primary law with extensive, proper rules.17 Therefore, recourse to the regulations of the Enhanced Cooperation (Article 20 TEU, Articles 326–334 TFEU) was not necessary. The asymmetry between the EMU and EU is also reflected in the internal organizational structures of the EMU, such as the European System of Central Banks (ESCB) and the Eurosystem which are both also part of the institutional structure of the EU. The ESCB, which consists of all twenty-seven Member States, forms the outer circle. Inscribed as a kind of an inner circle is the Eurosystem, formally named as such since Lisbon (Article 282(1) sentence (2) TFEU). The Eurosystem consists of the European Central Bank (ECB) and the National Central Banks (NCBs) of the euro area Member States, which in 2019, are nineteen NCBs. Just as in the geometric model, both circles have a common centre. This centre is the ECB as primary law grants the leadership role of both systems to the ECB (Article 129(1), Article 282(1) and (2) sentence (2) TFEU). Like the relationship between the EU and EMU, the ESCB in relation to the Eurosystem forms the broader integrated network, as the ESCB 12 Herrmann in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 3) Article 119 TFEU, para 10. 13 Francis Snyder, ‘EMU—Integration and Differentiation: Metaphor for European Union’ in Paul Craig and Gráinne de Búrca (eds), The Evolution of EU Law (OUP 2011) 687, 703ff (hereafter Snyder, ‘EMU’). 14 As stated in Article 139(2)(a) and (b) TFEU, Articles 121 and 126 are not entirely inapplicable but only specific paragraphs (Articles 121(2) and 126(9) and (11)). This gap between the Ins and Outs was widened with the introduction of the ‘six-pack’ and ‘two-pack’. 15 See Andreas Haratsch in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (Mohr Siebeck 2017) Article 20 TEU, para 4; and, especially for the EMU, Cornelia Manger- Nestler in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (Mohr Siebeck 2017) Article 82 TFEU, para 3 (hereafter Manger-Nestler in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV). 16 See Herrmann in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 3) Article 119 TEU, para 10; Herrmann and Dornacher, International and European Monetary Law (n 4) 74ff. 17 Snyder, ‘EMU’ (n 13) 687; Chiara Zilioli and Martin Selmayr, The Law of the European Central Bank (Hart Publishing 2001) 133 (hereafter Zilioli and Selmayr, The Law of the European Central Bank).

Guiding Principles 195 includes all NCBs of the EU Member States, even those not yet participating in the euro. For the latter Member States, this opens a kind of waiting and preparation framework.18 In contrast, the Eurosystem is formally a part of the ESCB.19 The ECB, even if settled in the centre of both circles, can act in a legally binding manner only if addressing the Member States of the euro area.20 The competence transfer, which becomes ultimately active in monetary policy with the implementation of the single currency, makes the NCBs strictly subordinate to the ECB in terms of organization and function.21 Consequently, NCBs become integral, or in other words inscribed parts of the inner monetary integration union.

2. Relationship between Monetary and Economic Union The principle of asymmetry is not only relevant for the relationship between the groups of participating Member States of the EMU and the EU-27, but also for other provisions of the EU law. The linguistic term ‘Economic and Monetary Union’, which appears in the Union’s objectives (Article 3(4) TEU) and also in other rules of primary law (eg Articles 66, 119, 121, and 136 TFEU), covers up the fact that the Member States were not ready to transfer sovereign rights to the Union in both policy areas to the same extent. The consequence of these asymmetric integration grades between economic and monetary union lead to different intensities of integration22 and a serious legal asymmetry.23 These were conceptually created by the Treaty of Maastricht between the Economic Union24 based on coordination (Article 119(1) TFEU) and the Monetary Union, which is based on uniformity (Article 119(2) TFEU). With the implementation of the single currency in 1999, the sovereignty of the (then eleven, today nineteen) Member States in this policy area found an end and was, at the same time, transferred to the supranational responsibility of the Eurosystem, which is managed by the ECB as an institution of the Union (Article 13(2) TEU). The resulting high 18 See further Chapters 14 and 15 of this work. 19 Snyder, ‘EMU’ (n 13) 687, 704. 20 See Imelda Mahler, ‘Competition Law Modernization: An Evolutionary Tale‘ in Paul Craig and Gráinne de Búrca (eds), The Evolution of EU Law (OUP 2011) 717, 727; Herrmann in Siekmann (ed), EWU (n 4) Article 139 TFEU, para 15; Manger-Nestler in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 15) Article 282 TFEU, para 12; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (CH Beck 2015) §2, para 2 (hereafter Ohler, Bankenaufsicht); René Smits, The European Central Bank: Institutional Aspects (Kluwer Law International 1997) 103, 135 (hereafter Smits, ECB). 21 Prevailing view, see Florian Becker in Helmut Siekmann (ed), EWU— Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 129 TFEU, para 55 (hereafter Becker in Siekmann (ed), EWU); Jean- Victor Louis, ‘The Economic and Monetary Union: Law and Institutions’ (2004) 41 Common Market Law Review 575, 587; Manger-Nestler in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 15) Article 129 TFEU, para 6ff; Ulrich Palm in Eberhard Grabitz, Meinhard Hilf and Martin Nettesheim (eds), Das Recht der Europäischen Union (CH Beck 2016) Article 282 TFEU, paras 24 and 26; Smits, ECB (n 20) 94 (‘clear line of command’); Zilioli and Selmayr, The Law of the European Central Bank (n 17) 54ff. See also Chapter 15 of this work. 22 See Peter-Christian Müller-Graff in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (Mohr Siebeck 2017) Article 3 TEU, para 42. 23 Rüdiger Bandilla in Eberhard Grabitz, Meinhard Hilf, and Martin Nettesheim (eds), Das Recht der Europäischen Union (CH Beck 2016) Article 119 TFEU, para 33; Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 119 TFEU, para 13; Ulrich Häde, ‘Die Wirtschafts-und Währungsunion im Vertrag von Lissabon’ (2009) 44 Europarecht 200, 202 (hereafter Häde, ‘Die Wirtschafts-und Währungsunion im Vertrag von Lissabon’); Herrmann in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/ AEUV (n 3) Article 119 TFEU, paras 10 and 58; Helmut Siekmann in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 119, para 23 (hereafter Siekmann in Siekmann (ed), EWU). 24 See, in detail, Part VI (Economic Union) of this work.

8.11

8.12

196 THE ARCHITECTURE OF EMU degree of supranationalization is ultimately a consequence of the exclusive competence of the Union for monetary policy, excluding the principle of subsidiarity which characterizes other areas of policy of the Union (Article 5(3) TEU).25 Consequently, the principle of uniformity26 applies to the EMU, which characterizes the uniform institutional structure of the Eurosystem (eg Articles 129(1) and 282ff TFEU) just as the substantial legal orientation27 of the common monetary policy. The objective to define and to implement a single monetary policy is constitutionalized in primary law in a manner that price stability is the primary objective of the Union’s monetary policy28 but not of the Union’s policy as a whole.29 By transferring the responsibility for a concrete definition of price stability to the Eurosystem led by the ECB, which established its own operational definition of the term,30 the objective of price stability is interlocked with the organizational structure of the Eurosystem. The principle of unity thus receives greater power of action. After all, the ECB/Eurosystem may only ‘support’ the general economic policies in the Union as far as price stability is ensured absolutely (Article 127(1) and (2) TFEU).31 8.13

In contrast to the single monetary policy, the economic policy is characterized by the principle of exclusive economic competences of the Member States and thus follows the model of intergovernmental coordination.32 Even if, taking into account the lessons learnt from the financial and euro crisis, the Member States of the euro area significantly expanded the economic and fiscal control mechanisms at the level of the EU law,33 there is no further consensus on the intended degree of supranationalization of national economic policies. The present discussion about the reform of the EMU highlights this discrepancy and reveals profound demarcation problems concerning competences, especially regarding the further development of the European Stability Mechanism (ESM) to a European Monetary Fund (EMF).34

8.14

However, the model of a single currency can only work without tensions and as a coherent part of the Union if the uniform monetary transmission mechanism does not lead to different economic effects in the participating Member States.35 Apart from close intertwinement between the EMU and EU, divergence between economic and monetary union, which became obvious during the sovereign debt crisis, has to be avoided. This divergence 25 Smits, ECB (n 20) 111ff; Zilioli and Selmayr, The Law of the European Central Bank (n 17) 70ff. 26 See Becker in Siekmann (ed), EWU (n 21) Article 129 TFEU, para 20; Herrmann in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 3) Article 119 TFEU, paras 22ff and para 51; Zilioli and Selmayr, The Law of the European Central Bank (n 17) 70. 27 In particular see Article 3(4) TEU; Articles 119(2), 128(1), 133, and 140(3) TFEU. 28 See, in particular, Articles 119(2), 127(1), and 282(2), (3) TFEU. 29 Barbara Dutzler, The European System of Central Banks: An Autonomous Actor? (Springer 2004) 34ff; Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 119 TFEU, para 24; Siekmann in Siekmann (ed), EWU (n 23) Article 119 TFEU, para 102. 30 Price stability is defined as a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below 2 per cent. To counter critiques of a risk of deflationary tendencies in 2003 the ECB Governing Council clarified that ‘in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2 per cent over the medium term’, see accessed 23 January 2020. 31 See Chapter 22 of this work. 32 See Articles 5(1), 119(1), and 121(1) TFEU. 33 See for details Chapters 27 and 28 of this work. 34 See Cornelia Manger-Nestler and Robert Böttner, ‘Der Europäische Währungsfonds nach den Plänen der Kommission’ (2019) 79 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 1 (hereafter Manger- Nestler and Böttner, ‘Der Europäische Währungsfonds’). 35 Ohler, Bankenaufsicht (n 20) §3 para 8.

Membership and Territorial Scope 197 originates in the asymmetric architecture of the economic and monetary union and, therefore, requires profound changes.36

III. Membership and Territorial Scope The outlined basic principles of monetary policy provide a suitable background for analysing the conditions of participation in the EMU and its territorial scope in more detail. The first aspect discussed is the development of the group of participating Member States. As a result of the asymmetry between the EU-27 and the euro area Member States, the relationship to the non-participating States, so-called ‘Outs’, needs to be considered as well.

8.15

A. Development of the group of participating Member States Participation in the EMU has required a significant amount of sovereign rights to be transferred from EU Member States to the level of the EU. The development of the circle of participants took place in several phases, since not all Member States completed this integration step in 1999.37 Some Member States followed in the years thereafter, but others are unable or do not want to join the common currency area to this day, with the reasons for this varying greatly.

1. The first euro area Member States 1999 Since 1 January 1999, the Union has been in the third or final stage of the EMU. The Member States had agreed on the date of commencement in the Maastricht Treaty38 and thus did not make use of the option of an earlier start of the third stage. Two Member States—the United Kingdom (UK), being a member until 2020, and Denmark—had insisted on making their own decision on entering the third stage of EMU in primary law. For the remaining Member States, the conditions for transition to the final stage of the EMU applied, even if not all Member States met the convergence criteria in 1999. Based on the convergence reports of the ECB, the Commission and the ECOFIN Council about the participation, the Council decided in May 1998 that eleven of the then fifteen Member States would join the EMU.39 Accordingly, the Council ‘irrevocably’ specified the exchange rates for the currencies of Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.40 In the Council’s view, Greece

36 See paragraphs 8.70–8.71. 37 See Chapter 2 of this work, in particular concerning EMU in three stages as suggested in the Delors Report. 38 Article 109j(4) sub-para 1 TEC (Maastricht version). 39 Council Decision of 3 May 1998 in accordance with Article 109j(4) of the Treaty (98/317/EC) [1998] OJ L139/ 30. 40 See Article 109(4) sub-para 1 TEC (Maastricht version) and Council Regulation (EC) 2866/98 of 31 December 1998 on the conversion rates between the euro and the currencies of the Member States adopting the euro [1998] OJ L359/1 based on it. Under Article 1 of the Regulation (in its original version) the Euro replaces the national currencies of the first Member States ‘irrevocably’ in each case in the following relation: 1 euro = 13,7603 Austrian schillings; = 40,3399 Belgian francs; = 1,95583 Deutsche Mark (German marks); = 5,94573 Finnish marks; = 6,55957 French francs; = 0,787564 Irish pounds; = 1936,27 Italian lire; = 40,3399 Luxembourg francs; = 2,20371 Dutch guilders; = 200,482 Portuguese escudos; and = 166,386 Spanish pesetas.

8.16

8.17

8.18

198 THE ARCHITECTURE OF EMU and Sweden did not meet the convergence criteria at that time. In the case of Greece, the euro area Member States voted for its entry to the euro area in 2000. Sweden does not participate in the euro area as there are, then, as now, legal deficits rooted in the Swedish Riksbank (Bank of Sweden) lacking full independence;41 consequently Sweden does not participate in the Exchange Rate Mechanism II (ERM II). The other Member States granted both the UK42 and Denmark43 a special status in the Treaty of Maastricht, excluding automatism for the EMU.44

8.19

2. Gradual expansion of the euro area Before the eastward enlargement of the EU in 2004, the Member States had already declared that the EMU legislation and the third stage in particular belong to the acquis communautaire and therefore to the normal status of integration, which all new members have to adopt in case of accession. This is confirmed by the language in Article 140(1) sub-para 1 sentence 1 TFEU that mentions the ‘obligations’ of the Member States with special status for the implementation of the economic and monetary union, thus setting a legal obligation to introduce the euro.45 This leads to the obligation of the Member States to dedicate themselves sincerely to the fulfilment of the convergence criteria and to introduce the euro in the near future.46 Hence, the non-participation is a temporary exceptional state47 granted by the Union in case of accession of new members. The exceptions to the UK (special status) and Denmark (exemption) granted in the past are no longer negotiable for new members since 2004.48 However, for twenty-six out of (remaining) twenty-seven Member States, legally binding participation in the third stage of the EMU is a necessary but by no means a sufficient condition for the introduction of the euro in the respective EU Member State.49 This interpretation is supported by the system of the Treaties which distinguishes between two groups of Member States: on the one hand, there are Member States that fulfil the necessary legal and economic conditions for the introduction of the single currency—the convergence criteria—and thus participate in the single currency with all its rights and obligations; these 41 See Commission, ‘Convergence Report 2018’ (2018) Institutional Paper 078, 119 accessed 23 January 2020 (hereafter Commission, ‘Convergence Report 2018’). 42 Protocol No 15 on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland OJ C202/284. No 4, s 1 of the Protocol excludes the applicability of the most of the provisions of the TFEU regarding the EMU, in detail Articles 119(2), 126(1), (9), and (11), 127(1)–(5), 128, 130, 131, 132, 133, and 138, 140(3), 219, and 282(2) with the exception of the first and last sentences thereof, Articles 282(5) and 283 TFEU. See Herrmann in Siekmann (ed), EWU (n 4) Protocol No 15, paras 5ff. 43 Protocol No 16 on certain provisions relating to Denmark [2016] OJ C202/287. By this Protocol Denmark has been primarily equated to the Member States with a derogation under Article 139(1) TFEU. See Siekmann in Siekmann (ed), EWU (n 23) Protocol No 16, paras 12ff. 44 For details, see paragraphs 8.28–8.30. 45 Phoebus L Athanassiou, ‘Withdrawal and expulsion from the EU and EMU: Some Reflections’ (2009) Legal Working Paper No 10, 14 (hereafter Athanassiou, ‘Withdrawal and expulsion from the EU and EMU’); Siekmann in Siekmann (ed), EWU (n 23) Article 119 TFEU, para 95; Herrmann in Siekmann (ed), EWU (n 4) Article 139 TFEU, para 2. 46 Herrmann and Dornacher, International and European Monetary Law (n 4) 85ff; Eva Indruchová, ‘European Union Member States outside the Euro Area: Their legal status and approach towards the Euro’ (2013) 3 The Lawyer Quarterly 225, 229f (hereafter Indruchová, ‘European Union Member States outside the Euro Area’). 47 Häde, ‘Die Wirtschafts-und Währungsunion im Vertrag von Lissabon’ (n 23) 208; Siekmann in Siekmann (ed), EWU (n 23) Einführung, paras 63ff. 48 Indruchová, ‘European Union Member States outside the Euro Area’ (n 46) 233; Mirjam Allam, ‘The Adoption of the Euro in the New EU Member States: Repercussions of the Financial Crisis’ (2009) Eipascope 2009/ 1, 27. 49 Zilioli and Selmayr, The Law of the European Central Bank (n 17) 134ff.

Membership and Territorial Scope 199 ‘Member States whose currency is the Euro’ (Article 139(2) sub-para 2 TFEU) are also called ‘Ins’. Therefore, if the term ‘Member States’ is used in the context of the EMU, this includes only the Member States with the euro as currency (argumentum ex Article 139(2) sub-para 2 TFEU). On the other hand, those Member States that do not yet fulfil the conditions and, being at the third stage of the economic and monetary union, automatically fall under a derogation; these ‘Member States with a derogation’ (Article 139(1) TFEU) are called ‘Pre-Ins’.50 The term ‘derogation’ shows that primary law considers the introduction of the single currency as the normal legal state. In contrast, non-participation is only qualified as a temporary state or transitional solution.51 This view is confirmed by the obligation of the Commission, the ECB and the Council to report, at least, once every two years or upon request of the Member States in question, to what extent the ‘Member States with a derogation’ made progress (convergence check, Article 140(1) sub-para 1 sentence 1 TFEU). If the Council concludes that the Member State in question is now fulfilling the necessary legal and economic conditions for introducing the euro, it will cancel the derogation in order to introduce the euro in accordance with EU law (Article 140(2) TFEU).

8.20

Since its beginnings in 1999, the EMU grew in seven steps of enlargement to 19 Member States (in 2020). The beginning was made by Greece52 (2001), followed by Slovenia53 (2007), Cyprus54 and Malta55 (2008), Slovakia56 (2009), Estonia57 (2011), and Latvia58 (2014). The last Member State to join the EMU was Lithuania59 in 2015.

8.21

50 See paragraphs 8.22–8.27. 51 Herrmann in Siekmann (ed), EWU (n 4) Article 139 TFEU, para 6; Erich Vranes, ‘The “Internal” External Relations of EMU—on the Legal Framework of the Relationship of “In” and “Out” States’ (2000) 6 Columbia Journal of European Law 361, 372 (hereafter Vranes, ‘The “Internal” External Relations of EMU’). 52 Council Decision (2000/427/EC) of 19 June 2000 in accordance with Article 122(2) of the Treaty on the adoption by Greece of the single currency on 1 January 2001 [2000] OJ L167/19; Council Regulation (EC) 1478/2000 of 19 June 2000 amending Regulation (EC) 2866/98 on the conversion rates between the euro and the currencies of the Member States adopting the euro [2000] OJ L167/1 determined the conversion rate between the euro and the Greek drachma: 1 euro = 340,750 Greek drachma. 53 Council Decision (2006/495/EC) of 11 July 2006 in accordance with Article 122(2) of the Treaty on the adoption by Slovenia of the single currency on 1 January 2007 [2006] OJ L195/25. Council Regulation (EC) 1086/2006 of 11 July 2006 amending Regulation (EC) 2866/98 on the conversion rates between the euro and the currencies of the Member States adopting the euro [2006] OJ L195/1 determined the conversion rate between the euro and the Slovenian tolars: 1 euro = 239,640 Slovenian tolars. 54 Council Decision (2007/503/EC) of 10 July 2007 in accordance with Article 122(2) of the Treaty on the adoption by Cyprus of the single currency on 1 January 2008 [2007] OJ L186/29; Council Regulation (EC) 1135/2007 of 10 July 2007 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Cyprus [2007] OJ L256/2 determined the conversion rate between the euro and the Cyprus pounds: 1 euro = 0,585274 Cyprus pounds. 55 Council Decision (2007/504/EC) of 10 July 2007 in accordance with Article 122(2) of the Treaty on the adoption by Malta of the single currency on 1 January 2008 [2007] OJ L186/32; Council Regulation (EC) 1134/2007 of 10 July 2007 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Malta [2007] OJ L256/1 determined the conversion rate between the euro and the Maltese liras: 1 euro = 0,429300 Maltese liras. 56 Council Decision (2008/608/EC) of 8 July 2008 in accordance with Article 122(2) of the Treaty on the adoption by Slovakia of the single currency on 1 January 2009 [2008] OJ L195/24; Council Regulation (EC) 694/2008 of 8 July 2008 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Slovakia [2008] OJ L195/3 determined the conversion rate between the euro and the Slovak korunas: 1 euro = 30,1260 Slovak korunas. 57 Council Decision (2010/416/EU) of 13 July 2010 in accordance with Article 140(2) of the Treaty on the adoption by Estonia of the euro on 1 January 2011 [2010] OJ 196/24; Council Regulation (EU) 671/2010 of 13 July 2010 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Estonia [2010] OJ L196/4 determined the conversion rate between the euro and the Estonian kroons: 1 euro = 15,6466 Estonian kroons. 58 Council Decision (2013/387/EU) of 9 July 2013 on the adoption by Latvia of the euro on 1 January 2014 [2013] OJ L195/24; Council Regulation (EU) 870/2013 of 9 July 2013 amending Regulation (EC) 2866/98 as regards the conversion rate to the euro for Latvia [2013] OJ L243/1 determined the conversion rate between the euro and the Latvian lats: 1 euro = 0,702804 Latvian lats. 59 Council Decision (2014/509/EU) of 23 July 2014 on the adoption by Lithuania of the euro on 1 January 2015 [2014] OJ L228/29; Council Regulation (EU) 851/2014 of 23 July 2014 amending Regulation (EC) 2866/98 as

200 THE ARCHITECTURE OF EMU

B. Member States with a derogation (Pre-Ins) 8.22

8.23

8.24

1. Circle of Pre-Ins Apart from (the UK as a former Member State and) Denmark, there are another seven EU Member States not participating in the EMU. Accordingly, Bulgaria, the Czech Republic, Croatia, Poland, Romania, Sweden, and Hungary have the status of a Member State with a derogation (Article 139(1) TFEU). All of the named central and eastern European Member States partly still do not fulfil all of the legal and economic convergence criteria today (2020) and do not participate in the ERM II (Article 140(1) TFEU). Consequently, the accession of one of these states to the EMU in the short or medium-term is unlikely.60 2. Inapplicable provisions The special status of the Member States with a derogation is characterized by the fact that essential provisions related to the EMU do not apply to the Pre-Ins (Article 139(1) sub-para 1 TFEU). As a result, the uniform applicability of EU law is compromised in a functional and, consequently, territorial way.61 This leads to a graded or differentiated integration.62 The reason for this finding is that the NCBs belong to the ESCB but have not transferred any monetary competences to the ECB/Eurosystem as they have not introduced the single currency. On the contrary, the NCBs keep their monetary competences according to their national legislation.63 In a catalogue-like listing, Article 139(2) sub-para 1 TFEU names ten provisions that do not apply to Member States with a derogation. These are: – lit. (a) adoption of the parts of the broad economic policy guidelines which concern the euro area generally (Article 121(2); – lit. (b) coercive means of remedying excessive deficits (Article 126(9) and (11)); – lit. (c) the objectives and tasks of the ESCB (Article 127(1) to (3) and (5)); – lit. (d) issue of the euro (Article 128); – lit. (e) acts of the European Central Bank (Article 132); – lit. (f) measures governing the use of the euro (Article 133); – lit. (g) monetary agreements and other measures relating to exchange-rate policy (Article 219); – lit. (h) appointment of members of the Executive Board of the European Central Bank (Article 283(2)); – lit. (i) decisions establishing common positions on issues of particular relevance for economic and monetary union within the competent international financial institutions and conferences (Article 138(1)); and regards the conversion rate to the euro for Lithuania [2014] OJ L233/21 determined the conversion rate between the euro and the Lithuanian litas: 1 uro = 3,45280 Lithuanian litas. 60 See Commission, ‘Convergence Report 2018’ (n 41). 61 Herrmann in Siekmann (ed), EWU (n 4) Article 139 TFEU, para 15; Herrmann and Dornacher, International and European Monetary Law (n 4) 87. 62 See paragraphs 8.9–8.10. 63 See Article 282(4) sentence 2; Article 42.2 Statute of the ESCB. For details see Smits, ECB (n 20) 134ff; Zilioli and Selmayr, The Law of the European Central Bank (n 17) 168.

Membership and Territorial Scope 201 – lit. (j) measures to ensure unified representation within the international financial institutions and conferences (Article 138(2)).

The extensive but not exhaustive catalogue64 is complemented by Article 140(3) 8.25 TFEU. Accordingly, as the monetary competences have not been transferred to ECB/ Eurosystem, the NCBs of the Member States with a derogation are not bound to rights and obligations of the ESCB.65 The remaining substantial consequence of the membership of the ESCB is that also the Member States with a derogation are included in the key for subscription of the ECB’s Capital. Therefore, they obtain a certain weighting (Article 29(1) Statute of the ESCB).66 As Pre-Ins they are not required to pay up their subscribed capital.67 Finally, Article 139(4) TFEU states that the voting rights of Member States with a derogation in Council’s decisions are suspended (which is authorized by the provisions listed under Article 139(2) TFEU). This leads to an exclusion from the participation in decisions concerning the EMU and alterations in the calculations of the qualified majority.

8.26

Special rights for Member States with a derogation are, finally, mentioned in the Articles 143 and 144 TFEU. They concern the procedure applied in case of difficulties or crisis in the balance of payments. These provisions do not apply for the euro area Member States.68

8.27

C. Legal status of Out-Members (Outs) Besides UK, which is no longer an EU member since February 2020,69 the other Member States granted a special status to Denmark concerning the monetary union. As a result of its position ‘outside’ the EMU, it will be denominated ‘Out-Member(s)’ (Outs) hereinafter, even if this term cannot be found in primary law.70

8.28

In the course of the revision of the Treaty of Maastricht, an automatic accession to the EMU was excluded for both the UK71 and Denmark.72 For them, participation in the euro is

8.29

64 Applicable EMU provisions of the TEC, Smits, ECB (n 20) 140ff. 65 Article 139(3) TFEU excludes from Chapter XI of the Statute of the ESCB, in particular Article 42, whereby the Articles 3, 6, 9.2, 12.1, 14.3, 16, 18, 19, 20, 22, 23, 26.2, 27, 30, 31, 32, 33, 34, and 49 Statute of the ESCB are not applicable. 66 See Article 1 ECB Decision (EU) 2019/48 of 30 November 2018 on the paying-up of the ECB’s capital by the non-euro area national central banks and repealing Decision ECB/2013/31 (ECB/2018/32) [2019] OJ L9/196. 67 The General Council of the ECB (Article 44 Statute of the ESCB) is authorized to decide to pay a minimum percentage, see Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 139 TFEU, para 4. 68 See Chapter 34 of this work. 69 The United Kingdom left the EU at 31 January 2020. See European Council Decision (EU) 2020/135 of 30 January 2020 on the conclusion of the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, XT/21105/2018/REV/ 3 [2020] OJ L29/1ff. 70 See for details Vranes, ‘The “Internal” External Relations of EMU’ (n 51) 361. 71 No 4 of the Protocol No 15 (n 42) according to which, in particular, the applicability of Article 119(2) TFEU was expressly excluded. 72 Protocol No 16 (n 43). See Siekmann in Siekmann (ed), EWU (n 23) Protocol No 16, paras 12ff.

202 THE ARCHITECTURE OF EMU de jure only a general long-term objective belonging to the Union’s mission to build an economic and monetary union (Article 3(4) TEU). This does not imply concrete obligations that are more than the general obligation to cooperate with the EU institutions and the other Member States (Article 4(3) TEU). 8.30

Denmark, therefore, remain at the second stage until today, and can change this only by their own decision.73 After two failed referenda on the introduction of the euro (1992 and 2000), it is questionable if Denmark will aspire to the accession to the third stage. In June 2016, the UK held a referendum on whether the UK should remain in the European Union (also known as Brexit). In March 2017, the UK notified the European Council of its intention to leave the EU, thus formally triggering Article 50 TEU. In spite of the controversial positions about the conditions of the agreement of withdrawal as well as the future relationship between the UK and the EU, each demanded by Article 50 TEU, the UK left the EU on 31 January 2020.74 Accordingly, the question of a possible introduction of the euro also becomes obsolete, as the UK is no longer an EU Member State.

D. The Convergence Criteria and other conditions for access 8.31

8.32

1. Background To be part of the single currency with all rights and obligations, a Member State primarily needs to meet a number of legal and economic conditions the so-called convergence criteria or Maastricht criteria.75 As with accession to the EU (Article 49, Article 2 TEU), membership of the EMU is not automatic, but condition-based, which means that it is based on certain legal and economic entrance conditions. The criteria are fixed in primary law. They were decided for the group of the first euro area Member States in 1998, and upon which the Commission, the ECB and the Council still have to base the cancellation of the existing derogation. As with the EU entrance conditions, the entrance conditions to the monetary union were defined as part of the general scheme of the EMU during the revision of the Maastricht Treaty in Article 140(1) sub-para 1 sentences 2, 3 TFEU and in the Protocol of the Convergence Criteria,76 which is added to the TFEU according to Article 140(1) sub- para 2 TFEU. Hereafter, the individual convergence criteria are further analysed and embedded in their economic background, as the key elements of the substantial and formal requirements of the accession to the EMU. 2. Economic rationale From the history of ideas, the convergence criteria are based on the economic theory of an optimum currency area, pioneered by the Canadian economist Robert Mundell in 1961 and awarded the Nobel Prize in Economic Sciences in 1999. As the theory deals with the economic conditions for a successful functioning of monetary unions, it became a kind of an 73 Herrmann and Dornacher, International and European Monetary Law (n 4) 86; Smits, ECB (n 20) 137ff; Zilioli and Selmayr, The Law of the European Central Bank (n 17) 137ff. 74 European Council Decision (EU) 2020/135 (n 69). 75 Smits, ECB (n 20) 121. 76 Protocol No 13 on the Convergence Criteria [2012] OJ C326/281.

Membership and Territorial Scope 203 intellectual forerunner for the EMU. For this reason, it shall be briefly outlined for a deeper understanding.77 According to Mundell, an optimum currency area consists of countries that only have minor probability of different economic development,78 ie, the economic cycles of the Member States need to run synchronously to enable an effective single monetary policy. If this premise is not provided, there is a danger of asymmetric shocks, which can be evaluated by three criteria: trade integration, homogeneity of the production structure and adjustment mechanisms. Mundell also showed that certain economic circumstances can cushion or neutralize the tensions created by the asymmetric shocks: high flexibility of wages and prices, factor mobility, in particular of workforce, and diversified production structures in the respective country.79 According to Mundell, a high probability of asymmetric shocks inside a monetary union—as it was from the beginning between the Northern and Southern European Member States of the economic and monetary union—needs a high level of wage flexibility and/or mobility of labour. As the labour market regulations of most European countries limit wage flexibility, a single monetary policy is especially effective when it is supported by a common fiscal policy able to absorb asymmetric shocks.80

8.33

Finally, the concept of the EMU as enshrined in the Treaty of Maastricht (1992) is a compromise between opposing economic views.81 The economic dispute concentrates on the temporal-causal link between economic convergence and exchange rate stability. In other words, the question is if the economic or monetary convergence is the original trigger of the causal chain, whose events are the mutual cause and effect (‘chicken-and-egg’ problem). The ‘monetarist view’82 demands for early, ad hoc fixation of the exchange rates in a monetary union, which, as a result, would pave the way for the economic convergence. In contrast, representatives of the Keynesian view, also referred to as ‘economists’, primarily wanted a close coordination of the economic and monetary policy of the Member States that would be the result of competition for the best economic model.83 At the same time, the disadvantages of a single interest rate were pointed out,84 which, in a framework of inconsistent economies, are difficult to overcome.

8.34

The legal compromise finally laid down in the convergence criteria tries to combine both views mentioned above. In a kind of a parallel political development process85 the criteria

8.35

77 See Chapter 3 of this work. 78 Robert A Mundell, ‘A Theory of Optimum Currency Areas’ (1961) 51 American Economic Review 657; beyond Paul de Grauwe, Economics of Monetary Union (12th edn, OUP 2018) 3ff (hereafter de Grauwe, Economics of Monetary Union). 79 De Grauwe, Economics of Monetary Union (n 78) 49ff; Ohler, Bankenaufsicht (n 20) §3 para 9. 80 See for details de Grauwe, Economics of Monetary Union (n 78) 17ff. 81 Critical view represented by Paul de Grauwe, ‘Monetary Union and Convergence Economics’ (1996) 40 European Economic Review 1091, 1092 (hereafter de Grauwe, ‘Monetary Union’). 82 De Grauwe, Economics of Monetary Union (n 78) 73ff, 207; Cornelia Manger-Nestler, Par(s) inter pares? Die Bundesbank als nationale Zentralbank im Europäischen System der Zentralbanken (Duncker & Humblot 2008) 90 (hereafter Manger-Nestler, Par(s) inter pares?); see also Matthias Ruffert in Matthias Ruffert (ed), Enzyklopädie Europarecht: Europäisches Sektorales Wirtschaftsrecht §1 para 19 (hereafter Ruffert in Ruffert (ed), Enzyklopädie Europarecht). 83 De Grauwe, Economics of Monetary Union (n 78) 74ff; Manger-Nestler, Par(s) inter pares? (n 82) 90. 84 Paul Craig and Gráinne de Búrca, EU Law: Text, Cases, and Materials (6th edn, OUP 2015) 730 (‘contingent disapproval’ and ‘outright rejection’); Ruffert in Ruffert (ed), Enzyklopädie Europarecht (n 82) §1 paras 4ff, para 18. 85 In this context it is also called the ‘principle of parallelism’, see Manger-Nestler, Par(s) inter pares? (n 82) 106, 109; cf Amtenbrink, ‘The Metamorphosis’ (n 4) 720ff; de Grauwe, Economics of Monetary Union (n 78) 122ff.

204 THE ARCHITECTURE OF EMU refer to indispensable conditions (eg criteria of price stability, exchange rate, as well as legal convergence) but also give, partly considerable, freedom of manoeuvre86 regarding single economic variables (eg the fiscal policy criterion). The aim of the convergence criteria is to limit the level of debt countering moral hazard concerning public spending. However, the economic convergence criteria were not focused on neutralising asymmetric shocks. Moreover, some of the Member States do not have the necessary political will to bear the costs of the situation created by the loss of adjustment mechanisms. They also threaten the success of the monetary union by short-time thinking that is limited to national (electoral) interests.87 Regarding this critical assessment, it seems even more important to explore the scope and the legal boundaries of each single convergence criterion. 8.36

8.37

8.38

There are five convergence criteria that can be divided into two equal subdivisions.88 Next to the legal convergence, also referred to as convergence in a wider sense, the applicant Member State has to achieve ‘a high degree of sustainable convergence’ (Article 140(1) sub-para 1 sentence 3 TFEU), which stands for the better-known economic criteria (convergence in a narrow sense). The latter shall ensure a minimum of economic homogeneity in the single currency area.

3. Legal convergence Article 140(1) sub-para 1 sentence 2 TFEU requires, first of all, the legal convergence of a Member State,89 ie an adaptation of its national legislation in the fields of the Central Bank and monetary law to the provisions of the EU law. The primary concern in this process is legal protection of the independence of the respective NCB. The provisions in Articles 130 and 131 TFEU and Articles 7 and 14 Statute of the ESCB define the standard and the degree of independence.90 Strictly speaking, this obligation is not dependent from the introduction of the euro, as Article 131 TFEU demands that the legal adjustment has already taken place. The only derogation was for the United Kingdom.91 In the 1990s, the principle of central bank independence was only recognized, and accordingly entrenched in law, in a small number of Western industrialized States. Therefore, the requirement of legal convergence required considerable legislative changes from most of the Member States and sometimes a completely new view on the position of the central bank in the democratic structure of the state. For example, the French Ministry of Finance had to fully outsource the Banque de France (French central bank) to become compatible with the Treaty of Maastricht. Even in Germany, whose Deutsche Bundesbank is regarded as one of the most independent central banks in the world, the Bundesbank Act had to be adjusted in some respects.92 86 Phil Sypris, ‘The EU and National Systems of Labour Law’ in Anthony Arnull and Damian Chalmers (eds), The Oxford Handbook of European Union Law (OUP 2015) 943, 960. 87 Critically from an economic point of view de Grauwe, ‘Monetary Union’ (n 81) 1091. 88 Jörn Axel Kämmerer in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (Mohr Siebeck 2017) Article 140 TFEU, para 14 (Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV). 89 See in detail Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, paras 9ff; Smits, ECB (n 20) 121. 90 For criteria dividing national governments’ and central banks’ responsibilities, see Laurence Gormley and Jakob de Haan, ‘The democratic deficit of the European central Bank’ (1996) 21 European Law Review 95, 97–99. 91 Protocol No 15 (n 42) para 4. 92 See for details Manger-Nestler in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/ AEUV (n 15) Article 131, para 6; Manger-Nestler, Par(s) inter pares? (n 82) 115ff.

Membership and Territorial Scope 205

4. Criteria of economic convergence The conditions ensuring a minimum of economic homogeneity inside the single currency area are circumscribed by the constant high degree of economic convergence. Within such economic convergence, there is no ranking of the individual criteria; compliance with all four cumulative93 conditions rather serves as a benchmark for assessing the economic maturity of a future euro area Member State. Accordingly, Article 140(1) sub-para 1 sentence 3 TFEU94 lists four criteria: price stability, fiscal stability, exchange rate and interest rate. The Protocol of the Convergence Criteria95 further specifies these four criteria. a) Price stability The first criterion requires the achievement of a high degree of price stability. This will be apparent from a rate of inflation which is close to that of the—at most three—best performing Member States in terms of price stability, meaning that the inflation rate does not exceed the best performing Member States above 1.5 percentage points;96 the reference year is the year preceding the ‘entrance examination’ (Article 140(1) sub-para 1 sentence 3, 1st indent TFEU).

8.39

8.40

The drafters of primary Union law, therefore, have not defined absolute but relative 8.41 limits. Their measures are the outcomes in the field of price stability in all EU Member States, not only the euro area Member States.97 This is confirmed by the wording and context of Article 139(2) sub-para 1 TFEU, where Article 140(1) TFEU is not mentioned (argumentum e contrario). It must also be mentioned that price stability and convergence and economic, social and territorial cohesion respectively are treaty objectives applicable to all Member States of the EU, not only to the euro area (Article 3(3) TEU). The ECB also has to ‘strengthen the co-ordination of the monetary policies of the Member States, with the aim of ensuring price stability’ (Article 141(2) 2nd indent TFEU). According to the concept which is the obvious basis for primary law, the euro is not supposed to economically divide the Union but to encourage a convergence and cohesion process in the whole Union with the target of price stability. In addition, primary law aims at the introduction of the euro by all Member States (at least as long- term objective). That is why economically divergent development of the Member States regarding price stability is not to be accepted and not within the scope of the application of the convergence criteria.98 The Union institutions confirmed this interpretation that is focused on an ambitious understanding99 of price stability in the Treaties in the course of the controversy surrounding the participation of Lithuania in the euro area in 2006.

93 Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, para 15 and for each criterion in detail paras 21ff. 94 Corresponds to the former Article 109j TEC-Maastricht, followed by Article 123(5) TEC (Nice version). 95 See above (n 76). 96 See Article 1 sentence 1 Protocol No 13 (n 76). 97 Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, para 18. 98 Zilioli and Selmayr, The Law of the European Central Bank (n 17) 168. 99 See Council of the European Union, ‘2753rd Council Meeting—Economic and Financial Affairs’ (C/06/278, Luxembourg, 10 October 2006) 8 accessed 4 February 2020.

206 THE ARCHITECTURE OF EMU 8.42

b) Fiscal policy The second convergence criterion is the fiscal policy criterion which, by focusing government spending,100 envisages the close link between fiscal and monetary policy. The sustainability of the government’s financial position is required. This will be apparent from having achieved a government budgetary position without a deficit that is excessive as defined in Article 126(6) TFEU in combination with Article 140(1) sub-para 1 sentence 3 2nd indent TFEU. According to Article 2 of the Protocol on the Convergence Criteria, the absence of a corresponding Council decision is crucial.

8.43

In this respect, Article 140 TFEU employs the findings by the Council (and the Commission) in identical composition in the context of the excessive deficit procedure pursuant to Article 126 TFEU. It, therefore, concentrates the prerogative of assessment of the budgetary position of a Member State in ‘one hand’ or rather makes it subject to a single decision, thereby excluding conflicting decisions under Articles 126(6) and 140(2) TFEU.101

8.44

Finally, the seemingly strict deficit ceilings are rather flexible criteria,102 added by the discretionary margin of the Council according to Article 126(6) TFEU.103 Especially as the Council has been generous in the past, the reference values are also within the scope of Article 126 TFEU. They not just directives and targets but normatively binding requirements104 that do not leave a margin to the Union institutions by reference to the formal criterion of the Council Decision.

8.45

8.46

c) Exchange rate The third convergence criterion, the so-called exchange rate criterion, requires the observance of the normal fluctuation margins provided for by the ERM II105 of the European Monetary System (EMS) for, at least, two years and without devaluation against the euro (Article 140(1) sub-para 1 sentence 3 3rd indent TFEU). According to Article 3 Protocol of the Convergence Criteria, this condition means that the normal fluctuation margins were respected without severe tensions for two years before the examination. Devaluation of a currency’s bilateral central rate against the euro is harmless only if the impulse came from another Member State. According to the Agreement of the ERM II106 the Member State’s central bank, in the scope of the operative part, is legally required to keep the exchange rate of their currency within 100 Alicia Hinarejos, ‘Economic and Monetary Union’ in Catherine Barnard and Steve Peers (eds), European Union Law (2nd ed, OUP 2017) 573, 574 (hereafter Hinarejos, ‘EMU’). 101 Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, para 21; Smits, ECB (n 20) 124; Herrmann and Dornacher, International and European Monetary Law (n 4) 84ff. 102 Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, para 35. 103 In conjunction with Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6. 104 Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, para 35; Helmut Siekmann, ‘The Legal Framework for the European System of Central Banks’ (2015) White Paper No 26, 21 (hereafter Siekmann, ‘The Legal Framework’); Fabien Terpan, ‘Soft Law in the European Union—The Changing Nature of EU Law’ (2015) 21 European Law Journal 85ff. Regarding potential sanctions, see Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, para 21. 105 See Chapter 25 of this work. 106 The ERM II was created in the context of the reorganization of the EMS by an Agreement between the ECB and the NCBs of all Member States, whose anchor currency is the euro today; cf Agreement of 16 March 2006 between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union

Membership and Territorial Scope 207 certain fluctuation margins and to intervene in the exchange market to support the exchange rate if necessary. Within the revised Agreement of the ERM II it is unclear what the wording of ‘normal fluctuation rates’ mean. While it is argued that it refers to the value that triggered the requirement to intervene in the earlier EMS, another opinion refers to the today’s standard of fluctuation band of +/-1 5 per cent of ERM II.107 However, the Commission and ECB require significantly more than the standard fluctuation band of +/- 15 per cent. This position must be accepted as the expanded fluctuation band can be traced to the EMS crisis in 1993 and, therefore, can hardly have an impact on the macroeconomic convergence. Hence, what is vital for the exchange rate criterion is the capacity of a Member State to keep the national currency in the narrow fluctuation band of +/-2.25 per cent within the ERM II without tensions in the two years preceding the convergence check.108 Exceeding the fluctuation band can only be justified in exceptional cases.109 After all, the exchange rate criterion requires participation in the ERM II for, at least, two years prior to the adoption of the euro. So far, the Commission and ECB always considered this formal participation as necessary, even if they found a participation of a little less than two years to be sufficient, provided that outside the ERM II, exchange rate convergence against the euro could clearly be seen. Currently, only the central bank of Denmark participates in the ERM II.110

8.47

d) Interest rate criterion The forth economic convergence criterion requires the euro candidate to reach an average 8.48 long-term nominal interest rate level which is, in the course of the year preceding the examination, no more than two percentage points above the corresponding interest rate of the— at most three—best-performing Member States in terms of price stability (Article 140(1) sub-para 1 sentence 3 4th indent TFEU).111 The fulfilment of the interest rate criterion stands for the durability of the convergence criteria achieved by a Member State and the participation in the ERM mechanism. In so far, it is an additional criterion to recognize convergence rather than being a convergence criterion.

5. Legally binding effect and justiciability In the light of the described room for interpretation, the question arises to what extent the convergence criteria are legally binding or how binding effect can be derived from them. [2006] OJ C73/21, as amended most recently by the Agreement of 13 November 2014 between the European Central Bank and the national central banks of the Member States outside the euro area [2014] OJ C61/1. 107 See for details Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, paras 23ff; Herrmann and Dornacher, International and European Monetary Law (n 4) 85. 108 Cf Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, paras 24ff. In a wider sense Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, para 38. 109 Smits, ECB (n 20) 126. 110 The Danish Central Bank made use of the possibility of Article 17 of the Agreement of the ERM II (n 106) to determine a narrower fluctuation band of +/-2.25 per cent for the Danish Krone, see ECB, ‘Euro central rates and intervention rates in ERM II’ (Press Release, 31 December 1998) accessed 4 February 2020. 111 Therefore, the criterion includes Article 4 Protocol of the Convergence Criteria (n 76).

8.49

8.50

208 THE ARCHITECTURE OF EMU 8.51

Beginning with the historical origins as a methodical starting point for interpretation, the willingness of the Member States in the course of the treaty revisions of Maastricht was crucial. According to the Treaty of Maastricht, on the one hand, the convergence criteria are legally binding provisions.112 On the other hand, all of the convergence criteria contain economic variables that by definition have a margin for assessment, prognosis and valuation.113 Just as economic expertise is being emphasized here, there is limited scope for judicial review of this discretion. This is particularly true for the highly complex matters between aspects of economic and monetary policy and their mutual overlap that often can only be blurrily conferred to one or the other policy area.114

8.52

However, experiences with the accession of Italy,115 Belgium,116 (1999) and Greece117 (2001) demonstrate that the Council exhausted and, in the case of Greece,118 even exceeded the above-mentioned discretion by using manipulated data.

8.53

Even if the Council has a certain margin of discretion, the examination whether or not a Member State meets the required conditions to adopt the euro is based on legal specifications. Given this legally binding effect, even if it is rather weak, there is no room for politically motivated expediency.119 If legal regulations are not properly applied, they may lose significance for reliable stability prognosis.

8.54

The Council Decision on the convergence criteria is basically justiciable. As a result, the Council may not refuse the abrogation of the derogation when the convergence criteria are met. Vice versa, the Council may refuse the abrogation of the derogation if one of the criteria has not been met. It emerges from this legally binding effect that Council Decisions generally can be judicially reviewed and annulled within the framework of an action for annulment (Article 263 TFEU).120

8.55

6. Procedural aspects In contrast to the extensive convergence check, the procedural aspects are comparatively small. The only formal criterion for a Member State’s transition from a Member State with a derogation to the participation in the euro area is a Council decision declaring the initial fulfilment of the convergence criteria. The decision for lifting the derogation is made by 112 Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, para 36. 113 Heinz Herrmann and Christiane Steven in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 140 TFEU, para 69 (hereafter Herrmann and Steven in Siekmann (ed), EWU); Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, para 18. 114 Ohler, Bankenaufsicht (n 20) §3 paras 23ff. 115 Council Decision (98/311/EC) of 1 May 1998 abrogating the Decision on the existence of an excessive deficit for Italy [1998] OJ L139/15. 116 Council Decision (98/307/EC) of 1 May 1998 abrogating the Decision on the existence of an excessive deficit for Belgium [1998] OJ L139/9. 117 Council Decision (2000/427/EC) of 19 June 2000 in accordance with Article 122(2) of the Treaty on the adoption by Greece of the single currency on 1 January 2001 [2000] OJ L167/19. 118 See Hinarejos, ‘EMU’ (n 100) 578. 119 In the Maastricht Judgement the FCC warns that the Convergence Criteria as such are not disposable by the Council, BVerfG, Order of the Second Senate of 31 March 1998—2 BvR 1877/97. This aspect is also emphasized by Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, para 62; Siekmann, ‘The Legal Framework’ (n 104) 21. 120 Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, para 36; Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, para 63.

Termination of Membership 209 the Council on a proposal from the Commission (Article 140(2) sub-para 1 TFEU). The Council Decision is based on the so-called convergence report made by the Commission (Article 140(1) TFEU). However, the treaty’s wording does not specify the extent to which the Council is bound by the Commission’s findings in the convergence report. The wording of Article 140(2) TFEU suggests that there is no binding effect, as reference is made to a ‘proposal’ in the sense of a suggestion of the Commission; though this discussion would lead to useless formalities in the European Council. The Council is thus not required to follow the Commission’s proposal; but the Council has to consider it in good faith resp. in the case of a Council’s amendment unanimity is required (Article 293 TFEU).121 Furthermore, as the wording in Article 140(2) sub-para 1 sentence 2 TFEU suggests, the Council not only may, but even must make its own subsumption122 that goes beyond an examination whether the reports of ECB and Commission contains obvious errors. What is, however, not required is renewed fact-finding by the Council. When the Council has decided that the convergence criteria (Article 140(1) TFEU) have been met,123 the abrogation of the derogation must be the necessary consequence in the sense of a legal obligation. In contrast to the former ruling,124 there is no room for legal or political discretionary decisions or arbitrary acting for the selection of the Member States.125

8.56

IV. Termination of Membership The consequences of the financial and euro crises and the own economic defaults in some Member States prove that the renouncement of an own currency and the related option to devalue without an adjustment of the economic and budgetary policy can have problematic effects.126 In this respect, the question arises to what extent withdrawal, voluntarily or involuntarily, from union integration is possible.

8.57

A. Exit from the EMU To anticipate the result: the EU law generally does not provide for the possibility of withdrawal from the EMU.127 EMU is to be permanent, following the principle of irreversibility. 121 Ditto Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, para 60. 122 Herrmann and Steven in Siekmann (ed), EWU (n 113) Article 140 TFEU, para 69. 123 Cf for the discretion that follows from the economic indicators of the convergence criteria, see paragraphs 8.51–8.54. 124 See Article 109j TEC-Maastricht as well as Article 121(4) TEC (Nice version). 125 Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, para 10; Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, para 62. 126 Helmut Siekmann, ‘Exit, Exclusion, and Parallel Currencies in the Euro Area’ (2015) Working Paper Series No 99, 17ff (hereafter Siekmann, ‘Exit, Exclusion, and Parallel Currencies’); Riccardo Realfonzo and Angelantonio Viscione, ‘The Effects of a Euro Exit on Growth, Employment, and Wages’ (2015) Levy Economics Institute Working Paper No 840, 4ff. 127 Häde in Calliess and Ruffert (eds), Kommentar zum EUV und AEUV (n 4) Article 140 TFEU, para 50; Herrmann in Siekmann (ed), EWU (n 4) Article 139 TFEU, para 12.

8.58

210 THE ARCHITECTURE OF EMU Therefore, a Member State that introduced the euro is de lege lata not supposed to return to the previous situation.128 The irreversibility also derives from the fact that, contrary to the ECSC, there is no limitation of the monetary union’s duration in primary law. Belonging to Article 53 TEU and Article 356 TFEU, it therefore is valid for an indefinite period. 8.59

In addition, the derogation rules emphasize that they are only available if and as long as there are Member States with a derogation.129 That corresponds with the irrevocably specified exchange rates at which the national currency is replaced by the euro (Article 140(3) TFEU). To waver back and forth between national and single currency is excluded by the principle of irreversibility of the EMU (just as a euro area Member State cannot go back to the derogation rules).130 A standard corresponding to Article 50 TEU, which makes it possible to leave the EU, does not exist for this separate category of a one-sided exit from the monetary union. A separate withdrawal clause only for the EMU has deliberately not been included131 to avoid the danger of currency turmoil as a result of speculations on the single currency. Hence exit from the EMU is only possible in the context of exit from the EU.132

B. Exclusion 8.60

Legally it is not possible to exclude or expel a euro area Member State from EMU. Even if the Member State breaks one of the rules of the monetary union, stated in primary law (TEU, TFEU, or ESCB Statute), at least, the Treaties do not provide a statutory basis for such a sanction.133

8.61

The principle of irreversibility of the accession to the third stage of EMU including the irrevocable introduction of the euro is legally insurmountable. This also applies in the case of a violation of EU law by a participating EU Member State for which conclusive rules exist in EU primary law. Hence, if there is an excessive public debt violating Article 126(1) TFEU in one of the euro area Member States, the Council can impose sanctions (Article 126(9) and (11) TFEU) but cannot exclude the Member State from the EMU.134

8.62

It is also prohibited for the other Member States to invoke the clausula rebus sic stantibus under international law. As reversal of the EMU is legally prohibited,135 the euro area Member States are especially obliged to contribute to the proper functioning of the monetary 128 Chiara Zilioli, ‘National emergency powers and exclusive community competences—a crack in the dam?’ in ECB (ed), Legal aspects of the European System of Central Banks (2005) 115. 129 Article 141(1) and (2) TFEU; No 9 sub-para 2 Protocol No 15 (n 42); No 3 Protocol No 16 (n 43). 130 Kämmerer in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 88) Article 140 TFEU, paras 69ff; Herrmann in Siekmann (ed), EWU (n 4) Article 139 TFEU, para 12. 131 See Athanassiou, ‘Withdrawal and expulsion from the EU and EMU’ (n 45) 28; Christian Calliess in Christian Calliess and Matthias Ruffert (eds), Kommentar zum EUV und AEUV (5th edn, CH Beck 2016) Article 50 TEU, para 18; Herrmann and Dornacher, International and European Monetary Law (n 4) 88; Siekmann in Siekmann (ed), EWU (n 23) Einführung, para 50; Peter Szczekalla in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (Mohr Siebeck 2017) Article 50 TEU, para 26 (hereafter Szczekalla in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV). 132 See paragraphs 8.63–8.64. 133 See Siekmann, ‘Exit, Exclusion, and Parallel Currencies’ (n 126) 12ff. 134 Athanassiou, ‘Withdrawal and expulsion from the EU and EMU’ (n 45) 18ff; Siekmann, ‘Exit, Exclusion, and Parallel Currencies’ (n 126) 12ff. 135 Cf Athanassiou, ‘Withdrawal and expulsion from the EU and EMU’ (n 45) 12ff, 32ff; Herrmann in Siekmann (ed), EWU (n 4) Article 139 TFEU, para 12.

The Euro in a Third Country 211 union. In a more political but less legally binding self-perception, euro area Member States should cooperate beyond even the competences already provided for in the Treaties. This represents the character of the EMU as a kind of common destiny,136 excluding the right of separate unilateral withdrawal.

C. Exit from the European Union In contrast to the withdrawal of the United Kingdom as a result of Brexit, the exit of a euro Member State from the EMU has not been relevant so far. If a withdrawal request is made by one of the euro area Member States according to Article 50 TEU, this would a maiore ad minus also affect the membership in the single currency area,137 even if the text of the Treaties does not include regulations concerning this specific monetary union scenario.138 Therefore, the details would have to be specified in the withdrawal agreement to be negotiated so that even in the case of withdrawal from the EU withdrawal from the euro would not be compulsory. A Member State that has left the Union could no longer claim any institutional rights to participate in the decision-making bodies of the EMU, especially the ECB and the ECOFIN Council.

8.63

Apart from that, such a withdrawal could not lead to the return to the former national currency, as this has been lost. Therefore, it would be necessary to introduce a completely new national currency (eg Neu-Mark or nouveau Franc). However, it is conceivable that the euro would be kept as national currency, for example in European microstates,139 by means of an agreement under international law140 corresponding to the requirements of Article 219(3) TFEU.

8.64

V. Extraterritorial Scope: The Euro in a Third Country At first glance, the use of the euro as currency outside the common currency area seems to be an exotic idea. Nonetheless such monetary interfaces exist between the euro area and non-member countries and will be shortly outlined below.141

8.65

According to the territorial scope of the Union’s primary law (Article 52(1) TEU; Article 355 TFEU), the EMU extends across the territory of the EU Member States that are members of the common currency area in the shape of Eurosystem at the same time.142 If the Member States—as in the case of France—have overseas territories that do not belong to the

8.66

136 Commission, ‘Completing Europe’s Economic and Monetary Union (Five Presidents’ Report)’ 4 accessed 4 February 2020 (hereafter Five Presidents’ Report). 137 See in detail for possible scenarios Siekmann in Siekmann (ed), EWU (n 23) Einführung, para 49; Szczekalla in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 131) Article 50 TEU, para 26. Critically, Athanassiou, ‘Withdrawal and expulsion from the EU and EMU’ (n 45) 23ff; René Smits, ‘The European Constitution and EMU: an appraisal’ (2005) 42 Common Market Law Review 425, 463ff. 138 Herrmann and Dornacher, International and European Monetary Law (n 4) 88. 139 See paragraphs 8.70–8.71. 140 Athanassiou, ‘Withdrawal and expulsion from the EU and EMU’ (n 45) 40ff. 141 See Chapters 6 and 7 of this work. 142 Zilioli and Selmayr, The Law of the European Central Bank (n 17) 221.

212 THE ARCHITECTURE OF EMU territorial scope of the Union’s primary law (so called La France d’outre-mer, eg Saint-Pierre et Miquelon, Mayotte, and St-Barthélemy), there are specific arrangements that permit the application of the euro as legal means of payment.143 8.67

In this respect, there are no explicit substantive legal requirements to be found in primary law concerning a so-called ‘euroization’ codifying whether and under which conditions the euro can be used as currency in third countries. EU law makes participation in the EMU dependent on the EU membership (Articles 49 and 2 TEU). The adoption of the single currency is, therefore, only possible for Member States with a derogation or special status and requires the fulfilment of the convergence criteria (Article 140(1) TFEU).144 To prevent the circumvention of the convergence criteria (arg ex Article 119(2) TFEU), primary law excludes a ‘shortcut’ to the euro by euroization of the Member States with a derogation or special status.145 In general, if a third country wants to adopt the euro and conclude an international treaty with the Union for this purpose, such a formal euroization would only be possible as an agreement ‘concerning monetary or foreign exchange regime matters’ as stated in and within the conditions of Article 219(3) TFEU. Such an agreement differs from the exchange rate arrangements provided for in Article 219(1) TFEU insofar that it does not entail monetary intervention obligations for the ECB.146

8.68

However, there are certain monetary interfaces between the euro area and non-Member States. The reasons are mostly historic and/or geographic relations between euro area Member States and other European, especially small or microstates. These are specifically Andorra, Principality of Monaco, San Marino and the Vatican.147 The EU law cannot be directly applied in the mentioned territories, which is why the EU has regulated the use of the euro as a currency in the small states by monetary agreements that are partly built upon different legal bases.148

8.69

Lastly, there are so-called passive users of the euro. These are (micro) states, eg Kosovo and Montenegro, where the euro is de facto the most commonly used currency, without the explicit approval of the ECB.149

143 See, in detail, Ludwig Gramlich in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (Mohr Siebeck 2017) Article 219 TFEU, para 17 (hereafter Gramlich in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV); Christoph Herrmann, ‘Monetary Sovereignty over the Euro and External Relations of the Euro Area: Competences, Procedures and Practice’ (2002) 7 European Foreign Affairs Review 1 (hereafter Herrmann, ‘Monetary Sovereignty’); Zilioli and Selmayr, The Law of the European Central Bank (n 17) 223ff. 144 See paragraphs 8.31–8.56. 145 Council of the European Union, ‘Report by the Council to the European Council in Nice on the exchange rate aspects of enlargement’ (Brussels, 8 November 2000); Council of the European Union, ‘Press Release No 13055/00’. 146 See, for (procedural) details, Gramlich in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/ GRC/AEUV (n 143) Article 219 TFEU, paras 7ff. 147 See Rosa M Lastra, International Financial and Monetary Law (OUP 2015) 282ff (hereafter Lastra, International Financial and Monetary Law). 148 Monetary Agreement between the European Union and the Principality of Andorra [2011] OJ C369/1; Monetary Agreement between the European Union and the Principality of Monaco [2012] OJ C310/1; Monetary Agreement between the European Union and the Republic of San Marino [2012] OJ C121/5; Monetary Agreement between the European Union and the Vatican City State [2010] OJ C28/13. See for details Gramlich in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 143) Article 64 TFEU, para 11; in detail Herrmann, ‘Monetary Sovereignty’ (n 143) 13ff. 149 See Lastra, International Financial and Monetary Law (n 147) 283ff; Gramlich in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (n 143) Article 219, para 18.

Perspectives 213

VI. Perspectives From its very beginning, the architecture of the EMU was considered to be challenging, as the common monetary policy of the Eurosystem is confronted with an economic policy that is in the national responsibility of the Member States. Therefore, the conceptual asymmetry between the economic and the monetary union is (and will remain) without doubt one of the challenges of the future for a functioning monetary union. Under the pressure of crisis-ridden distortions of the past ten years, profound conceptual problems of an extensive monetary integration emerged. This is not combined with true parallelism, meaning the close interlocking with the economic policy coordination, but with an asymmetrical integration process. In addition, the conditions for access to the euro area, in particular the convergence criteria,150 were too generously applied at times to certain Member States. This is one of the main causes leading to the crisis phenomena in the past decade. These developments demonstrated clearly that the limits of the power of law are at the same time those of political assertiveness. The success of (primary) legal rules depends on whether they formulate criteria making market participants trust in a reliable monetary policy of the ECB and on whether the Member States act according the EU rules. This is related to the enormous challenge of reorganising this field of tension, where the effects overlap but there are opposing interests. In a kind of triangular relationship, the common monetary policy, including the Monetary and Banking Union, faces the progressive opening of capital markets, in the shape of the Capital Markets Union, and the Member State’s political wish to preserve their economic policy scope.

8.70

The urgent challenge in integration policy, which was already tackled during the crisis by completing the fiscal legislative framework, therefore, is to find a compromise that, on the one hand, respects the statehood of the Member States and, on the other hand, makes the EU’s instruments more effective to ensure the focus on stability.151 However, the process of consolidation that was actuated by the Five Presidents’ Report152 and the subsequent reform proposals153 (‘Nicholas Package 2017’154), reveal a high path dependence on the underlying economic model.155 If the objective of monetary integration is not to be abandoned in the long-term, a close(r) connection according to a consistent synchronism of economic and monetary policy is necessary. This would, in an evolutionary process, depend on a greater political entanglement inside the Union156 without imposing it from the outset.

8.71

150 See paragraphs 8.51–8.54 and paragraphs 8.55–8.56. 151 In broader interpretation Jean-Victor Louis, ‘The EMU after the Gauweiler Judgement and the Juncker Report’ (2016) 23 Maastricht Journal of European and Comparative Law 55, 77 (hereafter Louis, ‘The EMU’) emphasizes that ‘Eurozone needs a government, not only a better governance’. Also cf for the outer limits of the Maastricht framework Amtenbrink, ‘The Metamorphosis’ (n 4) 731ff. 152 Five Presidents’ Report (n 136). Based on the Five-Presidents’, Commission, ‘Reflection Paper on the Deepening of the Economic and Monetary Union’ COM (2017) 291 accessed 4 February  2020. 153 Commission, ‘Further Steps towards completing Europe’s Economic and Monetary Union: A Roadmap (Communication)’ COM (2017) 821 final; see also Commission, ‘Commission sets out Roadmap for deepening Europe’s Economic and Monetary’ (IP/17/5005, 6 December 2017) accessed 4 February 2020. 154 See for details Manger-Nestler and Böttner, ‘Der Europäische Währungsfonds’ (n 34). 155 See paragraphs 8.32–8.36. 156 In this sense see Louis, ‘The EMU’ (n 151) 78.

9

OBJECTIVES OF THE EMU Dariusz Adamski*

I. Overview II. The Original Level 2 Objectives

9.1 9.6

A. Prerequisite and driver of the internal market 9.10 B. Countermeasure against the German monetary dominance 9.12 C. Restraint on domestic economic policy-makers 9.15 III. The Original Level 3 Objectives 9.19 A. Price stability 9.21 B. Sound public finances 9.25 C. Sustainable balance of payments and economic convergence 9.41

IV. The EMU’s Objectives and Principles Against the Euro Area Crisis 9.48 V. Reassessing and Redefining the Objectives and Principles of the EMU During and After the Sovereign Debt Crisis 9.58 A. Establishing balance of payments financial assistance funds B. Reinforcing economic coordination C. Redefining the monetary policy D. Introducing macroeconomic shock- absorbers at the European level

VI. Assessment

9.66 9.87 9.98 9.103 9.123

I. Overview 9.1

The Economic Monetary Union (EMU)—the most visible, advanced, and sophisticated field of European integration—was designed to contribute to two major rudimentary goals of the integration process, which will be referred to throughout this chapter as ‘Level 1 objectives’. One of them is economic, the other political, but ultimately both comprise two sides of the same coin. The economic goal—to stimulate trade and economic cooperation, and hence to boost economic growth and well-being of Europeans—was clearly expressed in the preparatory documents published in the run-up to the Maastricht accord.1 This objective dovetails with the more general ambitions of the economic integration enshrined by Article 3(3) of the Treaty on European Union (TEU): of achieving ‘the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress’, combating ‘social exclusion and discrimination’, promoting ‘social justice and protection, solidarity between generations’, and supporting ‘economic, social and territorial cohesion, and solidarity among Member States’.

* Research for this chapter was supported by the Polish National Science Centre (UMO-2015/18/M/HS5/ 00252). 1 See especially Commission, ‘One market, one money: An evaluation of the potential benefits and costs of forming an economic and monetary union’ (1990) European Economy No 44 (hereafter Commission, ‘One market, one money’). Dariusz Adamski, 9 Objectives of the EMU In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0012

Overview 215 The other (political) goal is more elusive, but ultimately more rudimentary. According to it, EMU ought to bind European societies together, in order to preclude future conflicts or hostilities. The two original major architects of EMU—the German Chancellor Helmut Kohl and the French President François Mitterrand—saw it as a method of uniting Europe politically.2 The European Central Bank (ECB) President Draghi highlighted the symbolic flipside of the same ultimate political objective of EMU, when he reminded that ‘the banknotes that we issue bear the European flag and are a powerful symbol of European identity’.3 The same objective is confirmed by the TEU providing that ‘the Union shall establish an economic and monetary union whose currency is the euro’ (Article 3(4) TEU). Accordingly, the attainment of the Level 1 political objective will fully materialize when all the EU countries—other than Denmark, which secured permanent opt-outs in Maastricht4—join the Euro area, attracted by the promise of the economic Level 1 objective indicated earlier.5

9.2

The euro area crisis, which lingered in some EU countries for almost a decade,6 demonstrated, however, that achieving the two Level 1 EMU objectives may be much more difficult than originally hoped. A few European (mainly British) and many American economists predicted it during the decade preceding the introduction of euro coins and banknotes in 2002. A Commission report published in 2009 aptly summarized their attitude in its title: ‘The euro: It can’t happen. It’s a bad idea. It won’t last.’7 This judgment was routinely based on the insight that the EMU—as constitutionalized by the Maastricht Treaty of 1992—was too remote from the theoretical requirements of the so-called optimum currency area8 and that it lacked a political union, in the sense of a fiscal federation,9 to stave

9.3

2 As Chancellor Kohl reportedly stated to President Mitterrand in 1982: ‘I may be the last Chancellor with whom you can build Europe’, quoted in Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union (OUP 1999) 309 (hereafter Dyson and Featherstone, The Road to Maastricht). 3 Mario Draghi, ‘The future of the euro: stability through change’ Die Zeit (Hamburg, 29 August 2012). 4 Cf Protocol No 16 on certain provisions relating to Denmark. 5 Joining the euro area is a political decision, not an enforceable legal obligation. Article 140 of the Treaty on the Functioning of the European Union (TFEU), which refers to ‘obligations’ of the Member States with a derogation ‘in fulfilling their obligations regarding the achievement of economic and monetary union’ (section 1), only establishes a procedure for entering the single currency area by the EU countries fulfilling the convergence criteria, under the additional condition that they accept the exchange rate at which the euro replaces their national currencies. For a similar point, cf eg John Usher, ‘Legal Background of the Euro’ in Paul Beaumont and Neil Walker (eds), Legal Framework of the Single European Currency (Hart Publishing 1999) 7, 15; Antonio Estella, Legal Foundations of EU Economic Governance (CUP 2018) 46–52. 6 The euro area as a whole experienced negative economic growth only in the years 2009, 2012, and 2013 (-4.5 per cent, -0.9 per cent and -0.3 per cent, respectively). This data, however, conceals serious divergences between euro area countries. While some of them recorded significant Gross Domestic Product (GDP) growth in the period 2006–16: especially Malta (3.7 per cent annual GDP growth on average), Ireland (3.4 per cent), Slovakia (3.1 per cent) and Luxembourg (2.7 per cent)—others lingered in stagnation. The latter refers especially to Greece (-2.7 per cent annual GDP growth on average), Italy (-0.6 per cent), Cyprus and Portugal (-0.2 per cent), Finland (0.1 per cent) and Spain (0.3 per cent). Data: Eurostat, GDP and main aggregates—selected international annual data. 7 Lars Jonung and Eoin Drea, ‘The euro: It can’t happen. It’s a bad idea. It won’t last. US economists on the EMU 1989–2002’ (2009) Economic Papers 395. The phrase itself was originally coined by the MIT economist Rudiger Dornbusch in 2001. 8 As established especially in the writings of Robert A Mundell, Peter Kenen, and Ron McKinnon published throughout the 1960s and 1970s. For an excellent broader overview of the theory’s evolution against changing macroeconomic paradigms, cf Harris Dellas and George S Tavlas, ‘An Optimum-Currency-Area Odyssey’ (2009) Bank of Greece Working Paper No 102. 9 There exists no clear-cut formula defining the scope of optimal fiscal centralization in a multilevel political system. However, the theory of fiscal federalism—which was maturing in parallel to the theory of optimum currency areas—has strived to answer the question of how to allocate responsibilities for public policies in such a system and how to adjust fiscal instruments accordingly. Cf especially Richard Musgrave, The theory of public finance: a study in public economy (McGraw Hill 1959); Wallace E Oates, Fiscal federalism (Harcourt Brace Jovanovich 1972). For more contemporary discussion in the European context, cf eg Alicia Hinarejos, ‘Fiscal

216 OBJECTIVES OF THE EMU off asymmetric (ie country specific) economic shocks to which such a divergent economic system is inherently conducive. 9.4

The euro area crisis did not only confirm these misgivings, but it also ushered in a serious and sophisticated, even if also convoluted and obscure, process of reconsidering the original detailed goals, principles and institutional arrangements behind EMU. While, therefore, the two most rudimentary (Level 1) objectives have remained the same, the economic and political convictions as to how they can be attained have changed in recent years, triggering a complex process of constitutional adaptations.

9.5

The wording of primary European Union (EU) law is too terse to clearly depict either the original political and economic aspirations (objectives) of EMU, or the adaptation processes its constitutional setup has undergone subsequently. Hence, this chapter first sketches intentions originally motivating the creation of the euro area and its more detailed (Level 2) objectives than the two indicated at its beginning (see Section II). Then it concentrates on how the Treaty couched them into norms of primary law determining even more granular (Level 3) EMU objectives (see Section III). Next, Section IV elaborates on how the original objectives and principles discussed earlier failed during the sovereign debt crisis.10 Finally, this contribution discusses how the objectives and principles have been adapted in recent years (see Section V) and concludes on what this process betokens for the EMU’s future (see Section VI).

II. The Original Level 2 Objectives 9.6

The idea of replacing national currencies with European money was seriously discussed in various European policy-making circles since the mid-1960s, when the Bretton Woods monetary management system experienced its first serious jitters.11 Only in the second-half of the 1980s did the prospect of introducing the single currency become realistic, however.

9.7

There are two main reasons for this epochal transition in the 1980s: The first is directly related to the internal market programme launched by the Commission in 1985.12 The single currency was conceived of as the next natural step of economic integration, introduced in order to bolster ‘the area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties’— as Article 26(2) TFEU defines the internal market—and to harness its full potential. The perception of EMU as a natural and indispensable extension of the internal market is epitomized in the title of the Commission’s 1990 report ‘One market, one money’,13 federalism in the European Union: Evolution and future choices for EMU’ (2013) 50 Common Market Law Review 1621; Alicia Hinarejos, The Euro Area Crisis in Constitutional Perspective (OUP 2015) 183–88 (hereafter Hinarejos, The Euro Area Crisis). 10 The term ‘sovereign debt crisis’ is here associated with the period of steep spikes in government debt premiums, experienced by some of the euro area countries from 2010 to 2012/2013. 11 The Bretton Woods system, based on the 1944 Bretton-Woods Agreement, introduced a system of currency convertibility (and hence of pegged exchange rates). It formally lasted until 1971, when the US denounced the main linchpin of the system: the gold convertibility of the US dollar. For a broader overview, cf Harold James, Making the European Monetary Union (Belknap 2012) (hereafter James, European Monetary Union). 12 Commission White Paper, ‘Completing the Internal Market’ COM (1985) 310 final, established a roadmap to enact about 300 legislative acts intended to achieve the internal market by 1992. 13 Commission, ‘One market, one money’ (n 1).

The Original Level 2 Objectives 217 which laid down the foundations for the approach to EMU subsequently embodied in the Maastricht Treaty. The second reason was rooted in the economic experiences of the 1970s, when discordant (and expansionary) national fiscal and monetary policies led in many industrialized countries to inflation and public debt much higher than in the previous decade, without inducing economic growth or sustainably reinstating full employment (the so-called ‘stagflation’ problem). This period undermined the prevailing beliefs about macroeconomics, paving the way to the new economic thinking called ‘neoliberalism’.14 Gradually gaining salience throughout the 1980s, neoliberalism was conceptually more conducive to the idea of a single European currency than had been the earlier Keynesianism. It differed from the previously prevailing approach to macroeconomics by prioritising deregulation of capital flows and (in some of its variants) by questioning the State theory of money.15 In the formative period of EMU—ie between June 1988, when the idea of the Economic and Monetary Union as a new layer of the European economic integration was relaunched16 and December 1995, when the exact scenario of the changeover to the single currency was decided17—no economic theory was more influential in Europe than a neoliberal view of money.18

9.8

The two new phenomena contributed to a serious intellectual transformation, which saw the single currency as an indispensable vehicle to achieve the goals of European economic integration. They also defined the understanding of the three more proximate original objectives of EMU, referred to as ‘Level 2 EMU objectives’ throughout this chapter. The three objectives are:

9.9

(1) Improving the performance of the internal market. (2) Establishing a countermeasure to the German monetary dominance. (3) Restraining domestic decision- makers from pursuing self- defeating macroeconomic policies. Each of them will be now discussed in turn. 14 For an introduction, cf David Harvey, A Brief History of Neoliberalism (OUP 2007); Simon Springer, Kean Birch and Julie MacLeavy, Handbook of Neoliberalism (Routledge 2016). 15 ‘The State theory of money—recognised in modern constitutions—has been typically construed as a necessary consequence of the sovereign power over currency’: see Rosa M Lastra, International Financial and Monetary Law (OUP 2015) 15. 16 During the Hanover European Council meeting in June 1988 the European Council appointed a Committee, chaired by Commission President Delors, entrusted with ‘the task of studying and proposing concrete stages leading towards’ Economic and Monetary Union (European Council, ‘Conclusions of the Presidency’ (Hannover, 27–28 June 1988) § 5). The Committee published its final study next year (Committee for the study of economic and monetary union, ‘Report on economic and monetary union in the European Community’ (EC Publications Office, April 1989), establishing intellectual and political foundations for the euro area as established by the Maastricht Treaty). 17 The Madrid European Council (15 and 16 December 1995) decided both the name of the single currency and the timeframe of the final—third—stage of introducing it. 18 It should be remembered, however, that a big share of neoliberal economists viewed fixing exchange rates between diverse economic organism as economically dangerous. Cf eg Milton Friedman, ‘The Euro: Monetary Unity To Political Disunity?’ (Project Syndicate, 28 August 1997) accessed 5 February 2020. Furthermore, any macroeconomic theory is heavily politically laden. Because the euro area was not politically popular in the UK (otherwise very neoliberal in the 1980s), the thinking that the monetary policy can be elevated to the European level did not gain traction there, contrary to the other EEC countries, where economic theories justifying further economic integration were in much higher demand.

218 OBJECTIVES OF THE EMU

A. Prerequisite and driver of the internal market 9.10

Along the attainment of a truly free movement of goods, persons and services, the internal market programme executed between 1986 and 1992 pushed for an expedite elimination of obstacles to the free movement of capital and payments. At the same time the European Economic Community (EEC) countries remained committed to maintaining fixed exchange rates, wishing to avoid the effects both devaluations and revaluations entail for international trade (devaluations boost external cost-competitiveness, revaluations entail the opposite effects). The two factors had serious consequences for the mainstream thinking about the monetary policy in the second-half of the 1980s. The influential financial trilemma—also called the impossible trinity or the Mundell-Fleming trilemma—predicated that it is possible to achieve only two out of three following goals: exchange rate stabilization, free international capital mobility, and a monetary policy oriented towards domestic goals.19 In other words, free movement of capital within the internal market and fixed parities left no room for monetary sovereignty.20 By the same token, the single currency was believed to be indispensable if the allocation of resources would be to benefit from the free movement of capital and if competitive devaluations were to be put to an end by the irreversible fixing of parities (currency stability).

9.11

Poorer countries of the EEC in particular hoped to benefit from the abandonment of the monetary sovereignty when juxtaposed with the free movement of capital. Because these countries were characterized by lower average per capita levels of income and output, they also had higher future growth potential than the core of the euro area. Investments would therefore flow to these regions. In consequence, the single currency was believed to propel the productive allocation of capital towards the countries at the periphery of the euro area. This process, ignited by the free movement of capital, was expected to be seriously reinforced by the exchange rate stability and low inflation to be achieved by the central bank of the euro area moulded on the template of the German Bundesbank.21

B. Countermeasure against the German monetary dominance 9.12

The economic boost for the euro area’s periphery—as mentioned above a direct effect of introducing the euro conflated with the internal market—was expected to go hand in hand with the effects produced by the single currency for German monetary relations. Both of the effects were hoped to contribute to the Level 1 objectives of EMU.

9.13

In the majority of EEC countries the 1971 breakdown of the Bretton Woods fixed exchange rate system ushered in several years of exchange rate volatility accompanied by 19 Cf Maurice Obstfeld, Jay C Shambaugh, and Alan M Taylor, ‘The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility’ (2004) NBER Working Paper No 10396. 20 It is remarkable from this perspective that the first stage of EMU was launched the same day (1 July 1990) when Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty [1988] OJ L178/5 entered into force. 21 These convictions were premised on the economic theory claiming that even the initially divergent national economies would gradually become synchronized by innate (endogenous) processes set in motion by the internal market. Cf Jeffrey A Frankel and Andrew K Rose, ‘The Endogeneity of the Optimum Currency Area (1998) 108 Economic Journal 1009.

The Original Level 2 Objectives 219 stagflation. These economically deleterious effects were largely sparing Germany, however. The Deutschmark remained profoundly stable, gradually gaining the status of an anchor for other EEC currencies. The German economic model based on high exports, high savings and (as a flipside) low imports was keeping the Deutschmark constantly under a revaluation pressure.22 However, managing this pressure was more comfortable for German central bankers than the opposite scenario of a devaluation pressure experienced by most of other EEC countries. The periods of underappreciated Deutschmark exchange rates made it easier for this country’s economy to sustain its external cost competitiveness, in turn stimulating the export-driven economic model Germany championed. Inflation was also of no serious concern in such an environment, contrary to the situation prevailing in the other main economies of the EEC—the UK, France, and Italy—where exchange rates remained under a downward pressure. The arrangements intended to replace the Bretton Woods system with new stabilization tools throughout the 1970s and 1980s (the so-called ‘snake-in-the-tunnel’ between 1972 and 1978 and the European Monetary System established in 1979) did not prove sufficiently effective to remedy the entailing economic and political tensions. The resulting German monetary hegemony23 was often depicted as sagging the growth potential of other EEC economies.24 Outside Germany, the single currency was believed to eliminate this economic advantage produced by the export-led economic model and the monetary policy of the Bundesbank. A more seamless European economy, in turn a prerequisite for the advancement of the political integration, was arguably also the main reason why Chancellor Kohl and his long-serving Vice-Chancellor and Minister of Foreign Affairs Genscher decided in the late 1980s to forego the economic benefits of the Deutschmark.25

9.14

C. Restraint on domestic economic policy-makers The third major original Level 2 objective of the EMU was directly influenced by the neoliberal intellectual revolution. As mentioned earlier, this economic thinking was shaped in the opposition to the experiences of the 1970s, when many European governments used their monopoly (called ‘seigniorage’) of issuing currency to manipulate financial markets for debt management purposes. These attempts largely failed in the countries where central banks were unable to withstand the pressure of governments to embark on monetary stimuli, contributing to the stagflation problem. The lesson to be drawn from it was also corroborated by the opposite German example, where the strongly guaranteed and respected independence of the Bundesbank made it impervious to similar political pressures, to the benefit of the economy. This institutional pattern made it easier for Germany to enjoy both 22 Ie, an upward adjustment of the parity in a fixed exchange rate system. In effect, the currency becomes ‘more expensive’ in terms of the currencies towards which it is revalued. 23 Cf also Karl Kaltenthaler, Germany and the Politics of Europe’s Money (Duke UP 1998); Paul J J Welfens, European Monetary Integration: From German Dominance to an EC Central Bank? (Springer Science & Business Media 2012). 24 In his memorandum issued in January 1988, the Italian Finance Minister Giuliano Amato argued that the German economic and monetary policies ‘on the one hand induce tension within the exchange system, pushing up the D-mark . . . and, on the other hand, they remove growth potential from the other nations. In the long run, the cohesion of the system could suffer’ cited in James, European Monetary Union (n 11) 229. 25 Cf also Dyson and Featherstone, The Road to Maastricht (n 2).

9.15

220 OBJECTIVES OF THE EMU lower levels of inflation and higher economic growth than many of its European trading partners. 9.16

Such an experience made a strong case for a strict separation of fiscal policy and monetary policies, as otherwise monetary stability can be easily compromised by attempts of election seeking politicians to run debt-financed expansionary fiscal policies. The thinking prevailing since the early 1980s held it that such a fiscal dominance may lead to a short- term economic boost, but that it also erodes structural economic foundations. This insight has clear policy and institutional consequences: the mandate of central banks should be narrowly tailored to achieving monetary stability. As a corollary, monetary financing— ie exchanging government debt for money freshly printed by central banks, intended to diminish the cost of servicing public debt—ought to be strictly prohibited and the independence of the central bank unequivocally enshrined.26 For the very same reason the government ought not to receive preferential loans or other methods of financing from other Member States or from supranational institutions (the so-called ‘no-bailout principle’). In this setup all the financing needs of sovereigns would be covered either by taxes, by State revenues based on assets owned by the State, or by borrowing from financial markets, in all cases imposing restraining and disciplining pressure on the expenditure side of the general government’s budget.

9.17

The thinking prevailing in the 1980s and the 1990s assumed that in this environment, called monetary dominance (the prevalence of a policy concentrated on low inflation over priorities of public debt management),27 national governments would be forced to abandon quixotic attempts to stimulate economic growth with expansionary fiscal and monetary policies. They would have no other choice than to improve the economic performance by concentrating on the economic supply side: the business environment, competition, innovation, and labour flexibility.

9.18

The Maastricht setup, based on this very assumption, aimed to establish monetary dominance as a method of forcing national governments of the euro area countries to run sound, prudent, and coordinated fiscal and economic policies. Corresponding with the dominant, economically liberalising (market-opening) nature of the European economic constitution,28 it also required that both economic and monetary policies of the EMU were run ‘in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources’.29 It was believed that in this environment, in which 26 For a broader overview of the evolving economic thinking on the topic, cf Bertrand Blancheton, ‘Central bank independence in a historical perspective. Myth, lessons and a new model’ (2016) 52 Economic Modelling 101. 27 Ie the regime in which the monetary authority independently determines inflation and seigniorage, while the fiscal authority adjusts spending or taxation to achieve government’s intertemporal budget constraint. Cf also Carl E Walsh, Monetary Theory and Policy (MIT Press 2010) 143. 28 Cf Wolf Sauter, ‘The Economic Constitution of the European Union’ (1998) 4 Columbia Journal of European Law 27; Armin Hatje, ‘The Economic Constitution within the Internal Market’ in Armin von Bogdandy and Jürgen Bast (eds), Principles of European Constitutional Law (Bloomsbury Publishing 2009) 589; Kaarlo Tuori and Klaus Tuori, The Eurozone Crisis: A Constitutional Analysis (CUP 2014) (hereafter Tuori and Tuori, The Eurozone Crisis); Herwig Hofmann and Katerina Pantazatou, ‘The Transformation of the European Economic Constitution’ (2015) University of Luxembourg Law Working Paper No 2015-01; Christian Joerges, ‘The European Economic Constitution and its Transformation through the Financial Crisis’ Dennis Patterson and Anna Södersten (eds), Blackwell Companion to EU Law and International Law 247. 29 Article 120 TFEU (the economic policy) and Article 127(1) TFEU (the monetary policy). These principles confirm the crucial influence of the German thinking about the monetary and economic policies (‘ordoliberalism’) on the approach to the EMU. For a comprehensive discussion of ordoliberalism, cf Josef Hien

The Original Level 3 Objectives 221 economic policy-makers would not be able to take recourse to inflationary policies, the central bank of the euro area would not find it difficult to run its stability oriented monetary policy, because its mission would be attuned to passive, stable and predictable economic policy by default. Because the central bank would not come to the rescue of the government, the latter would be fully exposed to the disciplining pressure of (by default rational) financial markets.

III. The Original Level 3 Objectives The objectives of the EMU discussed so far, both the most rudimentary ones corresponding to the goals of the European economic integration more generally (Level 1) and the more specific political and economic aspirations surfacing in the late-1980s (Level 2) determined the more specific, operational objectives of the EMU introduced to the Maastricht Treaty as written norms subject to standard legal interpretation (Level 3 objectives). Conceiving the EMU’s objectives in such a layered manner makes it easier to understand both the practical consequences of the Level 1 and the Level 2 objectives, as well as deeper teleological justifications of the Level 3 objectives. What is ultimately more important, the hierarchical relationship between the three layers is particularly useful in comprehending how the sovereign debt crisis defied the objectives in one layer (Level 2) and paved the way for replacing them with a new one. Due to the hierarchical chain, this process has had serious implications for the Level 3 objectives and has posed important questions about the role of the EMU in achieving the Level 1 objectives.

9.19

Before elucidating on this point, the original Level 3 objectives of the EMU should be introduced and explained. There are three of them:

9.20

1. price stability (the objective of the monetary policy); 2. sound public finances (the objective of the economic policy); 3. sustainable balance of payments and economic convergence (the objective of the economic policy).

A. Price stability According to Article 119(2) TFEU the EMU’s ‘M’ prong consists of: a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Union, in accordance with the principle of an open market economy with free competition.

and Christian Joerges, Ordoliberalism, Law and the Rule of Economics (Bloomsbury Publishing 2017) and the works referenced above (n 28). It should be remembered in this context, however, that the global raise of neoliberalism throughout the 1980s, separate from ordoliberalism in its intellectual roots but similar when it comes to the policy prescriptions, also played a very important role in imbuing the EMU with its economically liberal characteristics.

9.21

222 OBJECTIVES OF THE EMU Hence the monetary policy (understood broadly, as covering the exchange rate policy as well), both in the euro area countries and in the EMU countries with a derogation,30 is intended to achieve price stability first and foremost, reflecting ‘above all German concerns, some would term it the German obsession, with a stable currency’.31 Price stability—the primary objective of the monetary policy repeated in several other Treaty provisions32—is in principle defined by the ECB (a quantitative definition) as a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below but close to 2 per cent over the medium-term.33 While the HICP inflation—a price-change of a representative basket of consumer goods and services—has been considered as an accurate depiction of price trends, the ECB also has happened to use price changes in a basket of goods and services excluding the most volatile items (the so-called ‘core’ inflation, or HICP all-items inflation excluding energy and unprocessed food) as the driving factor of its monetary decisions.34 9.22

In the pre-Maastricht Treaty setup price stability was considered a goal equally important to high level of employment and a balance of payments equilibrium (ie balanced economic transactions with the rest of the world).35 Maastricht changed this relationship, manifesting the underlying belief that monetary dominance would discipline domestic economic policy-makers, by the same token establishing more stable conditions for a durable economic growth. In consequence of this intellectual shift, the Treaty provides that: without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union’.36

In other words, the actions of the ESCB can support general economic policies of the Union only as far as this does not jeopardize the primary objective of price stability.37 As a flipside, the stance of European monetary authorities could (and even should) contradict general economic policies of the Union if inflation diverges from the statutory goal and if the ECB 30 While Article 119(2) TFEU refers to one monetary policy and one currency (euro), it should be remembered that each non-euro area country has retained its own monetary policy, as confirmed by the long list of the provisions related to the monetary union inapplicable to these countries (Article 139(2) TFEU). On the other hand, Article 119 TFEU, which most rudimentarily constitutes Level 3 objectives, is not one of such provisions. 31 Matthias Herdegen, ‘Price Stability and Budgetary Restraints in the Economic and Monetary Union: The Law as Guardian of Economic Wisdom’ (1998) 35 Common Market Law Review 9, 14. 32 Articles 127(1), 141(2), 219(1)–(2), and 282(2) TFEU; Article 3(3) TEU; Article 2 of Protocol No 4 on the Statute of the European System of Central Banks and of the European Central Bank [2012] OJ C326/230. Price stability is also the first of the convergence criteria established by Protocol No 13 on the Convergence Criteria. 33 A slightly narrower version of this definition was originally announced by the Governing Council of the ECB in October 1998. It was refined in May 2003. Cf also ECB, ‘The definition of price stability’ accessed 5 February  2020. 34 Cf ECB, ‘Monetary policy decisions’ (Press Release, 9 March 2017) accessed 5 February 2020. 35 Article 104 of the Treaty establishing the European Economic Community (TEC) provided that: ‘Each Member State shall pursue the economic policy necessary to ensure the equilibrium of its overall balance of payments and to maintain confidence in its currency, while ensuring a high level of employment and the stability of the level of prices.’ 36 Article 127(1) TFEU and Article 2 Statute of the ESCB and the ECB. Cf also Article 119(2) TFEU. Cf Section I on the relevant objectives of the Union, as established by Article 3 TEU. 37 Contrary to Article 119(1) TFEU, Article 119(2) TFEU refers to (many) ‘general economic policies in the Union’ instead of one European ‘economic policy’.

The Original Level 3 Objectives 223 finds contractionary actions to be justified by its primary objective. In this respect, the EMU closely follows the price stability culture of the German Bundesbank,38 differing from the so-called dual mandate of the US Federal Reserve in particular.39 The ESCB pursues the goal of price stability in principle by performing its statutory basic 9.23 tasks.40 The most important among them—defining and implementing the monetary policy—determines the supply of the monetary base (currency in general circulation and bank reserves),41 which in turn influences money market conditions and steers market interest rates. In order to facilitate this process, the ESCB exercises the basic task of promoting the smooth operation of payment systems. It does so mainly by operating the cross- border settlement system called TARGET2.42 While the notion of price stability adopted by the ECB concentrates on internal monetary 9.24 stability (low inflation), two other Treaty basic tasks of the ESCB—conducting foreign- exchange operations and managing the official foreign reserves of the Member States—deal primarily with the external monetary stability (stable exchange rates). The two dimensions of the monetary stability are inherently related, however. As the exchange rate (the price of the currency in other currencies) determines prices for exports and imports, the external monetary stability is also important for the level of domestic prices for consumer goods and services and for how the monetary policy influences the so-called ‘real economy’—the non- financial part of the economy producing goods and services.

B. Sound public finances Fiscal policy, focussed on managing fiscal revenues and expenditures, plays a very important role in every economy. It influences the aggregate demand and therefore the level of economic activity, income distribution and the level of savings and investments. It is also quantifiable. Especially the indicators of government deficits and public debt make it easier to compare fiscal policies across jurisdictions. They also allow for establishing specific targets and benchmarks of national performance against these targets.

9.25

The significance of achieving sound public finances by the countries joining the monetary union was pressed during the Maastricht negotiations, because high government deficits can undermine confidence in national economy and currency. The experiences preceding EMU had corroborated that the entailing tensions jeopardize the balance of

9.26

38 Cf also Jakob de Haan, The History of the Bundesbank: Lessons for the European Central Bank (Routledge 2000). 39 The Federal Reserve Act of 1913 (as subsequently amended) treats both stable prices and maximum sustainable employment as two equally important objectives. More specifically, its Section 2A provides that: [t]‌he Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. 40 Article 127(2) TFEU; Article 3(1) Statute of the ESCB and the ECB. 41 Cf also ECB, The Monetary Policy of the ECB (ECB 2011). 42 TARGET2 ‘settles payments related to monetary policy operations, interbank and customer payments, and payments relating to the operations of all large-value net settlement systems and other financial market infrastructures handling the euro (such as securities settlement systems or central counterparties)’ accessed 5 February  2020.

224 OBJECTIVES OF THE EMU payments and undermine monetary stability. Especially German leaders were concerned that national policy-makers of the countries with the previous record of lax economic and monetary policies would be strongly incentivized to pursue unsound fiscal policies when admitted to the euro area, since consequences of their fiscal mismanagements would be spread across the whole single currency area. They feared, in other words, that ‘in a monetary union, the Member States could have the incentive to implement unsustainable fiscal policies because they would expect the monetization of their debt by the common central bank or bailout from their partners’.43 If unsound public finances of some euro area countries were to undermine the value of the currency, other societies would also experience negative consequences of the process, even if their governments run very responsible fiscal policies. 9.27

Three constitutional developments introduced by the Maastricht Treaty were intended to safeguard the goal of sound public finances. The first is the ‘no-monetary financing clause’. The second is encapsulated in the ‘no-bailout clause’, and the third comprises a specific economic coordination process in the field of fiscal policy.

9.28

The no-monetary financing clause, established in Article 123 TFEU, aims to buttress both the objective of sound public finances and of price stability. According to the most important part of Article 123 TFEU: Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

9.29

It was indicated earlier that—according to one of the original Level 2 objectives of the EMU—the single currency should motivate national economic policy-makers to run non- inflationary policies stimulating economic growth by a continuous process of improving economic fundamentals and preventing quixotic attempts to boost it through deficit spending. One of the methods to achieve these goals and their more specific manifestations of sound public finances is to preclude the situation in which government deficits are funded with money freshly printed by the central bank and transferred to the national ministry of finance in order to alleviate the financial burden of government deficits.

9.30

The no-monetary financing clause expresses this very intention. Its prohibition covers two specific situations. The first is any type of credit facility in favour of public sector.44 No entities belonging to this sector should make credit agreements with their central bank that would permit them to withdraw from their accounts with this bank funds in excess of 43 Grégory Claeys, ‘How To Build A Resilient Monetary Union? Lessons From The Euro Crisis’ (2017) ADBI Working Paper Series No 778, 2 accessed 5 February 2020. 44 According to Article 3(1) Council Regulation (EC) 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions referred to in Articles 104 and 104b(1) of the Treaty [1993] OJ L332/1, for the purposes of defining the terms used in what is now Article 123 TFEU ‘ “public sector” means Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of Member States’.

The Original Level 3 Objectives 225 their account’s credit balance.45 Because the no-monetary financing clause should be interpreted in the light of the sound public finances objective, only the credit facilities with fiscal policy purposes—ie intended to alleviate the government deficit burden—ought to be covered by it. Credit facilities used by public authorities always have such fiscal policy purposes and should therefore always be prohibited. On the other hand, however, some public undertakings—public banks—are exempt from the prohibition when they use standard central bank’s credit facilities in their normal commercial activities.46 The second situation covered by the no-monetary financing clause deals with purchases of debt instruments issued by public sector, but only when the purchases are conducted on the primary market (ie directly from the issuer).

9.31

Transactions of central banks with credit institutions (secondary market) involving government bonds and other similar public debt instruments are not encompassed by the same prohibition, as they play a very important role in the contemporary monetary policy. Government bonds collateralize the refinancing credit received by commercial banks from the central bank. By the same token, government bonds are crucial for both of the Eurosystem monetary policy operations—the so-called ‘standing facilities’ and ‘open market operations’—in which central banks determine the volume of the monetary base by providing central bank money to eligible banks against eligible collateral.47 In such operations, public debt instruments are treated preferentially to other marketable assets.48 As a result, monetary policy operations affect the market for public debt. When a central bank runs an expansionary monetary policy, gradually augmenting the volume of the public debt it accumulates, it also makes it scarcer for other purchasers. This in turn enhances demand for it and puts a downward pressure on the servicing costs. The main purpose of such purchases, however, is inherently monetary. The transactions between central banks and credit institutions (banks) play a very important role in determining money supply and its price (interest rates). Furthermore, in normal circumstances monetary policy operations have no bearing on fiscal policy, so they do not jeopardize the objective of sound public finances.

9.32

Purchases of government debt securities on the primary market are very different in this respect. It is important in this context that—to fulfil its goals—the monetary transmission

9.33

45 In parallel, Article 124 TFEU establishes a prohibition of privileged access by public sector to financial institutions more generally. Its goal is identical to Article 123 TFEU, the only difference being in the group of the institutions covered by the ban. 46 Otherwise the central bank would limit the effectiveness of its monetary policy instruments. This is arguably why Article 123(2) TFEU states that the prohibition established in para 1 ‘shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions’. 47 According to Article 5(1) ECB Guideline (EU) 2015/510 of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) (recast) [2015] OJ L91/3, with amendments, open market operations are ‘to steer interest rates, manage the liquidity situation in the financial market and signal the stance of monetary policy’. They fall in the following four main categories: main refinancing operations; longer-term refinancing operations; fine-tuning operations and structural operations (Article 5(2)). Pursuant to Section 10 of the Preamble of the same Guideline ‘[t]‌he set of instruments at the Eurosystem’s disposal for offering standing facilities are the marginal lending facility and the deposit facility, which are aimed at providing and absorbing overnight liquidity respectively, signalling the stance of monetary policy and bounding overnight money market interest rates’. 48 For the purpose of valuation haircuts applied to eligible marketable assets, debt instruments issued by central governments and (to a lesser degree) debt instruments issued by local and regional governments are always treated preferably to debt instruments of similar credit quality, residual maturity and coupon structure issued by private sector. Cf ECB Guideline 2016/65 of 18 November 2015 on the valuation haircuts applied in the implementation of the Eurosystem monetary policy framework (ECB/2015/35) [2016] OJ L14/30, with amendments.

226 OBJECTIVES OF THE EMU mechanism should always be intermediated by the banking system, while the latter is excluded from the transactions when the central bank purchases debt instruments directly from the government. For this reason government bond purchases on the primary market cannot be explained in terms of providing financial liquidity to the real economy. Their only tenable explanation is fiscal. On the one hand, an intervention of a central bank on the primary market for government debt reduces the stock of debt available on the market. The price of the government debt stock available to credit institutions should therefore go up (the interest to be paid by the government to service its debt would diminish). On the other hand, and more importantly, the government would not in practice pay any interest on the debt purchased directly by the central bank. This is because by purchasing government debt directly from the sovereign the central bank exchanges money supply (liabilities of the central bank) for government bonds or other debt instruments (liabilities of the government). In other words, liabilities of one unit of public sector (general government) are exchanged for liabilities of another unit of public sector (central bank). This in turn has one obvious consequence: because profits of central banks—eg the interest earned on transactions involving purchases of marketable assets, like government bonds—are government revenues, the interest the government pays to the central bank in the process returns to the treasury. In this setup the government is encouraged to pursue deficit spending, because adding new public debt becomes costless. 9.34

Ultimately, therefore, credit facilities in the central bank or in financial institutions in favour of the government and purchases of government bonds on the primary market run counter to the principle of sound public finances. Both are tantamount to cash transfers of the freshly printed money to the Ministry of Finance and both diminish the financial penalty for running excessive government deficits. In addition, in normal circumstances, ie when the economy is not otherwise subject to a lasting deflationary pressure, monetary financing contravenes the objective of price stability. By definition, it increases money supply—the amount of monetary assets available in the economy—so it is inherently inflationary.

9.35

The second rule buttressing the objective of sound public finances is the no-bailout principle, established in Article 125(1) TFEU. According to it: The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

9.36

The no-bailout principle enshrined in EU primary law is clearly inspired by the US constitutional setup. There the credible (even if unwritten) commitment to it has been deterring the states from running irresponsible fiscal policies ever since the financial crisis of the 1840s.49 This principle was also intensively postulated by German proponents of the EMU 49 Cf eg Alasdair Roberts, ‘ “An ungovernable anarchy”: the United States’ response to depression and default, 1837–1848’ (2010) 45 Intereconomics 196; John Joseph Wallis, Richard E Sylla, and Arthur Grinath, ‘Sovereign debt and repudiation: the emerging-market debt crisis in the US states, 1839–1843’ (2004) NBER Working Paper No 10753.

The Original Level 3 Objectives 227 during its maturation in the 1990s, in order to demonstrate that the euro would not pave the way to any form of a transfer union funnelling resources of the wealthier societies to the poorer ones.50 The prohibition established in Article 125(1) TFEU covers only relations between the Member States, as well as between the Member States and the Union. By the same token it does not extend to bailouts by third countries or international organizations other than the EU (eg the International Monetary Fund (IMF)). Furthermore, Article 122 TFEU establishes an exception to the rule that the no-bailout principle encompasses also the EU as the organization behind a potential bailout. This latter article authorizes the Council ‘to grant, under certain conditions, Union financial assistance to the Member State concerned’ if ‘a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control’ (Article 122(2) TFEU). According to the wording of the solidarity clause set up by the quoted provision, the assistance should be provided by the EU and not by its individual countries. Furthermore, when read in the context of its original goal (securing sound public finances), it ought to be allowed only when the crisis making the national government seek financial assistance is caused by factors entirely independent of the Member State concerned. A contrario, it should not be permitted when the crisis is triggered by occurrences controllable by its government; flaws in its policies in particular.

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The third main tool to achieve the sound public finances objective is the so-called ‘excessive deficit procedure’.51 Based on Article 126 TFEU, it provides for a possibility of imposing financial sanctions on the country persistently deviating from the so-called fiscal reference values (ie government deficit of no more than 3 per cent Gross Domestic Product (GDP), government debt of up to 60 per cent GDP).52

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According to the original setup, the sanctions could only be imposed after a sophisticated process involving policy iterations between EU institutions and the Member State concerned. More importantly, this procedure provides for certain escape clauses allowing the Member States missing the reference values to avoid the sanctions. First, the very etymology of the expression ‘excessive deficit procedure’ implies that it is concentrated on one of the two Treaty reference values.53 Second, the Treaty authorizes national governments to run higher public deficits if ‘either the ratio has declined substantially and continuously and reached a level that comes close to the reference value’ of 3 per cent GDP, ‘or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value’ (Article 126(2)(a)).54 Third, Article 126 TFEU requires

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50 For a concise summary of the problem, cf Markus K Brunnermeier, Harold James, and Jean-Pierre Landau, The Euro and the Battle of Ideas (Princeton UP 2016) 106–10 (hereafter Brunnermeier, James, and Landau, The Euro and the Battle of Ideas). 51 If it were able to achieve sound public finances, the excessive deficit procedure would also secure the no- bailout clause. As a flipside, however, had the procedure failed to deliver its intended objectives (which indeed has happened), the objective of sound public finances would be impossible to accomplish, at the same time undercutting the no-bailout clause. 52 These two reference values are established in Article 1 of Protocol No 12 on the excessive deficit procedure. 53 Arguably, if government deficits are kept under control, government debt should also be manageable. Under low GDP growth, however, the Maastricht government deficit fiscal reference value may lead to an accumulation of public debt. 54 Similarly, the public debt ratio of 60 per cent GDP could be exceeded if ‘the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace’ (Article 126(2)(a) TFEU). This exception is, however, insignificant in practice, as long as the excessive deficit procedure is detached from this fiscal reference value.

228 OBJECTIVES OF THE EMU that the sanctions be treated as ‘ultima ratio’ measures.55 To reach them the Council must first decide that an excessive deficit exists (Article 126(6)). Then the country must ‘persist in failing to put into practice the recommendations of the Council’ accompanying the excessive deficit decision. The Council is also obliged to give it a notice ‘to take, within a specified time limit, measures for the deficit reduction which is judged necessary by the Council in order to remedy the situation’ (Article 126(9)). Only if this notice is disobeyed by the relevant Member State, may the Council ‘require the Member State concerned to make a non- interest-bearing deposit’ or ‘impose fines’ (Article 126(10)). Each stage of the process can be initiated by the Commission only, which proposes a recommendation to be decided by the Council. The latter cannot fail to react to a Commission’s recommendation issued within the powers granted to the latter institution by Article 126 TFEU,56 nor can it replace its steps with a procedure unknown to this provision.57 Yet, at the same time, the Council cannot be condemned if the votes within it, cast in support of a Commission’s recommendation, are insufficient to move the procedure forward. 9.40

This basic Treaty pattern for fiscal coordination established by Article 126 TFEU was supplemented in 1997 by a high-level political declaration and two secondary law instruments intended to operationalize the general Treaty setup and hence to ensure its enforcement.58 Called the Stability and Growth Pact (SGP), these measures have aimed to ensure appropriate budgetary adjustments first by establishing monitoring and benchmarking procedures to be applied to all EU countries (the co-called ‘preventive arm’) and by defining the exact parameters and procedural steps of the excessive deficit procedure in the event the preventive arm does not ensure appropriate adjustments (the so-called corrective arm).59

C. Sustainable balance of payments and economic convergence 9.41

As mentioned earlier, one of the original Level 2 EMU objectives held it that the single currency would be inherently conducive to a balanced economic growth in the euro area. The free movement of capital in particular was expected to facilitate the process. For this very reason the EMU’s constitutional setup, as agreed in Maastricht, was designed with the assumption that economic convergence would flow from the adoption of the euro and from its interactions with other economic policies of the EU. In addition, domestic economic policies run deep into idiosyncratic national institutional arrangements and social policies 55 In addition, Article 139(2)(b) excludes the application of ‘coercive means of remedying excessive deficits (Article 126(9) and (11))’ in respect to the countries outside the euro area. 56 Cf also Article 126(13) TFEU. 57 As confirmed in Case C-27/04 Commission v Council [2004] ECR I-6649 (hereafter Commission v Council). 58 Cf Resolution of the European Council on the Stability and Growth Pact of 17 June 1997 [1997] OJ C236/1; Council Regulation (EC) 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1997] OJ L209/1 (the preventive arm, based on what now is Article 121 TFEU); Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6 (the corrective arm, based on what now is Article 126 TFEU). 59 For the original setup, cf Hugo J Hahn, ‘The Stability Pact for European Monetary Union: Compliance with Deficit Limit as a Constant Legal Duty’ (1998) 35 Common Market Law Review 77; Anne Brunila and others, The Stability and Growth Pact: The Architecture of Fiscal Policy in EMU (Palgrave Macmillan 2001). On early experiences with the SGP, cf Fabian Amtenbrink and Jakob de Haan, ‘Economic governance in the European Union: Fiscal policy discipline versus flexibility’ (2003) 40 Common Market Law Review 1075.

The Original Level 3 Objectives 229 (eg the welfare State, education, labour relations), with which the EU was not supposed to interfere according to the Maastricht bargain. For this reason the constitutional setup established in 1992 provided either no or only very rudimentary institutional tissue intended to approximate the objective of supporting economic convergence, sustainable balance of payments, and general economic policies in the Union. More specifically, at the general level the Treaty put the goal of achieving a sustainable balance of payments at par with the objectives of stable prices and sound public finances.60 However, no specific institutional arrangements to support the attainment of this goal followed it, because it seemed paradigmatic during the Maastricht negotiations that the euro area would be entirely immune to the so-called balance of payments crises, ie the situations in which a country develops an unsustainable deficit in economic transactions with the rest of the world. There were two main reasons for this belief. First, until recently economically advanced countries—by default benefiting from strong domestic institutions and an easy access to international financial markets—had been thought to be able to correct their current account deficits on their own, or at least to be capable of attracting net capital inflows to net out any current account deficits. In other words, it had seemed certain that the free flow of capital—a part and parcel of the internal market—would always satisfy the borrowing needs of each euro area country, making a balance of payments crisis impossible. Second, it was hoped that this first reason would be reinforced by sound fiscal and monetary policies and the enhanced economic growth the euro area was promising to its poorer countries.

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The resultant constitutional assumption—as one of the landmark preparatory documents 9.43 on the way to Maastricht put it—was that ‘a major effect of EMU is that balance of payments constraints will disappear . . . Private markets will finance all viable borrowers, and savings and investment balances will no longer be constraints at the national level’.61 This finding translated into the provisions of the TEC, which precluded granting balance of payments assistance to the countries entering the euro area.62 It also influenced the wording of the Treaty of Lisbon, which envisages procedures for the so-called mutual assistance (loans to buttress financially the economy in a balance of payments crisis) only in respect to the so- called ‘countries with a derogation’, ie the EU (and EMU) countries outside the euro area.63 Pursuant to Article 143 TFEU mutual financial assistance may be granted by the Council to a country with a derogation under two conditions. The first requires that the Member 60 According to Article 119(3) TFEU, ‘activities of the Member States and the Union’ in the field of the EMU ‘shall entail compliance with the following guiding principles: stable prices, sound public finances and monetary conditions and a sustainable balance of payments’. 61 Commission, ‘One market, one money’ (n 1) 24. 62 While Articles 119 and 120 of the Treaty establishing the European Community (TEC) provided for a legal framework in respect to any EU country in a balance of payments crisis, Article 119(4) stated that it ‘shall cease to apply from the beginning of the third stage’ (ie on 1 January 1999). Subsequently Council Regulation (EC) 332/ 2002 of 18 February 2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments [2002] OJ L53/1 was introduced, on the basis of the flexibility clause (Article 308 TEC). It has been interpreted as allowing for balance of payments assistance for non-euro area countries only, and has served as a legal basis for the assistance granted to Hungary (Council Decision 2009/102/EC of 4 November 2008 providing Community medium-term financial assistance for Hungary [2009] OJ L37/5), to Latvia (Council Decision 2009/ 289/EC of 20 January 2009 granting mutual assistance for Latvia [2009] OJ L79/37) and to Romania (Council Decision 2009/459/EC of 6 May 2009 providing Community medium-term financial assistance for Romania [2009] OJ L150/8). 63 Pursuant to Article 139(1) TFEU Member States with a derogation are: ‘Member States in respect of which the Council has not decided that they fulfil the necessary conditions for the adoption of the euro.’

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230 OBJECTIVES OF THE EMU State ‘is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardize the functioning of the internal market or the implementation of the common commercial policy’ (Article 143(1) TFEU). Pursuant to the second condition, previous unilateral actions—to be coordinated by the country concerned with the Commission—must have failed to overcome the crisis. Furthermore, the financial assistance should be accompanied by ‘directives or decisions laying down the conditions and details of such assistance’ (Article 143(2) TFEU). While the Treaty provides for specific forms of conditionality,64 it does not mention macroeconomic reforms among ‘conditions and details’ of financial assistance. In practice, however, such reforms have been a very important flipside of every balance of payments assistance programme. In the actual practice, they have always been coordinated with the conditionality requirements accompanying IMF’s stand-by arrangements granted in parallel with the assistance based upon Article 143 TFEU.65 9.45

As mentioned earlier, the original assumption behind the euro area held not only that its Member States would be sheltered from balance of payments crises. It had been also hoped that the confluence of the single currency and the internal market would propel economic convergence, rendering the poorer Member States gradually more impervious to financial crises even without any serious economic coordination processes. In consequence, the Maastricht setup provided for very flexible, non-binding processes of general macroeconomic policy coordination (as separate from fiscal policies), unintrusive both for the euro area Member States and for the countries outside of it.

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The relevant Treaty provision (Article 121 TFEU) states that ‘Member States shall regard their economic policies as a matter of common concern and shall coordinate them within the Council’ (Article 121 paragraph 1). It also provides for a method of coordination: broad economic policy guidelines, adopted by the Council acting in liaison with the Commission and the European Council (Article 121 paragraph 2).66 If a Member State does not respect

64 The Treaty indicates three types of ‘the conditions and details of such assistance’ (Article 143(2) TFEU). The first regards a ‘concerted approach’ to be presented in global organizations (like the IMF). The second is concerned with methods of avoiding ‘deflection of trade’ (eg by boosting too much the price competitiveness of the beneficiary country by steep depreciation of its exchange rate), but only when the country ‘maintains or reintroduces quantitative restrictions against third countries’ (ie when it imposes import restrictions to facilitate the rebalancing of its current account). The third refers to supplementing the assistance granted by the Council with ‘limited’ bilateral loans funded by the Member States, ‘subject to their agreement’. 65 As the IMF’s Guidelines on Conditionality, adopted in 2002 define it (Section A.1): Conditionality—that is, program-related conditions—is intended to ensure that Fund resources are provided to members to assist them in resolving their balance of payments problems in a manner that is consistent with the Fund’s Articles and that establishes adequate safeguards for the temporary use of the Fund’s resources . . . accessed 5 February 2020. For a broader analysis of the evolving IMF’s approach to the conditionality, cf eg Claus D Zimmermann, A Contemporary Concept of Monetary Sovereignty (OUP 2013) 66–72. 66 Currently broad economic policy guidelines for the EU (the most recent is Council Recommendation (EU) 2015/1184 of 14 July 2015 on broad guidelines for the economic policies of the Member States and of the European Union [2015] OJ L192/27), are supplemented by specific guidelines for the euro area (issued on the basis of Article 121(2) in conjunction with Article 136 TFEU). Cf eg Council Recommendation of 14 May 2018 on the economic policy of the euro area (2018/C 179/01) [2018] OJ C179/1. Individual Member States report on their progress towards the goals established in the economic policy guidelines each year in National Reform Programmes (NRPs). Each July the Council issues its recommendations on the NRPs of individual Member States.

The EMU’s Objectives and Principles 231 the guidelines or if its economic policies otherwise ‘risk jeopardizing the proper functioning of economic and monetary union’, the Commission may issue ‘a warning’ and the Council is empowered to ‘address the necessary recommendations to the Member State concerned’ (Article 121 paragraph 4). Because, however, none of the three types of acts (guidelines, warnings, recommendations) is binding, none of them can be enforced in case they are disobeyed. This policy pattern engrafted on the original Maastricht setup can be politically justified by the unwillingness of the euro area Member States to surrender their economic sovereignty in crucial economic policies. Yet the resulting institutional setup, in which the coordination required by the Treaty is not accompanied by powers sufficient to make it effective, did not augur well for the economic convergence to be pursued through formal processes of EU governance. This institutional pattern also remains in stark contrast to Article 119(1) TFEU, according to which:

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For the purposes set out in Article 3 of the Treaty on European Union,67 the activities of the Member States and the Union shall include, as provided in the Treaties, the adoption of an economic policy which is based on the close coordination of Member States’ economic policies . . .68

With very loose governance patterns institutionalized by the Maastricht Treaty, only very imperfect and superficial coordination of general macroeconomic policies could be possible. It fulfilled neither the Treaty promise of ‘the close coordination’, nor of achieving a single ‘economic policy’. Instead, one could expect ‘very loose coordination’ and ‘many economic policies’, rendering the economic convergence entirely contingent on the very uncertain vehicle of capital movements within the internal market.

IV. The EMU’s Objectives and Principles Against the Euro Area Crisis The experiences of the euro area during the sovereign debt crisis unveiled the vulnerability of the original Level 2 and Level 3 objectives. The essence of this process will now be briefly discussed,69 as it constituted a transformation leading to the new set of EMU’s goals.

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During its first decade, the euro area experienced financial flows towards its periphery, seemingly confirming that the first Level 2 objective (the single currency as a prerequisite and a driver of the internal market) was progressively achieved. However, the capital flows reaching the euro area’s periphery largely contributed to consumption driven bubbles in the so-called non-tradable sectors (construction, private services, non-market services). As capital was flowing to the periphery primarily in the form of short-term inter-bank and wholesale debt, it also found it easy to withdraw when the periphery fell from grace of

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67 Cf Article 3 paragraph 1 TFEU. 68 Emphasis added. 69 Cf Dariusz Adamski, Redefining European Economic Integration (CUP 2018) ch 1 (hereafter Adamski, Redefining European Economic Integration).

232 OBJECTIVES OF THE EMU financial markets in the aftermath of the Great Recession.70 A domino effect of balance of payments crises and banking crises—both caused by massive capital outflows, also enabled by the internal market—ensued as a result. 9.50

The process was propelled by what was originally hoped to be a blessing: a supranational (non-State) character of the euro. Because national governments in a monetary union do not control the currency in which their obligations are denominated, their liquidity crisis can easily morph into a sovereign debt crisis.71 When the financial markets conclude that a sovereign can be forced out of the monetary union, in which scenario a sovereign default would occur (its currency would depreciate steeply and debt obligations would not be respected in full), the demand for sovereign debt collapses, and its price to be paid by the national government soars. This inserts and upward pressure on government expenditures, which at this point in time most probably struggle also due to the costs of upholding a collapsing economy and a besieged banking system. In 2012, such a feedback loop between swiftly deteriorating confidence in the consistency of the euro area and in the fiscal sustainability of its peripheral countries brought the euro area close to implosion.

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The simultaneous capital flight from the euro area’s periphery to its core (especially Germany and the Netherlands) improved the performance of these otherwise structurally more resilient economies. Additionally, because the crisis in the periphery of the euro area was putting a downward pressure on the euro’s exchange rate, the export-oriented north found the single currency even more conducive to their economic model precisely at the time when the periphery was struggling with the consequences of the currency over-appreciated compared to its specific situation. In consequence of all these factors, the gradual economic convergence in the euro area, progressing throughout the previous decade, was seriously reversed, defying the original Level 2 objective of countering the German monetary dominance.

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The last Level 2 objective—restraining domestic decision-makers from pursuing self- defeating macroeconomic policies—also failed. The SGP as a disciplining coordination process was compromised soon after it was established. Already in 2003, the dominating role of the Council in the excessive deficit procedure was exploited by Germany and France to abort attempts of the Commission to enforce deficit corrections.72 The two countries soon initiated a political process which paved the way to the 2005 reform of the SGP.73 It was intended to adjust the excessive deficit procedure to the cyclical situation of the national economy and therefore to make it less susceptible to contestation on economic grounds.74 70 Silvia Merler and Jean Pisani-Ferry, ‘Sudden Stops in the Euro Area’ (2012) Bruegel Policy Contribution No 2012/06; Daniel Gros and Cinzia Alcidi, ‘Country adjustment to a “sudden stop”: Does the euro make a difference?’ (2013) Economic Papers No 492. 71 Paul De Grauwe, ‘The Governance of a Fragile Eurozone’ (2011) CEPS Working Document No 346. 72 The spat between the Commission and the Council led to a decision of the CJEU in Commission v Council (n 57). 73 Council Regulation (EC) 1055/2005 of 27 June 2005 amending Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2005] OJ L174/1; Council Regulation (EC) 1056/2005 of 27 June 2005 amending Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2005] OJ L174/5. 74 For a broader overview, cf Jean-Victor Louis, ‘The Review of the Stability and Growth Pact’ (2006) 43 Common Market Law Review 85; Fabian Amtenbrink and Jakob De Haan, ‘Reforming the Stability and Growth Pact’ (2006) 31 European Law Review 402; Leila Talani and Bernard Casey, Between Growth and Stability: The Demise and Reform of the European Union’s Stability and Growth Pact (Edward Elgar Publishing 2008); Martin Heipertz and Amy Verdun, Ruling Europe: The Politics of the Stability and Growth Pact (CUP 2010).

The EMU’s Objectives and Principles 233 In practice, however, compliance within the excessive deficit procedure remained very patchy in its aftermath.75 As some predicted early on,76 financial markets also failed to insert the disciplining pressure on economic and fiscal policies of the euro area governments. Poor financial market regulation and supervision had led to the accumulation of risks within the banking systems of the euro area’s periphery during the period of economic expansion following the introduction of the single currency. They had produced bubbles in asset markets (especially in Spain and Ireland) and a systemic banking crisis amplified by the interconnectedness of the euro area’s banking systems when the bubbles burst.

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The sovereign debt crisis thus demonstrated that euro area countries may be susceptible to 9.54 very serious financial crises, even if they achieve the goal of sound public finances and if price stability at the aggregate level of the euro area is maintained. The credit-driven consumption boom experienced by many peripheral euro area countries lowered unemployment levels there during the first decade of the single currency. It also boosted economic growth and tax revenues. The two countries which in particular experienced these beneficial effects—Spain and Ireland—managed to reduce their public debt by more than 20 per cent from 1999 to 2007.77 Because, however, this process was fuelled by asset bubbles— growing unnoticed by financial markets and international economic organizations—public debt exploded in both of the countries when the bubbles burst in the aftermath of the Great Recession.78 Some other euro area countries—Portugal and Italy in particular—did not experience similar asset bubbles. But as they had lower growth rates and (as a consequence) higher fiscal deficits during the 2000s, they too experienced serious capital flights and sovereign debt tensions between 2010 and 2012. Finally, in Greece public finances remained clearly unsound during the first decade of the euro area, in open violation to one of the Level 3 EMU objectives. In consequence of its very pro-cyclical fiscal policy, this country’s public debt remained at an alarmingly high level of more than 100 per cent GDP throughout the 2000s, despite the relatively robust Greek economic growth. The dissipation of the EMU’s Level 2 objectives during the sovereign debt crisis had direct effects for Level 3 objectives as well. The objective of price stability—emphasized time and again in the Treaty and operationalized by the ECB as the HICP inflation of almost 2 per cent—was largely maintained during the first decade of the euro area. This success, however, came with a blot on the landscape. Because some EU countries experienced lower

75 The Treaty deficit-to-GDP ratios had exceeded the 3 per cent mark ninety-seven times between the establishment of the euro area and 2010 only. The excesses could not be justified pursuant to Article 2 Regulation 1467/97 in sixty-eight cases: CESifo, ‘EEAG Report on the European Economy’ (CESifo Group Munich, 2011) 79. In none of the cases had the excessive deficit procedure reached the stage anywhere close to sanctions provided by Article 126(11) TFEU. 76 In 1997 Charles Wyplosz argued that: markets tend to throw good money after bad for a time . . . When markets do react, it is often too late and too violently. They abruptly cut financing, making it impossible for the government to borrow further and bankrupting large bondholders, among them commercial banks and other financial institutions. This leads to a scenario where central banks may feel compelled to monetize (part of) the debt. See Charles Wyplosz, ‘EMU: Why and how it might happen’ (1997) 11(4) Journal of Economic Perspectives 3, 14. 77 Ireland reduced its public debt from 46.7 per cent in 1999 to 23.9 per cent in 2007 and Spain—from 60.9 per cent of GDP in 1999 to 35.5 per cent in 2007: see, Eurostat, General government gross debt: annual data. 78 By 2013 it reached 119.5 per cent in Ireland and 95.5 per cent in Spain.

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234 OBJECTIVES OF THE EMU levels of inflation and some other higher inflation, fine-tuning the monetary policy to the irreconcilable requirements of different Member States proved very difficult.79 9.56

It is important to note in this context that by default the monetary policy instruments— open market operations, standing facilities and reserve ratios—are used by each central bank indiscriminately across its jurisdiction. If, however, economies of the Member States comprising a monetary union differ substantially in their cyclical or structural positions, a uniform monetary policy will influence their economies differently. The so-called ‘monetary transmission mechanism’ can therefore produce varying economic results, if the constituent economies are starkly different. In particular, it can boost an economic expansion in countries experiencing above-average inflation and usher in economic stagnation in countries with below-average inflation. Even more perplexingly, above-average inflation can induce asset bubbles and corrode external price-competitiveness (which was indeed the case of the euro area’s periphery in the 2000s). The parts of a monetary union exposed to it become prone to financial crises if the inflation differential is permanent.

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As mentioned earlier, the vicissitudes of Spain and Ireland—applauded during the first decade of the euro area for their fiscal rectitude only to fall victim of a very acute financial crisis soon after—undermined the significance of another Level 3 objective: of sound public finances. The sovereign debt crisis damaged the perception of sound public finances as a rampart of financial stability in the euro area. What proved even more important in practice, two out of three Treaty principles originally intended to buttress the objective of sound public finances (the no-monetary financing clause and the no-bailout clause)80 as well as the lack of a framework for mutual assistance to be deployed to euro area countries in balance of payments crises undercut confidence on the financial markets, which in turn propelled the crisis. According to the orthodox reading of the original Maastricht setup prevailing in 2010 neither the Eurosystem (due to the no-monetary financing clause), nor the EU or other EU countries (because of the no-bailout clause) should have provided the countries engulfed by the crisis with financial liquidity disappearing as an effect of balance of payments crises. Accelerating financial instability ensued, because no alternative vehicle of macroeconomic financial assistance (the IMF in particular) had sufficient financial clout to stabilize the EMU.

V. Reassessing and Redefining the Objectives and Principles of the EMU During and After the Sovereign Debt Crisis 9.58

The systemic failure of the assumptions behind the original Level 2 and Level 3 objectives of the EMU during the sovereign debt crisis forced European policy-makers to 79 In 2006—the last year before global financial markets anxieties—the annual HICP inflation varied from 1.23 per cent in Finland and 1.38 per cent in Germany to 2.50 per cent in Portugal, 2.72 per cent in Spain, 2.98 per cent in Ireland, and 3.20 per cent in Greece: data available at accessed 5 February 2020. 80 The third principle—the ban on excessive deficits—became non-credible when the sovereign debt crisis erupted. Imposing financial sanctions on governments suddenly experiencing falling tax revenues and erupting expenditures would have increased refinancing needs of their treasuries, making the crisis more acute. Sanctions within the excessive deficit procedure were therefore prevented for political and economic reasons.

REASSESSING THE OBJECTIVES OF EMU 235 reengineer their priorities. Because the original Level 2 objectives had not been formally constitutionalized, their redesigning took place almost automatically through the political channel. In its consequence the previous economic and political aspirations were replaced by one new goal: of re-establishing and maintaining the stability of the euro area, in the very basic sense of securing the existence of the single currency area and restoring possibly undistorted operation of its economies, financial systems and social as well as political relations. Academic commentators have not failed to grasp this constitutional shift. As Hinerajos aptly noted, ‘safeguarding the financial stability of the euro area’ has been ‘discovered’ during the Euro area crisis as ‘an ultimate objective for EMU’ ‘that had no basis in the Treaties and that supersedes the Treaty-sanctioned objectives of budgetary discipline and price stability’.81 Similarly, Tuori and Tuori contended that ‘arguably, the euro area crisis has replaced price stability with financial stability as the overriding objective which European economic policies, including the monetary policy of the ECB, are expected to serve’.82 To another commentator financial stability has raised to ‘the role of supranational and foundational objective in EU law and policy’.83

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The rudimentary goal of re-establishing and maintaining the stability of the euro area has two facets. One—‘the stability of the euro area as a whole’84—is concentrated on macroeconomic aspects. The other—‘the stability of the banking system in the euro area’85—pivots on banking systems as the key area of financial intermediation in Europe. Both are tantamount to ‘do whatever it takes to preserve the euro’ goal, as the ECB President Draghi phrased it famously in his 2012 speech.86 Even when exacted in this way, the concept remains elusive as an object of legal analysis. By the same token, however, it leaves decision-makers more latitude in choosing more specific (Level 3) objectives and tools.

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The new Level 2 objective was all the more critical and difficult to achieve during the sovereign debt crisis, because the crisis hit the euro area very asymmetrically, propelling centrifugal financial flows and serious economic divergences. In the years following 2010 policy-makers were therefore confronted with the task of maintaining a single currency area with its export-driven core (especially Germany and the Netherlands) recovering fast from the Great Recession of 2008–09, while the southern periphery languished in a protracted recession caused by a confluence of balance of payments, banking and sovereign debt crises.

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As the original EMU’s Level 2 objectives had unravelled primarily because their Level 3 counterparts had not been attained or worked differently than originally hoped, the

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81 Hinarejos, The Euro Area Crisis (n 9) 125–26. 82 Tuori and Tuori, The Eurozone Crisis (n 28) 183. 83 Gianni Lo Schiavo, The Role of Financial Stability in EU Law and Policy (Kluwer Law International 2017) 3. 84 Case C-370/12 Thomas Pringle v Government of Ireland and others [2012] ECLI:EU:C:2012:756, para 56 (hereafter Pringle). 85 Joined Cases C-8/15 P to C-10/15 P Ledra Advertising Ltd and others v Commission and ECB [2016] ECLI:EU:C:2016:701, para 74. 86 ECB, ‘Verbatim of the remarks made by Mario Draghi’ (Global Investment Conference, London, 26 July 2012) accessed 5 February  2020.

236 OBJECTIVES OF THE EMU reengineering of the political and economic assumptions behind EMU must have involved the latter level as well. Using a trial and error method—elegantly termed ‘exploratory governance’ by Dawson, Enderlein, and Joerges87—the decision-makers have sought new instruments capable of re-establishing and maintaining the stability of the euro area. Because, however, these objectives of EMU have been enshrined by the primary law, their reconfiguration became politically and legally contestable. To limit this contestability, policy-makers have preferred the strategy of filling old constitutional forms with new content, rather than trying to instigate a fully-fledged Treaty amendment process. 9.63

The sequence of the actions leading up to the redefinition of the Level 3 objectives was determined by the unfolding of the events during the crisis. In spring 2010, it turned out in particular that preserving the basic integrity and stability of the euro area would be virtually impossible without new tools to manage balance of payments crises. Establishing them became the first new Level 3 objective. Soon after EU policy-makers rushed to redesign economic coordination, wishing to signal that politically driven economic and fiscal convergence processes would now become reinforced. Third, the ECB has profoundly redefined its monetary policy. This alteration has staved off the spectre of an EMU’s implosion, while additional constitutional groundwork has been initiated to manage macroeconomic shocks better at the European level.

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The resultant list of the new Level 3 objectives includes:

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1. Establishing balance of payments financial assistance funds; 2. Reinforcing fiscal and economic coordination; 3. Redefining the monetary policy; 4. Introducing macroeconomic shock-absorbers at the European level.

These new goals have remained in an ambivalent relationship to the original Level 3 objectives. Managing financial crises in particular is not easily reconcilable with the objective of sound public finances more generally, and with the no-bailout principle in particular. It is, on the other hand, intended to buttress the objective of sustainable balance of payments and economic convergence. Redefining the monetary policy has caused tensions with another original principle behind the objective of sound public finances: of no-monetary financing. At the same time both the objective of reinforcing fiscal and economic coordination, as well as of introducing macroeconomic shock-absorbers at the European level, aim to attain the original goals of sound public finances, as well as of sustainable balance of payments and economic convergence. Below each of the four new Level 3 objectives will be discussed in turn.

87 Mark Dawson, Henrik Enderlein, and Christian Joerges, ‘Introduction: Exploratory Governance in the Euro Crisis’ in Mark Dawson, Henrik Enderlein, and Christian Joerges (eds), The Governance Report 2015 (OUP 2015) 13–24; Mark Dawson, Henrik Enderlein, and Christian Joerges, ‘Introduction: The Governance of the Transformation of Europe’s Economic, Political, and Constitutional Constellation since the Euro Crisis’ in Mark Dawson, Henrik Enderlein, and Christian Joerges (eds), Beyond the Crisis: The Governance of Europe’s Economic, Political and Legal Transformation (OUP 2015) 1–10.

REASSESSING THE OBJECTIVES OF EMU 237

A. Establishing balance of payments financial assistance funds The necessity of setting up an institutional structure capable of rescuing financially the countries in balance of payments crises became all too clear in spring 2010, when the outflow of capital from the externally unbalanced Greek economy and the very poor state of this country’s government accounts triggered a very acute sovereign debt crisis.

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As mentioned earlier, because the euro area had been thought immune to balance of payments crises, the Maastricht accord did not provide for any obvious responses to this debacle. The first actions intended to provide financial assistance to Greece first, and to Ireland and Portugal soon after, were therefore occluded in legal contestability.88

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On 2 May 2010 the first institutional scheme devised to provide Greece with the necessary financial liquidity was agreed by the Eurogroup. Called the Greek Loan Facility, it combined 80 billion euro of European bilateral loans, pooled by the European Commission, and the additional 30 billion euro under an IMF’s stand-by arrangement. This amount was intended to satisfy financial needs of Greece until June 2013.

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Simultaneously an exceptionally fast legislative process led to the establishment of a more sophisticated— and supranational— programme: the European Financial Stabilization Mechanism (EFSM).89 The EFSM could raise up to 60 billion euro on financial markets, posting the budget of the European Union as a collateral. Its resources were used to assist financially Ireland and Portugal between 2011 and 2014, as well as to offer short-term bridge loans to Greece in July 2015.

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In another step taken at the same time the ECOFIN Council agreed in May 2010 to set up a special purpose vehicle—European Financial Stability Facility (EFSF)—authorized to borrow on financial markets and to funnel the resources to the euro area countries in need of financial stabilization.90 The EFSF was set up next month as a limited liability company under Luxembourg law, with maximum lending capacity of 440 billion euro. It supplemented the EFSM resources deployed to finance the Irish and Portuguese bailout packages. It also financed the second Greek package, agreed in March 2012.

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All the three financial vehicles were established as ad hoc, temporary measures. This fact kept undermining the credibility of the crisis management efforts, because it turned out in 2010 that the euro area is structurally—and hence not only transitionally—prone to balance of payments crises. To confront this latter feature, which could easily morph into a self-fulfilling prophecy, policy-makers soon decided to establish a permanent financial backstop.91 The scheme—the European Stability Mechanism (ESM)—was established in

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88 Cf also Matthias Ruffert, ‘The European debt crisis and European Union law’ (2011) 48 Common Market Law Review 1777, 1778–93; Alberto de Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis: The Mechanisms of Financial Assistance’ (2012) 49 Common Market Law Review 1613. 89 Council Regulation (EU) 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism [2010] OJ L118/1. 90 Council of the European Union, ‘Extraordinary Council Meeting, Economic and Financial Affairs, Brussels, 9/10 May 2010’ (Press Release, 9596/10). 91 During the European Council meeting of 28–29 October 2010 (EUCO 25/1/10 REV 1 CO EUR 18 CONCL 4, Brussels, 30 November 2010), a general agreement was found on ‘the need for Member States to establish a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole’, cf Section I.2 of the Conclusions.

238 OBJECTIVES OF THE EMU September 2012 on the basis of an international treaty signed half-a-year earlier.92 With the maximum lending capacity of 500 billion euro, it has become the only source of financing for any new assistance programmes: the Spanish banking sector bailout in 2012, the Cypriot bailout in 2013 and the third Greek bailout in 2015. 9.72

Because of the ambiguous relationship between the stability mechanism and the no-bailout clause, an amendment to the TFEU (based on the simplified Treaty revision procedure; Article 48(6) TEU) was agreed in early 2011. According to Article 136(3) TFEU: The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.93

It was clearly to reconcile the permanent financial assistance scheme with the no-bailout clause, along highlighting the objective of re-establishing and maintaining the stability of the euro area in its wording. The fact, however, that the first financial disbursements from the ESM were launched before the amendment of Article 136 TFEU entered into force (which happened only in May 2013) had the reverse effect of fuelling legal uncertainties surrounding its establishment. Two related questions were particularly important from the perspective of the EMU’s objectives. First, does not a bailout mechanism recognized by the TFEU amendment yet established by an international agreement outside the EU legal framework infringe on the exclusive EU powers? Second, does not the Treaty no-bailout clause prohibit assistance vehicles akin to the ESM and intended to rescue financially the countries requiring balance of payments assistance? 9.73

The CJEU was confronted with these questions in the Pringle case,94 in which both the legality of the European Council’s decision to introduce Article 136(3) TFEU and the legality of the ESM itself were questioned. When answering the first of them, the Court indicated that ‘the objective of establishing the stability mechanism is the management of financial crises’,95 which ‘falls within the area of economic policy’.96 Because—according to Articles

92 Consolidated Version of the Treaty Establishing the European Stability Mechanism (2012) accessed 5 February  2020. 93 This provision was added to TFEU by Article 1 European Council Decision 2011/199/EU of 25 March 2011 amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro [2011] OJ L91/1. 94 Pringle (n 84). For annotations, cf Stanislas Adam, Parras Mena, and Javier Francisco, ‘The European Stability Mechanism through the Legal Meanderings of the Union’s Constitutionalism: Comment on Pringle’ (2013) 38 European Law Review 848; Gunnar Beck, ‘The Court of Justice, Legal Reasoning, and the Pringle Case-Law as the Continuation of Politics by Other Means’ (2014) 39 European Law Review 234; Gunnar Beck, ‘The Court of Justice, the Bundesverfassungsgericht and Legal Reasoning during the Euro Crisis: The Rule of Law as a Fair-Weather Phenomenon’ (2014) 20 European Public Law 539; Gunnar Beck, ‘The Legal Reasoning of the Court of Justice and the Euro Crisis—The Flexibility of the Court’s Cumulative Approach and the Pringle Case’ (2013) 20 Maastricht Journal of European and Comparative Law 635; Paul Craig, ‘Pringle and the Nature of Legal Reasoning’ (2014) 21 Maastricht Journal of European and Comparative Law 205; Paul Craig, ‘Pringle and Use of EU Institutions outside the EU Legal Framework: Foundations, Procedure and Substance’ (2013) 9 European Constitutional Law Review 263; Paul Craig, ‘Pringle: Legal Reasoning, Text, Purpose and Teleology’ (2013) 20 Maastricht Journal of European and Comparative Law 3; Etienne De Lhoneux and Christos Vassilopoulos, The European Stability Mechanism Before the Court of Justice of the European Union. Comments on the Pringle Case (Springer 2014); Hinarejos, The Euro Area Crisis (n 9) 123–29; Tuori and Tuori, The Eurozone Crisis (n 28) 119–80. 95 Pringle (n 84) para 59. 96 Ibid, para 60.

REASSESSING THE OBJECTIVES OF EMU 239 2(3) and 5(1) TFEU97—in this latter area the EU has coordinating powers only and ‘the provisions of the EU and FEU Treaties do not confer any specific power on the Union to establish a stability mechanism’,98 Member States are free to set it up outside the Treaty framework.99 As the Court highlighted, when operating such rescue vehicles, Member States must respect EU law. It also emphasized, however, that: the reason why the grant of financial assistance by the stability mechanism is subject to strict conditionality . . . 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 Union in the context of the coordination of the Member States’ economic policies.100

In other words, strict conditionality (economic and fiscal reforms to be adopted by the recipient country in exchange for financial assistance) was recognized as the key element reconciling the ESM with the EU legal system. Contingent on strict conditionality, the ESM was found to adapt two original Level 3 objectives of the EMU—sound public finances and sustainable balance of payments as well as economic convergence—to the necessities of the crisis management. Pringle also squared the ESM with the no-bailout clause. A strong interpretation of the latter—motivated both by the original reading of what sound public finances required and by the basic interpretational insight that constitutional principles should be interpreted broadly—would render any such a constitutional reconciliation impossible. Furthermore, the wording of the phrase ‘shall not be liable for or assume the commitments’ used in Article 125(1) TFEU might have also implied that the prohibition precludes the situations in which the EU or some of its Member States even temporarily become liable for (any part of) government debt of other Member States.

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This understanding of the no-bailout clause would make, however, managing the sovereign debt crisis back in 2010 impossible, almost certainly inducing a systemic breakdown of the euro area. Hence, in Pringle the CJEU interpreted the no-bailout clause in much softer terms. It argued first that the goal of the financial vehicles established to manage financial crises and of the no-bailout clause are the same. The former ought to make sure ‘that the Member States remain subject to the logic of the market when they enter into debt, since that ought to prompt them to maintain budgetary discipline’.101 From this finding the Court drew the conclusion that the no-bailout clause ‘prohibits the Union and the Member States from granting financial assistance as a result of which the incentive of the recipient Member State to conduct a sound budgetary policy is diminished’.102 As a flipside of the same:

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[the no-bailout clause] does not prohibit the granting of financial assistance by one or more Member States to a Member State which remains responsible for its commitments to 97 According to the former: ‘The Member States shall coordinate their economic and employment policies within arrangements as determined by this Treaty, which the Union shall have competence to provide.’ The latter states that: ‘The Member States shall coordinate their economic policies within the Union. To this end, the Council shall adopt measures, in particular broad guidelines for these policies. Specific provisions shall apply to those Member States whose currency is the euro.’ 98 Pringle (n 84) para 67. 99 Ibid, para 68. 100 Ibid, para 69. 101 Ibid, para 135. 102 Ibid, para 136.

240 OBJECTIVES OF THE EMU its creditors provided that the conditions attached to such assistance are such as to prompt that Member State to implement a sound budgetary policy.103

If these conditions are met, the financial assistance complies with EU law, assuming it also ‘is indispensable for the safeguarding of the financial stability of the euro area as a whole and subject to strict conditions’.104 9.76

According to such an interpretation the ESM (and other similar financial rescue vehicles) square with the no-bailout clause when two conditions are met. First, the financial support should be repaid and therefore the debtor ought to ultimately remain liable for its original debts. Second, the financial assistance must be accompanied by macroeconomic conditions capable of reinstating sound public finances, therefore pursuing financial stability of the euro area (the new Level 2 objective).

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While financially and institutionally the ESM has clearly marked progress towards achieving the goal of managing financial crises in the euro area, its resources have been clearly insufficient to stymie a fully-blown sovereign debt crisis in any of the biggest economies of the euro area. For this reason the ESM could not stop the sovereign debt crisis from spiralling out to Italy and Spain in 2011 and early 2012. This in turn spurred the ECB to step in and offer a more extraordinary vehicle for managing financial crises.

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The device—the OMT programme—was officially announced by the ECB in September 2012.105 It has never been activated so far. The goal of this programme is precisely the same as of the ESM: to provide financial assistance to the euro area’s countries unable to satisfy their financial requirements through other channels. As another analogous feature, the financial resources funnelled through the OMT are contingent on a memorandum of understanding between the recipient country and the ESM establishing strict conditionality to be obeyed by the recipient. What differentiates the OMT from other institutional schemes discussed so far, however, is the source of the outlays. The ESM and the previous bailout schemes designed since 2010 rely on financial resources either collected through taxes or borrowed on financial markets. Conversely, within the OMT the Eurosystem is to purchase sovereign debt of the country engulfed by a financial crisis for central bank liquidity: digital central bank money created by the Eurosystem specifically for this purpose.

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The ECB found the OMT programme indispensable for ‘safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy’.106 According to the underlying logic, the fact that the original setup of the euro area had not provided for credible mechanisms for managing financial crises makes it prone to bad equilibriums, in which doubts about the integrity of the single currency area translate into growing interest rates on sovereign debt.107 This damages the fiscal sustainability of the governments exposed to 103 Ibid, para 137. 104 Ibid, para 136. 105 ECB, ‘Technical features of Outright Monetary Transactions’ (Press Release, 6 September 2012). accessed 5 February 2020 (hereafter ECB, ‘Outright Monetary Transactions’). 106 Ibid. 107 On the day the OMT was announced, the ECB’s President Draghi stated that ‘the assessment of the Governing Council is that we are in a situation now where you have large parts of the euro area in what we call a “bad equilibrium”, namely an equilibrium where you may have self-fulfilling expectations that feed upon themselves and generate very adverse scenarios’: ECB, ‘Introductory statement to the press conference

REASSESSING THE OBJECTIVES OF EMU 241 this pressure, which in turn further fuels doubts about the integrity of the euro area. The process has direct implications for the banking sector in the afflicted jurisdictions. Because domestic banks use sovereign paper in large quantities as implicitly safe assets, a sovereign debt crisis undermines their liquidity and hampers credit action. In this environment, the bad equilibrium explanation goes, monetary circumstances in the real economy cannot be influenced by monetary policy decisions, because monetary transmission is impaired by the credibility issues provoking the sovereign debt crisis. The monetary transmission argument used by the ECB as the sole explanation of the OMT seems plausible, but its logic is not foolproof. The programme—when activated—would certainly strain the ECB’s monetary credibility. First, it would pose the question of whether the liabilities of the Eurosystem (central bank money) can maintain their high quality if they are exchanged for low quality assets of a government in a financial crisis. Second, and more importantly in practice, when announcing the OMT, the ECB was empathetic that ‘a necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme’.108 Pursuant to the ESM Treaty, the Frankfurt institution shares the function of overseeing the strict conditionality with the Commission and the IMF (if the latter institution is also involved).109 Because an OMT programme were to be funded by the Eurosystem, the ECB would ineluctably become the politically most potent enforcer of the strict conditionality attached to a corresponding ESM assistance programme. However, the predictably strained relationship between the Frankfurt bank and the society of the country on the ESM assistance programme would undermine the ownership of the economic, fiscal and social reforms to be pursued in exchange for the financial assistance. Such political tensions can easily jeopardize the macroeconomic adjustment necessary to overcome the financial crisis and can put the repayment of the ESM/ECB assistance in danger. This matters not only from the perspective of the potential financial losses the Eurosystem might experience in such a scenario, but also because—according to the interpretation laid down in Pringle—only successful assistance programmes comply with the no-bailout clause.

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Such concerns about the OMT programme are inherently economic and political. Yet they were also aired in the Gauweiler case:110 a dispute pivoting on whether the OMT programme

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(with Q&A) of Mario Draghi, President of the ECB and Vítor Constâncio, Vice-President of the ECB’ (Press Conference, 6 September 2012) accessed 5 February 2020. 108 ECB, ‘Outright Monetary Transactions’ (n 105). 109 According to Article 13(7) ESM Treaty ‘the European Commission—in liaison with the ECB and, wherever possible, together with the IMF—shall be entrusted with monitoring compliance with the conditionality attached to the financial assistance facility’. 110 Case C-62/14 Peter Gauweiler and others v Deutscher Bundestag [2015] ECLI:EU:C:2015:400 (hereafter Gauweiler and others). The decision has been broadly commented: Dariusz Adamski, ‘Economic constitution of the euro area after the Gauweiler preliminary ruling’ (2015) 52 Common Market Law Review 1451; Georgios Anagnostaras, ‘In ECB we trust . . . the FCC we dare! The OMT preliminary ruling’ (2015) 40 European Law Review 744; Stefania Baroncelli, ‘The Gauweiler Judgment in View of the Case Law of the European Court of Justice on European Central Bank Independence: Between Substance and Form’ (2016) 23 Maastricht Journal of European and Comparative Law 79; Vestert Borger, ‘Outright Monetary Transactions and the stability mandate of the ECB: Gauweiler’ (2016) 53 Common Market Law Review 139; Paul Craig and Menelaos Markakis, ‘Gauweiler and the Legality of Outright Monetary Transactions’ (2016) 41 European Law Review 4; Alicia Hinarejos, ‘Gauweiler and the Outright Monetary Transactions Programme: The Mandate of the European Central Bank

242 OBJECTIVES OF THE EMU is congruent with EU law. The aspect of this case particularly important from the perspective of this chapter is whether the OMT complies with the Treaty ban of monetary financing (Article 123 TFEU) and with the ECB’s monetary policy mandate. 9.82

More specifically, the claimants argued that the OMT programme does not have monetary purposes, while the ECB is not authorized to pursue (inherently fiscal) public debt management functions. They highlighted that the OMT is intended to quash interest rate premiums on sovereign debt when the premiums grow (in particular as a consequence of market distrust towards economic policies pursued by a sovereign) to the point of a sovereign debt crisis.

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The CJEU did not share this argumentation. It emphasized that the OMT would be executed as outright monetary transactions,111 ie a standard monetary policy instrument.112 It also accepted the monetary transmission argument of the ECB. The Court highlighted in this respect that: if the monetary policy transmission mechanism is disrupted, that is likely to render the ESCB’s decisions ineffective in a part of the euro area and, accordingly, to undermine the singleness of monetary policy. Moreover, since disruption of the transmission mechanism undermines the effectiveness of the measures adopted by the ESCB that necessarily affects the ESCB’s ability to guarantee price stability. Accordingly, measures that are intended to preserve that transmission mechanism may be regarded as pertaining to the primary objective’ of the ESCB.113

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Interpreting the no-monetary financing clause, it emphasized that ‘the action taken by the ESCB on the basis of Article 123 TFEU cannot be such as to contravene the effectiveness and the Changing Nature of Economic and Monetary Union’ (2015) 11 European Constitutional Law Review 563; Mehrdad Payandeh, ‘The OMT judgment of the German Federal Constitutional Court: repositioning the court within the European constitutional architecture’ (2017) 13 European Constitutional Law Review 400; Florian Sander, ‘Case C-62/14 Gauweiler and others: The Limits of Monetary Policy in light of the Outright Monetary Transactions (OMT) Program’ (2015–2016) 22 Columbia Journal of European Law 592, 563; Daniel Sarmiento, ‘The Luxembourg “Double Look”: The Advocate General’s Opinion and the Judgment in the Gauweiler Case’ (2016) 23 Maastricht Journal of European and Comparative Law 40; Berenike Schriewer, ‘The German Federal Constitutional Court’s First Reference for a Preliminary Ruling to the European Court of Justice: A 2016 Follow- Up’ (2017) 59 German Yearbook of International Law 533; Jukka Snell, ‘Gauweiler: some institutional aspects’ (2015) 40 European Law Review 133; Takis Tridimas and Napoleon Xanthoulis, ‘A Legal Analysis of the Gauweiler Case: Between Monetary Policy and Constitutional Conflict’ (2016) 23 Maastricht Journal of European and Comparative Law 17. 111 Gauweiler and others (n 110) paras 53–54. 112 According to Article 2(72) ECB Guideline (EU) 2015/510, with amendments, ‘ “outright transaction” means an instrument used in conducting open market operations, whereby the Eurosystem buys or sells eligible marketable assets outright in the market (spot or forward), resulting in a full transfer of ownership from the seller to the buyer with no connected reverse transfer of ownership’. Outright transactions are one of five major types of open market operations (the other four being reverse transactions, foreign exchange swaps for monetary policy purposes, the collection of fixed-term deposits, the issuance of ECB debt certificates). 113 Gauweiler and others (n 110) para 50. The CJEU (paras 76–77) added that: the purchase, on secondary markets, of government bonds of the Member States affected by interest rates considered by the ECB to be excessive is likely to contribute to reducing those rates by dispelling unjustified fears about the break-up of the euro area and thus to play a part in bringing about a fall in— or even the elimination of—excessive risk premia. In those circumstances, the ESCB was entitled to take the view that such a development in interest rates is likely to facilitate the ESCB’s monetary policy transmission and to safeguard the singleness of monetary policy.

REASSESSING THE OBJECTIVES OF EMU 243 of those polices by lessening the impetus of the Member States concerned to follow a sound budgetary policy’.114 After making this teleological statement, it predicated that the OMT complies with this goal of the no-monetary financing clause.115 In this respect the judges first emphasized the previous finding that the OMT is intended to achieve monetary—and not fiscal—purposes, so national governments cannot try to exploit it as a debt management tool.116 Purchases within the programme are also conditional117 and could be reversed by the ECB whenever the government benefitting from them runs unsound budgetary policy.118 In the Court’s view all the above mentioned features of the programme cannot encourage national governments of the euro area to move towards ‘lessened impetus to follow a sound budgetary policy’, while maintaining this impetus would suffice to square the OMT programme with the prohibition of monetary financing. In the Court’s view, the potential losses the Eurosystem could incur when executing the OMT cannot alter this conclusion.119 From the economic perspective the argumentation of the ECB, endorsed by the CJEU in the Gauweiler case, is seriously imperfect. When the OMT was announced, the willingness of commercial banks to extend credit to the real economy indeed varied from one euro area country to the next. This finding buttressed the so-called monetary transmission argument undergirding the OMT. The differences, however, could be deemed justified by very different political, economic and social contexts in which commercial banks operate in the structurally very disparate euro area. In particular, banking systems of different euro area countries have been very differently exposed to the problem of the private debt overhang. Also the institutional viability of individual Member States and the level of public indebtedness have differed seriously. Dissimilar risk premiums on government debt are not unnatural in this situation. Because private and public debt, as well as economic prospects, differ from one country to another, a disparate performance of the monetary transmission should not be surprising, either. Addressing the latter properly would require actions addressing their sources, all of which remain outside the remit of the monetary authorities. The singleness of the monetary policy argument used by the CJEU in Gauweiler challenges this conclusion. It authorizes the ECB to pursue policies intended to dissuade banks from recognizing the differences in the political, economic and social contexts, in order to artificially equalize credit conditions for the real economy across the euro area.

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While these reservations cast a shadow on the long-term feasibility of the tools developed by the euro area in recent years to manage financial crises, the CJEU should not have been expected to take another stance when vetting the OMT in the Gauweiler case. First, the nature of the disputed instrument (outright transactions) indeed clearly falls in the realm of monetary policy. Second, ECB’s attempts to secure the singleness of its monetary policy are natural and fully requisite in a single currency area. Accepting differences in the monetary transmission mechanism, the euro area’s central bank would contribute to the divergences

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114

Ibid, para 109. Ibid, para 121. Ibid, paras 112–14. 117 Ibid, paras 115–16, 119–20. 118 Ibid, para 117. 119 Ibid, paras 123–26. 115 116

244 OBJECTIVES OF THE EMU driving the single currency apart. Its interpretation of what was required to manage financial crises was therefore ultimately defined by the new Level 2 objective of re-establishing the stability of the euro area. Third, the statutory independence of the ECB,120 aiming to secure its meritocratic nature, naturally narrows the scope for possible judicial scrutiny of its actions. While, therefore, the CJEU predicated in Gauweiler that ‘a bond-buying programme forming part of monetary policy may be validly adopted and implemented only in so far as the measures that it entails are proportionate to the objectives of that policy’,121 it shunned a careful (and intrinsically economic) analysis of whether the programme is indeed adequate and necessary. Instead, it acknowledged that, because the ESCB is required to ‘make choices of a technical nature and to undertake forecasts and complex assessments, it must be allowed, in that context, a broad discretion’.122 This approach is fully understandable. Lacking economic expertise in central banking and monetary policy, a court of law should not be expected to legitimately second-guess policy choices of an expert institution, especially when—as it was clearly predictable when Gauweiler was decided—invalidating this choice would resuscitate the sovereign debt crisis which had been put to an end solely by announcing the OMT in summer 2012.

B. Reinforcing economic coordination 9.87

One of the reactions to the evaporating market confidence towards the euro area’s periphery during the first months of the sovereign debt crisis was an attempt to revamp economic coordination processes. It was intended to assure financial markets of the political resolve to prevent future economic divergences in the euro area. The new rules also aimed to assuage the societies backstopping financially the rescue mechanisms discussed in the previous subsection, by signalling that the enforcement of the fiscal and economic discipline would be improved. In other words, the drive towards strengthening coordination processes was intended to re-establish and to maintain the stability of the euro area by psychological effects associated with more imminent prospects of sanctions imposed on the countries transgressing coordination rules.

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The Treaty of Lisbon, which entered into force in December 2009, could also be read as encouraging policy-makers to reinforce the previous coordination patterns. According to a new article of the TFEU (Article 136(1) TFEU), added by the Lisbon Treaty amendment: In order to ensure the proper functioning of economic and monetary union, and in accordance with the relevant provisions of the Treaties, the Council shall, in accordance with the relevant procedure from among those referred to in Articles 121 and 126 [TFEU] . . . adopt measures specific to those Member States whose currency is the euro: (a) to strengthen the coordination and surveillance of their budgetary discipline; (b) to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance.

120 The independence of central banks in the EU is enshrined in Articles 130, 282(3) TFEU and Article 7 Statute of the ESCB and the ECB. 121 Gauweiler and others (n 110) para 66. 122 Ibid, para 68.

REASSESSING THE OBJECTIVES OF EMU 245 The wording of this new provision uses the verb ‘to strengthen’ in respect to budgetary coordination only. The expression ‘policy guidelines’ used in the context of any other economic coordination, as well as the phrase ‘in accordance with the relevant procedure from among those referred to in Article 121’ also seem to imply that only in the area of fiscal coordination any more stringent coordination process is permissible by the Treaty setup. Nonetheless, after the euro area crisis erupted in 2010, Article 136 TFEU was instrumental in enacting four new regulations intended to reinforce the disciplining powers within and outside the fiscal area.123 Other four new legislative acts, based solely on Articles 121 or 126 TFEU, reorganized information gathering and exchange processes within the economic coordination setup.124 The eight new pieces of secondary law were accompanied by a separate international agreement entitled Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the Stability Treaty or TSCG).125

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Four out of the six instruments enacted in 2011 introduced changes to fiscal coordination within the SGP. Accordingly, even the preventive (monitoring) arm could now lead to financial sanctions (an interest-bearing deposit of up to 0.2 per cent GDP) imposed on the countries with unbalanced public finances.126 The decision-making on sanctions in the corrective arm was expedited127 and both in the preventive and corrective arm of the SGP it was rendered semi-automatic by the requirement that a decision imposing sanctions ‘shall be deemed to be adopted by the Council unless it decides by a qualified majority to reject the Commission’s recommendation’ (reverse qualified majority-voting).128 Furthermore, the Treaty’s public debt reference value (the 60 per cent ratio of public debt to GDP) was introduced to the SGP, rendering the procedures more consistent with both of the Treaty fiscal reference values.129

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123 Two out of six new pieces of legislation comprising the so-called ‘six-pack’: European Parliament and Council Regulation (EU) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1; European Parliament and Council Regulation (EU) 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8; as well as two regulations of the so-called ‘two-pack’, adopted in 2013: European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1; European Parliament and Council Regulation (EU) 473/2013 of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area [2013] OJ L140/11. 124 European Parliament and Council Regulation (EU) 1175/2011 of 16 November 2011 amending Council Regulation 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2011] OJ L306/12; European Parliament and Council Regulation (EU) 1176/ 2011 of 16 November 2011 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/ 25; Council Regulation (EU) 1177/2011 of 8 November 2011 amending Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2011] OJ L306/33; Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41. 125 Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, signed on 2 March 2012 accessed 5 February 2020 (hereafter Stability Treaty or TSCG). For a broader legal analysis, cf Steve Peers, ‘The Stability Treaty: Permanent Austerity or Gesture Politics?’ (2012) 8 European Constitutional Law Review 404; Paul Craig, ‘The Stability, Coordination and Governance Treaty: principle, politics and pragmatism’ (2012) 37 European Law Review 231. 126 Article 4 Regulation (EU) 1173/2011. 127 Articles 5–6 Regulation (EU) 1173/2011. 128 Articles 4(2), 5(2), and 6(2) Regulation (EU) 1173/2011. 129 Article 5(1) Regulation (EC) 1466/97, introduced by Regulation (EU) 1175/2011, and Article 2(1a) Regulation (EC) 1467/97, introduced by Council Regulation (EU) 1177/2011.

246 OBJECTIVES OF THE EMU 9.91

The so-called ‘two-pack’ of two additional regulations enacted two years later brought the procedures of budgetary policy surveillance and coordination even further. It provides for specific processes of monitoring and assessing draft budgetary plans of euro area countries,130 granting the Commission a ‘semi-voting’ power over national budgetary plans when this institution ‘identifies particularly serious non-compliance with the budgetary policy obligations laid down in the SGP’.131 European institutions also gained new monitoring powers in respect to a broad set of euro area countries: those under the Excessive Deficit Procedure, those experiencing ‘serious difficulties with respect to’ their ‘financial stability which are likely to have adverse spill-over effects on other Member States in the euro area’, those having their macro-economic adjustment programmes pending, and those undergoing post-programme surveillance.132

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Outside the SGP an entirely new macroeconomic coordination process, called excessive imbalance procedure, was introduced to deter governments of euro area countries from running macroeconomic policies considered deleterious to their economic competitiveness and financial stability.133 A government of the euro area nurturing severe macroeconomic imbalances could become subject to a special excessive imbalance procedure. This procedure emulates the excessive deficit procedure and potentially leads up to the imposition of financial sanctions as a disciplining measure.134

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Finally, the so-called ‘Stability Treaty’—a separate international agreement outside the EU framework—requires the euro area countries (as well as Denmark, Bulgaria and Romania, which volunteered to sign up to its fiscal provisions) to introduce a fiscal golden rule of ‘budgetary position of the general government of a Contracting Party . . . balanced or in surplus’135 to national ‘provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes’.136 It also puts on the countries under an obligation to liaise with the Commission, in order to sue before the Court of Justice any of the countries failing to introduce the fiscal golden rule, while the Court can impose a fine (up to 0.1 per cent GDP) on obdurate transgressors.137

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The resultant legal tissue is much more complicated and sophisticated than the pre-crisis procedures. It purports to achieve greater centralization, greater judicialization, and greater asymmetry between the Member States compared not only to the previous setup, but also to the mature federation of the US.138 However, in actual practice none of the new powers has been exercised by European decision-makers. Despite of large economic divergences within the euro area and regardless of fiscally and macro-economically vulnerable positions

130 Articles 6–8 of Regulation (EU) 473/2013. 131 Article 7(2) Regulation (EU) 473/2013. 132 Regulation (EU) 472/2013 and Articles 9–13 Regulation (EU) 473/2013. 133 Article 2(1) Regulation (EU) 1176/2011 defines macroeconomic imbalance as ‘any trend giving rise to macroeconomic developments which are adversely affecting, or have the potential adversely to affect, the proper functioning of the economy of a Member State or of the economic and monetary union, or of the Union as a whole’. 134 Regulation (EU) 1174/2011. 135 Article 3(1)(a) Stability Treaty. 136 Article 3(2) Stability Treaty. 137 Article 8 Stability Treaty. 138 Federico Fabbrini, Economic Governance in Europe: Comparative Paradoxes and Constitutional Challenges (OUP 2016).

REASSESSING THE OBJECTIVES OF EMU 247 of some of its countries, never has either the excessive deficit procedure or the excessive imbalance procedure been brought to a point at which the possibility of imposing financial sanctions on a transgressor country could become real. Nor has the Commission ever exercised its powers to block a draft budgetary plan submitted to it according to Regulation 473/2013. Furthermore, none of the countries signing the Stability Treaty has ever been brought before the Court of Justice for failing to give effect to its fiscal golden rule. In its part, the Commission responded to the ‘invitation’, established by Article 8(1) Stability Treaty, ‘to present in due time to the Contracting Parties a report on the provisions adopted by each of them’ to implement the Treaty’s core provision with a report published in early 2017.139 It conceded that in some countries national provisions implementing the golden rule have not been—contrary to Article 3(2) of the Fiscal Compact—‘guaranteed to be fully respected and adhered to throughout the national budgetary processes’. Yet, it endorsed all national transpositions of it, whether they complied with the Treaty’s letter or not, opining that such aberrations can be excused by ‘formal and public commitments given by Contracting Parties that the national legal framework will be applied in line with the requirements’ of the Stability Treaty, by ‘the presence of strong national independent institutions monitoring compliance with the rules’ and by specific additional measures ‘announced . . . [and] needed to bring national law into line’ (at p 4).

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The reasons for this practical failure of the new coordination patterns are political and economic.140 From the political perspective, any attempt to use the new disciplining powers would inevitably stir a virulent political conflict between a national government of the country to be censured and the European institutions as well as the national governments pushing for sanctions. Because the outlier national government is all but certain to depict this spat as an external interference with domestic affairs, the ostensibly revamped economic coordination would undermine the allegiance of the local society to the EU, instead of bringing about a closer economic coordination. An additional political reason for the continuous practical latency of the new coordinating powers is that finance ministers of the Member States menaced with sanctions should be expected to perform unofficial negotiations with their peers from other countries, aimed to avoid sanctions whenever the Commission would like to dutifully enforce the economic coordination rulebook. This prospect, too, deters both the Commission and the Council from attempting to use the new powers gained after the onset of the sovereign debt crisis.

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There are also serious economic arguments pointing in the same direction. In that way or another more stringent economic policy coordination boils down to more austerity imposed on the outliers. In the realm of the fiscal coordination this relationship is direct, because by default governments of the countries in the excessive deficit procedure are expected to reduce government deficits. Also in the macroeconomic imbalance procedure transgressors are routinely expected to impose cost containing reforms of labour and product markets.

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139 Commission, ‘Report from the Commission presented under Article 8 of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union’ C (2017) 1201 final. 140 Cf also Dariusz Adamski, ‘National power games and structural failures in the European macroeconomic governance’ (2012) 49 Common Market Law Review 1319; Dariusz Adamski, ‘Economic policy coordination as a game involving economic stability and national sovereignty’ (2016) 22 European Law Journal 180.

248 OBJECTIVES OF THE EMU In both instances austerity is key to realigning effective exchange rates (nominal exchange rate adjustments are precluded by the very nature of a monetary union)141 to maintain the external competitiveness of the national economy. During the sovereign debt crisis it also turned out, however, that negative effects of austerity on economic growth are much higher than what had been previously expected.142 Austerity and structural reforms can therefore easily lead to lower GDP growth, higher unemployment and—as a result of lower tax receipts and higher expenditures on unemployment benefits—to higher budget deficits. This ambivalent effect would only by amplified if the country suffering from excessive macroeconomic (external) imbalances or an excessive deficit were to incur the additional fiscal burden of a financial sanction imposed on it within the economic coordination (SGP or macroeconomic imbalance) procedures. Because a financial fine imposed on a country engulfed by a crisis augments government expenditures precisely at the point when government accounts are strained by the crisis, the disciplining instruments established within the ostensibly reinforced economic coordination process would amplify the problem they are allegedly intended to eliminate. This incentive-incompatibility renders the disciplining pattern of the new coordination processes hardly feasible in practice.

C. Redefining the monetary policy 9.98

Until recently, the goal of price stability was associated with countering inflation exceeding the statutory price stability objective of the ECB. In the aftermath of the sovereign debt crisis, however, the ECB was confronted with inflation falling below its quantitative target. The Frankfurt institution has therefore been challenged with the necessity of generating higher levels of inflation, which ultimately spurred it to embark on a quantitative easing programme. This programme—the Asset Purchase Programme (APP)—was initially activated in late-2014, first on the market of covered bonds, ie debt instruments issued by credit institutions and secured by a pool of mortgage loans or public-sector debt (the so- called CBPP3), and on the market of debt securities collateralized by a pool of assets other than mortgages (the so-called ABSPP). As, however, headline inflation was falling further in subsequent months, in January 2015 the ECB announced the Public Sector Purchase Programme (PSPP): a large scale programme within which the Eurosystem would purchase marketable public sector (ie of governments and eligible public agencies) debt securities on the secondary market, until the headline inflation reaches the statutory target of almost 2 per cent ‘over the medium term’.143

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From March 2015 until March 2016, the purchases totalled 50 billion euro public-sector bonds (within the PSPP) a month and 10 billion euro private sector bonds (within the CBPP3 and the ABSPP). Then, between April 2016 and March 2017, total purchases were 141 For a broader explanation, cf Stefanie Walter, Financial Crises and the Politics of Macroeconomic Adjustments (CUP 2013). 142 Cf also Brunnermeier, James and Landau, The Euro and the Battle of Ideas (n 50) ch 8; Adamski, Redefining European Economic Integration (n 69) ch 3. 143 ECB, ‘ECB announces expanded asset purchase programme’ (Press Release, 22 January 2015) accessed 5 February 2020. Formalized as ECB Decision (EU) 2015/774 of 4 March 2015 on a secondary markets public sector asset purchase programme (ECB/ 2015/10) [2015] OJ L121/20.

REASSESSING THE OBJECTIVES OF EMU 249 stepped up from 60 billion euro a month to 80 billion euro, to subsequently return to the previous levels between April and December 2017 and to be further scaled down, first to 30 billion euro a month between January and September 2018 and then to 15 billion euro between October and December 2018. In mid-2018, the ECB announced it would discontinue the programme by the end of the year,144 but in September 2019 it decided to resume it (to the tune of 20 billion a month) since November 2019.145 What is systemically equally important, 80 per cent of the PSPP purchases were undertaken by National Central Banks of the respective countries. This share remained outside the so-called ‘risk-sharing’, so hypothetical losses in case of a default on the relevant debt should have, in principle, fallen only on the purchasing central bank. The remaining 20 per cent of the purchases would be subject to risk sharing. Yet, half of this compartment (10 per cent of all PSPP purchases) comprised securities issued by international organizations and multilateral development banks. Ultimately, therefore, only a small fraction (10 per cent) of the public-sector bonds amassed within the APP were subject to any direct redistribution of potential losses within the Eurosystem. In addition, national public sector bonds were bought according to the ECB’s capital key and Greek sovereign bonds were excluded from the programme since its very beginning. Therefore, a big share of national public sector bonds purchased under the so-called risk-sharing comprised debt of the unquestionably solvent and liquid countries and institutions. Irrespective of these risk-mitigating features of the PSPP, the programme was legally challenged in Germany on two main grounds: first, that the ECB overstepped its mandate by pursuing the programme; and secondly, that it violated the no-monetary financing clause of Article 123 TFEU. The claims in this dispute, which ultimately found its way to the CJEU,146 essentially repeated the arguments previously raised against the OMT programme in the Gauweiler case. It is therefore rather unsurprising that the final decision equally followed the Gauweiler legal standard. When applied to the PSPP, it entailed that the programme squares comfortably with the Treaty framework.147

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The Court’s conclusions were based on five main strands of arguments. First, the ECB did not encroach on the principle of conferral because the programme belonged to the sphere of monetary policy. The programme’s specific and direct objective was to maintain price stability (headline inflation converging with the ECB’s quantitative definition), while it was executed as an open market operation, ie as a standard monetary policy tool.148 Second, it was proportionate to the objectives of monetary policy. The Court emphasized in this respect that the monetary authority must be granted a broad discretion when performing

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144 ECB, ‘Monetary policy decisions’ (Press Release, 14 June 2018) accessed 5 February 2020. 145 ECB, ‘Monetary policy decisions’ (Press Release, 12 September 2019) accessed 5 February 2020. 146 Case C-493/17 Heinrich Weiss and others v Federal Government of Germany and others [2018] ECLI:EU:C:2018:1000 (hereafter Weiss and others). See also: Annelieke Mooij, ‘The Weiss judgment: The Court's further clarification of the ECB’s legal framework’ (2019) 26 Maastricht Journal of European and Comparative Law 449; Mark Dawson and Ana Bobić, ‘Quantitative Easing at the Court of Justice—Doing whatever it takes to save the euro: Weiss and Others’ (2019) 56 Common Market Law Review 1005. 147 Nonetheless, the compliance of the PSPP with the mandate of the ECB and the no-monetary financing clause was questioned in proceedings before the Bundesverfassungsgericht, which in turn led the latter to submit a preliminary question to the CJEU: BVerfG, Order of the Second Senate of 18 July 2017—2 BvR 859/15. 148 Weiss and others (n 146) paras 53–70. Cf also n 47.

250 OBJECTIVES OF THE EMU its tasks, which entails choices of a technical nature, based on complex forecasts and assessments.149 The ECB made a decision to launch temporary, monthly capped and conditional public bond purchases within a broader quantitative easing programme, undertaken when the euro area was in deflation and when less radical methods of bringing headline inflation closer to the statutory target had failed. Such a decision could not, according to the Court, be deemed either as vitiated by a manifest error of assessment or as going beyond what was necessary to achieve the programme’s objective of maintaining monetary stability.150 Third, the programme was found compatible with the no-monetary financing clause. According to the Court, it does not preclude interventions of the Eurosystem on secondary sovereign bond markets, as long as they are not tantamount to primary market purchases and they do not ‘reduce the impetus to follow a sound budgetary policy’.151 In the Court’s opinion, the PSPP fulfilled such conditions. The purchasers of public sector bonds on primary markets could not be certain that the debt instruments they possess would be repurchased by a central bank152 and the temporary, conditional and circumscribed nature of the programme did not allow the Member States to escape market discipline.153 None of it, according to the Court, could be altered by holding some of the bonds until maturity or by negative yields on the paper of the particularly credible sovereigns. None of these eventualities is by design precluded in the setup of open market operations and such effects cannot undermine the goals of the no-monetary financing clause.154 Fourth, the relationship between the possible losses incurred by the individual central banks participating in the programme with EU law could not be established, as the Court deemed the preliminary question on this matter too hypothetical to be answered.155 Nonetheless, it pinpointed the limited scope of the risk-sharing involved as a factor mitigating the related potential costs. Finally, fifth, the decisions of the ECB’s Governing Council on the PSPP met the legal standards for statements of reasons. These decisions were making ‘clear the essential objective pursued by the institutions’.156 In addition, various documents, economic analyses and communications of the ECB, published throughout the period when the programme was in force, further clarified in detail the policy position of the Governing Council envisaged in the decisions on the programme.157 9.102

The PSPP, however, raises profound questions regarding the goal of re-establishing and maintaining the stability of the euro area that remain unrecognized under the judicial standard applied to it. This programme worked as a huge debt management tool exchanging public sector liabilities purchased by the Eurosystem for central bank money (liabilities of the central banks comprising the Eurosystem). As a result, servicing public debt became cheap even in the heavily indebted countries with uncertain economic models. As a flipside of the same process, banking systems of the euro area periphery were partly cleaned up of government bonds and thus the main previous cause for the vicious circle between banks

149

Weiss and others (n 146) para 73. Ibid, paras 74–100. 151 Ibid, paras 103–08. 152 Ibid, paras 111–28. 153 Ibid, paras 132–44. 154 Ibid, paras 145–57. 155 Ibid, paras 159–67. 156 Ibid, para 32. 157 Ibid, paras 36–41. 150

REASSESSING THE OBJECTIVES OF EMU 251 and sovereigns has been soothed. This has allowed to improve the monetary transmission mechanism and to mitigate the deflationary tendencies visible when the PSPP was announced. On the other hand, however, this operation has alleviated the burden of public sector debt without properly remedying its original causes. It has also hardly encouraged national policy-makers to pursue fundamental socio-economic reforms capable of sustainably decreasing public debt levels and to improve economic productivity, to render foundations of national economies more convergent with their economically more competitive peers. This in turn may easily lead to further divergences undermining the new Level 2 objective when the euro area experiences the next asymmetric economic shock.

D. Introducing macroeconomic shock-absorbers at the European level Even in currency unions of federal states the constitutive units inevitably vary in their economic structure and business cycle positions. Their economies are thus prone to asymmetric shocks, ie the crises affecting some of the units only. Such crises propel economic divergences which—unless properly addressed at the federal level—can jeopardize the very existence of the monetary union.

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There are three methods of addressing idiosyncratic economic shocks in fully fledged currency unions (like the US): capital markets, the banking system, and the federal treasury. The role of the shock stabilization propensities of each of the channels has been subject to economic debate. But most researchers have concluded that in the US the vast majority of macroeconomic shocks is absorbed by capital markets (almost 40 per cent) and by credit markets (further 25 per cent); the fiscal channel absorbs no more than 15 per cent of output shocks.158

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In other words, in the US—which has always been presented as a role model for the euro area—the costs of asymmetric financial crises are borne mainly by investors and banks operating both in the geographical units afflicted by an economic crisis and in the regions spared by it, diversifying risks and losses. This channel smoothens the effects of the shock on incomes in an afflicted region. First, economic agents from other regions participate in its costs when their investments are located in the unit undergoing a crisis. Second, economic agents from the latter region benefit from investments in the prospering areas. Such a mechanism facilitates economic recoveries and improves the overall convergence between the geographical units comprising the monetary union. It is further reinforced by the fiscal channel. When an economic crisis afflicts only some parts of a fiscal federation, its federal tax receipts decrease and social transfers towards it increase. The federal government also tends to facilitate the recovery in the ailing regions by concentrating its investments there.

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158 Pierfederico Asdrubali, Bent E Sorensen, and Oved Yosha, ‘Channels of Interstate Risk Sharing: United States 1963–1990’ (1996) 111 Quarterly Journal of Economics 1081; Jacques Melitz and Frederic Zumer, ‘Regional redistribution and stabilization by the center in Canada, France, the UK and the US: A reassessment and new tests’ (2002) 86 Journal of Public Economics 263; Stefano Athanasoulis and Eric van Winco-op, ‘Risk sharing within the United States: what do financial markets and fiscal federalism accomplish?’ (2001) 83 The Review of Economics and Statistics 688.

252 OBJECTIVES OF THE EMU 9.106

The drafters of the Maastricht Treaty believed that capital flows propelling the expected economic convergence, as well as fiscal transfers within the regional policy, would mitigate the significance and frequency of asymmetric economic shocks in the euro area. They also hoped that any recession occurring nonetheless could be addressed by government deficits (up to 3 per cent GDP) permitted according to the EMU framework. In other words, the same thinking which implied that the euro area would be immune to balance of payments crises also led to underestimating the need to establish macroeconomic stabilization tools at the European level.

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Instead of forestalling asymmetric shocks, however, unencumbered capital flows on the internal market amplified the propensity of the euro area to attract such shocks. In addition, during the sovereign debt crisis the ailing sovereigns of the euro area’s periphery were not declared unviable but received bailouts, which allowed foreign banks exposed to their debt to gradually withdraw from the region without incurring losses and therefore without cushioning the impact of the crisis on the peripheral economies. The crisis was also amplified by the fact that, compared to the US, for instance, in Europe capital markets have traditionally played a minor role in the process of financial intermediation, and that they are largely compartmentalized along national borders. Therefore, they cannot offer the necessary shock absorption faculties. Finally, fiscal transfers between the Member States through the EU budget are insignificant and inflexible, rendering shock absorption through this channel seriously insufficient.

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Some of the flagship political initiatives in recent years have been based on the resultant insight that the euro area needs more robust shock absorption mechanisms. The idea of fiscal stabilization at the European level has been resurfacing in political debates since the onset of the sovereign debt crisis in 2010. Top political documents—the Four Presidents’ Report (2012) and the Five Presidents’ Report (2015)—endorsed it, emphasizing, however, that in no case can the stabilization tool lead to ‘permanent transfers between countries’.159 This latter condition is largely unsuitable for shock absorption purposes, because it can only be met by economies very similar to each other in structural terms. Conversely, the euro area economies differ conspicuously. In such a setup, any meaningful ‘fiscal union’ would inevitably be tantamount to a ‘transfer union’, in which a share of government expenditure in the countries with structurally more resilient economies would be redirected towards other societies. For political reasons no such a scenario is predictable in the euro area in any foreseeable future.

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Theoretically even without a viable fiscal union at the European level one can imagine macroeconomic stabilization tools with fairly efficient shock smoothing capabilities, under the condition that integrated capital markets and banking systems operate comparably to their US counterparts. None of this had been the case before the sovereign debt crisis. Both the idea of the European Banking Union and the Capital Markets Union pursued in the subsequent years have striven to fill up this gap.

159 Herman Van Rompuy and others, ‘Towards a Genuine Economic and Monetary Union’ (5 December 2012) 12; Commission, ‘Completing Europe’s Economic and Monetary Union (Five Presidents’ Report)’ 15 accessed 5 February  2020.

REASSESSING THE OBJECTIVES OF EMU 253 The term ‘European Banking Union’ (EBU) refers ‘either to the process of transfer of authority over banking policy from the national towards the European level, or to the European banking policy framework resulting from that transfer process’.160 Most often, it is associated with three building blocks: banking supervision, resolution and deposit guarantee.161

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However, the three blocks can function properly only as long as the fourth one—a microprudential rulebook—is in place. Microprudential rules aim to foster sound practices and to limit risk-taking of individual credit institutions without unnecessarily hindering product innovativeness and credit action. In the EU they are now based on one regulation and one directive; the so-called CRR/CRD IV package.162 The CRR establishes prudential requirements for banks regarding own funds, large exposures, liquidity requirements, as well as reporting and public disclosure obligations. The CRD IV in its turn establishes conditions of access to the activity of credit institutions and investment firms. It also determines powers, tools and publication requirements of prudential supervisors.

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Microprudential rules inevitably retain a broad scope of discretion for banking supervisors. This pattern is justified by highly diversified business models in the banking sector, different economic contexts (including the creditworthiness of the countries in which the bank is domiciled and in which it operates), as well as the evolution of banking products and models. Such heterogeneity can be conducive to lowering microprudential standards, both due to the competition for financial sector investments and to the excessively close ties between politicians and the financial sector.163

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The tenet of the banking supervision as one of the European Banking Union’s building blocks was designed on a very shallow Treaty basis164 precisely to make up for this shortcoming. It entails an institutional framework, in place since November 2014, in which the ECB is embedded as a key actor of the new institutional framework established at the European level to either replace or discipline national supervisors in their dealings with the most important credit institutions.165

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160 Nicolas Véron, ‘Banking Union in Nine Questions—Written statement prepared for the Interparliamentary Conference under Article 13 of the Fiscal Compact’ (Peterson Institute for International Economics, 30 September 2014) accessed 5 February  2020. 161 For broader accounts, cf Luis M Hinojosa Martínez and José María Beneyto, European Banking Union: The New Regime (Kluwer Law International 2015); Danny Busch and Guido Ferrarini, European Banking Union (OUP 2015); Juan E Castañeda, David G Mayes, and Geoffrey Wood, European Banking Union: Prospects and challenges (Routledge International Studies in Money and Banking 2015); Giuseppe Boccuzzi, The European Banking Union: Supervision and Resolution (Palgrave Macmillan Studies in Banking and Financial Institutions 2015); Jens- Hinrich Binder and Christos Gortsos, European Banking Union: A Compendium (CH Beck 2016). 162 European Parliament and Council Regulation (EU) 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 [2013] OJ L176/1; European Parliament and Council Directive 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC [2013] OJ L176/338. 163 Nicolas Véron, ‘Banking Nationalism and the European Crisis’ (Bruegel Blog Post, 19 October 2013) accessed 5 February  2020. 164 Article 127(5) TFEU and Article 3(3) Statute ESCB and ECB provide that the ESCB ‘shall contribute to the smooth conduct of policies pursued by competent authorities as to prudential supervision of credit institutions and the stability of the financial system stems’. Such wording suggests that the ESCB should play only an ancillary role when exercising this non-basic task. Interestingly, the Committee of Governors of the European Community Central Banks proposed in 1990—unsuccessfully, due to German opposition—to devise prudential supervision as one of the ECB’s core tasks. 165 Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63;

254 OBJECTIVES OF THE EMU 9.114

Microprudential policies and banking supervision, discussed so far, are ‘good weather’ instruments devised to maintain proper functioning of financial markets in normal circumstances. The remaining two components of the banking union—bank resolution and deposit guarantees—are devised for ‘bad weather’ scenarios.

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Substantive rules on the resolution of banks166 in the EU are now established by a directive applicable to all EU countries.167 It is supplemented by the SRM Regulation setting up uniform procedural rules and institutional tissue for bank resolution in the euro area, with the Single Resolution Mechanism (SRM) at the heart of the system.168 As the financial backstop of the system, the SRM Regulation establishes the so-called Single Resolution Fund (SRF). Funded by contributions of credit institutions and certain investment firms from the nineteen countries comprising the banking union, the SRF is intended to ensure that the banking system covers (ideally all) the costs of resolving even systemically important credit institutions.169

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Like the SRF, common deposit insurance schemes—the last element of a fully-fledged banking union—are funded by contributions of credit institutions. Their purpose is somewhat different, however. They are intended to insure bank deposits up to a certain amount. If a bank becomes unviable, the resources necessary to keep the insured deposits whole are drawn from the deposit insurance fund. The goal of it is to prevent bank-runs, ie massive withdrawals of cash from deposit accounts, which would otherwise undermine the financial stability of the whole economy by a chain reaction of bank bankruptcies.

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Because bank resolution and deposit insurance become particularly relevant in the same situations (a banking crisis), in the US both functions have been concentrated in one federal agency: the Federal Deposit Insurance Corporation (FDIC). By comparison, in the euro area the picture is much more complicated, with the gradually developed SRF, a rather complex institutional tissue behind the SRM, and a broad leeway for national authorities to pursue banking resolution without engaging the SRM170 and with entirely national deposit ECB Regulation (EU) 468/2014 of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM Framework Regulation) (ECB/2014/17) [2014] OJ L141/1. More broadly on the role of the ECB in this setup, cf Jakub Gren, David Howarth, and Lucia Quaglia, ‘Supranational Banking Supervision in Europe: The Construction of a Credible Watchdog’ (2015) 53 Journal of Common Market Studies 181. Agnese Pizzolla, ‘The role of the European Central Bank in the Single Supervisory Mechanism: a new paradigm for EU governance’ (2018) 43 European Law Review 3. 166 For recent and comprehensive accounts on bank resolution regimes, cf eg Simon Gleeson and Randall Guynn, Bank Resolution and Crisis Management: Law and Practice (OUP 2016). Cf also Michael Schillig, Resolution and Insolvency of Banks and Financial Institutions (OUP 2016). 167 European Parliament and Council Directive 2014/59/EU of 15 May 2015 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012 [2014] OJ L173/190. 168 European Parliament and Council Regulation (EU) 806/2014 of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation 1093/2010 [2014] OJ L225/ 1. 169 The Single Resolution Fund is gradually built until 31 December 2023. By then it should achieve the target level of at least 1 per cent (estimated to total approximately 55 billion euro) of covered deposits of credit institutions within the banking union: Article 69(1) Regulation (EU) 806/2014. 170 According to Article 18(1)(b) and (c) Regulation (EU) 806/2014, the SRM is not involved in a resolution process, even if a bank ‘is failing or is likely to fail’, if there is ‘reasonable prospect that any alternative private sector

REASSESSING THE OBJECTIVES OF EMU 255 insurance schemes.171 This confluence of ‘bad weather’ tools does not offer shock absorption functions in any way comparable to their counterparts in federal states. To mitigate this shortcoming and to complete the banking union, in 2015 the Commission proposed a regulation establishing a European Deposit Insurance Scheme (EDIS).172 The EDIS is to establish mutual insurance of national deposit guarantees, in order to confront the ongoing dependence of national schemes on the financial support from the treasuries of the respective Member States. This initiative would shift away—in line with the logic of asymmetric shock absorption—a share of the costs produced by bank crises in the euro area’s countries more vulnerable to the next asymmetric shock, towards banking systems of the countries spared by it. For this reason, however, it has not gained enough of political support to successfully complete the legislative process.

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In principle, the shortcomings of politically possible fiscal and banking shock absorbers could be mitigated had the euro area capital markets been interconnected similarly to their counterparts in well-functioning monetary unions. According to the Commission’s communication on this topic,173 the CMU is intended to foster transnational investments in corporate debt and—in particular—in equity. Such a development would improve access of European entrepreneurs to financial intermediation channels alternative to bank loans now dominating in Europe. Achieving it would allow for better diversification of investment risks throughout the EU. While such an aspiration explains why the CMU has not been limited to the euro area only, it also makes it clear why Europeanization of capital markets is particularly important as a shock-absorption tool in the euro area. For this reason, the CMU can be conceived as a crucial tool to achieve the objective of preserving the EMU’s lasting integrity.

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The idea, however, has been as much obvious theoretically as it is difficult to achieve in practice. Throughout its history, the EU has been reasonably effective in establishing regulatory requirements in certain clearly defined segments of the financial system, like credit institutions (mentioned earlier), investment firms and regulated markets,174 insurance and reinsurance undertakings,175 as well as the funds specializing in collective investment in transferable securities.176 Instead, however, of imposing new regulatory requirements (and hence additional transaction costs) on investors, the CMU aspires to generally animate and facilitate the financial intermediation in the market segments important for innovative

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measures . . . would prevent its failure within a reasonable timeframe’ and/or a resolution action is not ‘necessary in the public interest’. 171 European Parliament and Council Directive 2014/49/EU of 16 April 2014 on deposit guarantee schemes, [2014] OJ L173/149. 172 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulation 806/2014 in order to establish a European Deposit Insurance Scheme’ COM (2015) 586 final. 173 Commission, ‘Action Plan on Building a Capital Markets Union (Communication)’ COM (2015) 468 final. 174 European Parliament and Council Directive 2004/39/EC of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC [2004] OJ L145/1, with further amendments. 175 European Parliament and Council Directive 2009/138/EC of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) [2009] OJ L335/1, with further amendments. 176 European Parliament and Council Directive 2009/65/EC of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities [2009] OJ L302/32, with further amendments.

256 OBJECTIVES OF THE EMU economic activities now ailing in Europe (eg start-up and scale-up financing, retail investments, investments of insurance companies and pension funds in equity or risk capital, etc). 9.121

European shortcomings on all these accounts stem from complex causalities, which are very difficult to address through EU secondary law. They may be spawned by diverging tax incentives,177 by historically contingent roles and perceptions of the financial system, by disparate financial literacy and economic competitiveness of the local societies, and even by specific effects of the monetary policy.178 All the factors determine the investment climate and the approach to investment risks as well as to profit opportunities. Because European countries seriously differ from one to another on all these accounts, and because differences between them are path dependent, business environments more generally—and the environment in which capital markets function in particular—vary greatly throughout the EU as well.

9.122

In consequence, achieving a CMU remains a heroic task. On the one hand, EU’s soft law is hardly capable of altering the causalities determining the really important aspects of business environments across the EU. On the other hand, hard law can either tackle secondary issues only,179 or it faces political gridlocks when it targets more significant (and therefore politically more sensitive) areas.180

VI. Assessment 9.123

The sovereign debt crisis wiped out the original Level 2 objectives of the EMU. They have been replaced by the overarching goal of re-establishing and maintaining the stability of the euro area. In their turn, the original Level 3 objectives have been gradually reformulated and supplemented by a complicated set of new goals subordinated to the new Level 2 objective. Table 9.1 provides a synthetic depiction of the changes.

9.124

A particularly important related question is whether the new set of EMU’s objectives is sustainable. In other words, can they durably secure the attainment of the most rudimentary goals agitating the project of the single currency since its very inception? It should be indicated first in this respect that the Level 2 objective of preserving the basic integrity and stability of the euro area is in many respects less ambitious than its three predecessors. While this may be considered as a sign of a political and economic realism, the new goal does not in itself guarantee that the single currency necessarily stimulates economic cooperation and peaceful coexistence of European nations. In the scenario of growing economic, social and political divergences one can even imagine a situation in which the costs accompanying the

177 Corporate taxation is typically biased in favour of debt over equity. 178 An accommodative monetary policy intended to facilitate the monetary transmission directly aims to improve the supply of credit offered by credit institutions to the real economy. As a side effect, this approach restricts demand for alternative sources of financial intermediation. 179 Eg European Parliament and Council Regulation (EU) 2017/1129 of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC [2017] OJ L168/12. 180 Eg Commission, ‘Proposal for a directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU’ COM (2016) 723 final.

Assessment 257 Table 9.1 Evolution of the EMU’s objectives Original

Post Euro-area crisis

Level 1 objectives

1. Cementing and reinforcing the integration process; 2. Achieving more balances and stronger economic growth.

Level 2 objectives

1. Improving the performance of the internal market; 2. Establishing a countermeasure to the German monetary dominance; 3. Restraining domestic decision- makers from pursuing self-defeating macroeconomic policies. 1. Price stability; 2. Sound public finances; 3. Supporting economic convergence, sustainable balance of payments, and general economic policies.

Level 3 objectives

Re-establishing and maintaining the stability of the euro area.

The original objectives, as well as: 4. Establishing balance of payments financial assistance funds; 5. Reinforcing economic coordination; 6. Redefining the monetary policy; 7. Introducing macroeconomic shock- absorbers at the European level.

attempts to achieve the current Level 2 objective would undermine the more rudimentary Level 1 objectives motivating the whole European project. Whether such fallout effects occur depends ultimately on the costs (and the very attain- 9.125 ability) of the new Level 3 objectives. The efforts to establish a crisis management system— the first among the new Level 3 objectives—proved crucial in overcoming the sovereign debt crisis. Especially the announcement of the OMT programme was a game changer, because it convinced financial markets that the combined firepower of the ESM and the ECB would be sufficient to bail out even the biggest euro area countries. So far, this task has been accomplished without entailing any serious contingent costs of losses on government debt actually purchased by the ESM and its predecessors. If activated, however, the OMT will force the ECB to take the driving seat in the supervision of the corresponding strict conditionality programmes, with serious political and social costs capable of jeopardizing the integrity and stability of the EMU. Achieving another new EMU’s Level 3 objective—of redefining the monetary policy—has undoubtedly stimulated the economic recovery since 2015. The PSPP has removed a share of public sector liabilities produced in the euro area since its inception and stifling economic activity since the sovereign debt crisis. Because, however, a quantitative easing programme cannot replace appropriate political and socio-economic reforms on the national level, the PSPP has not eliminated causes of the public sector liabilities. Therefore, it has not been in a position to improve economic, political and social foundations of the economically more vulnerable euro area countries. Furthermore, as a side effect of the quantitative easing programme, the very accommodative monetary policy has propelled the financial cycle, stimulating lending and contributing to price increases of assets, financial (eg stocks and bonds) and non-financial (eg land and property). In the longer term, this feature of the APP can endanger the integrity and stability of the euro area during the downturn of the financial cycle, as it will amplify it as well. The very soft character of the so-called macroprudential tools

9.126

258 OBJECTIVES OF THE EMU intended to assuage financial cycles in the EU might not suffice to counter this process,181 while the largely divergent economic landscape of the euro area could easily trigger significant asymmetric economic shocks in such a situation. This would force the ECB to trigger an OMT, with its ambivalent political and social consequences. 9.127

The propensity of the euro area to experience future asymmetric economic shocks—and hence the uncertainly as to whether the goal of maintaining the basic integrity and stability of the euro area can be maintained durably—is further augmented by the still profoundly deficient economic coordination in the euro area. This conspicuous flaw should be attributed to the impossibility of pursuing actual economic coordination when Member States of the euro area remain ultimately sovereign in all the crucial political and socio-economic areas responsible for the structure of national economies.

9.128

All the factors pose very serious dangers to the new Level 2 objectives, and— in consequence—to the original Level 1 objectives of the EMU. They are further reinforced by the lack of viable macroeconomic shock-absorbers at the European level. The political impossibility of establishing a transfer union in the euro area (the fiscal shock absorber) and—more importantly—its banking systems and capital markets profoundly divided along national lines deprive the euro area countries of the cushions necessary to alleviate asymmetric economic shocks. The fact that in such a situation euro area countries cannot use the monetary policy as an alternative shock absorber will pose a very serious danger to the most rudimentary objectives of the EMU in the future.

181 Cf European Parliament and Council Regulation (EU) 1092/2010 of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board [2010] OJ L331/1. For broader analyses, cf Eilís Ferran and Kern Alexander, ‘Can Soft Law Bodies be Effective? Soft Systemic Risk Oversight Bodies and the Special Case of the European Systemic Risk Board’ (2011) University of Cambridge Faculty of Law Research Paper No 36; Xavier Freixas, Luc Laeven, and José-Luis Peydró, Systemic Risk, Crises, and Macroprudential Regulation (MIT Press 2015); Anita Anand, Systemic Risk, Institutional Design, and the Regulation of Financial Markets (OUP 2016).

10

SUBSTANTIVE LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES Charles Proctor

I. Introduction II. Nature of a Monetary Union III. Institutional Obligations with Respect to the Euro A. B. C. D.

Eurogroup Euro Summit European Central Bank National Central Banks

IV. Fiscal and Economic Obligations V. Stability and Integrity of the Euro

10.1 10.4 10.12 10.13 10.16 10.18 10.26 10.28 10.33

VI. The Euro Area and Mutual Support VII. Capital and Exchange Controls A. Cyprus B. Greece

VIII. Obligations of Member States with a Derogation A. Derogations and accession B. Sweden

IX. External Obligations

10.38 10.45 10.49 10.51 10.53 10.53 10.58 10.62

I. Introduction This chapter considers the substantive legal obligations of those European Union (EU) Member States that have adopted, or are to adopt, the euro as their currency.1 In other words, what is the nature of the burdens and obligations that a participating Member State is required to accept in return for its admission to the benefits of euro area membership?

10.1

It must be emphasized at the outset that the present chapter will focus primarily on the monetary and central banking aspects of Economic and Monetary Union (EMU). Whilst there will also be some discussion of fiscal and economic aspects in order to provide a complete overview of the package of obligations, it should be noted that Part VI of this work provides a much more in-depth consideration of those aspects.2

10.2

Against that brief introductory background, the contents of this chapter are arranged as follows:

10.3

– first of all, there will be a brief description of the nature of a monetary union; – secondly, the institutional obligations of the euro area Member States will be described; – thirdly, the text will outline the fiscal and economic obligations of Member States; 1 It should be noted that the present chapter is exclusively concerned with the obligations of EU Member States. In some cases, the EU itself and other institutions may be subject to similar or parallel obligations, but these are beyond the scope of the present discussion. 2 See Part VI of this work. Charles Proctor, 10 Substantive Legal Obligations of Euro Area Member States In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0013

260 LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES – fourthly, the text will examine the obligation of those Member States to contribute to the stability and integrity of the single currency; – fifthly, the obligation to provide mutual support in the event of a crisis is considered; – sixthly, the application of capital and exchange controls within the euro area will be discussed; – seventhly, a few observations will be made in relation to the obligation of non- participating Member States to accede to the euro area; and – finally, it is appropriate to note a few comments about the external obligations of euro area Member States vis-à-vis the International Monetary Fund (IMF).

II. Nature of a Monetary Union 10.4

The obligations to be considered in this chapter are derived from the fact that the relevant Member States participate in a monetary union. As a result, the nature and scope of the legal obligations of the euro area Member States can perhaps be best understood against a description of monetary sovereignty and the manner in which it may be pooled in order to create such a union.

10.5

It is a well-known proposition that every state has the sovereign power to issue and manage a currency.3 In general terms, this includes the right to designate the unit of account, to impose exchange controls and similar matters.4 However, like most other aspects of a nation’s sovereignty, it can be delegated, pooled, or otherwise limited by international agreement. Although it is nowhere explicitly stated in the EU Treaties, the creation of the euro involved a pooling of monetary sovereignty by participating Member States.5 This element of pooling is necessarily implicit in numerous aspects of the Treaty on the Functioning of the European Union (TFEU), including: (i) the provisions that confer exclusive note-issuing authority on the European Central Bank (ECB) itself;6 (ii) those provisions which confer upon the ECB exclusive responsibility for monetary policy throughout the euro area;7 and (iii) the requirement that the foreign reserves of Member States’ national central banks should be transferred to the ECB.8

10.6

But are these elements of pooling sufficient to create a monetary union? The definition of that term offered by the late Dr F A Mann reads ‘a monetary system common to several independent states and characterized by a single currency issued by or on behalf of a single central bank and being legal tender in the states of the union’.9 He added that this definition 3 Serbian and Brazilian Loans Cases, 1929, PCIJ Ser A, Nos 20/21. 4 By way of example, it should be noted that the sovereign power to impose exchange controls had been limited even prior to the introduction of the euro. In an EU context, see Articles 63 and 64 TFEU (prohibition against restrictions on free movement of capital and payments) and, in a wider international context, see Article VIII of the Articles of Agreement of the International Monetary Fund. 5 Although it must be carefully borne in mind that the exercise of sovereign powers on the plane of international law may be subject to limitations under the domestic law of the State concerned. This point is clear from the recent and important decision of the UK’s Supreme Court in the Brexit case R (on the application of Miller) v Secretary of State for Exiting the European Union [2017] UKSC 5. 6 See Article 128(1) Treaty on the Functioning of the European Union (TFEU) and Article 16 Statute of the European System of Central Banks (ESCB Statute). 7 See Article 127 TFEU and Article 3 ESCB Statute. 8 Article 30 ESCB Statute. 9 Charles Proctor, Mann on the Legal Aspect of Money (7th edn, OUP 2012) para 24.3.

Nature of a Monetary Union 261 had several consequences. For example, (i) the central bank must have the exclusive power to authorize the issue of bank notes with legal tender status throughout the monetary area; (ii) the central bank must be able to determine the single interest rate for the currency, and to effect the reduction/expansion of credit; and (iii) the union or its central bank must take control of the external reserves of member countries and effect the discharge of their external debts. In so far as it relates to the pooling of liabilities, the euro area does not meet the third criterion just noted.10 That issue apart, however, the features of the euro zone outlined above appear broadly to correspond to Dr Mann’s definition. Once a state has delegated national powers to a supranational authority, the Member State concerned is thenceforth prevented from seeking unilaterally to re-assume those powers, or to exercise them itself, for such action would manifestly constitute a breach of the treaty concerned.

10.7

Thus, for example, it would be unlawful for a participating Member State to seek to issue a new or parallel currency within its own borders.11 This duty would be implicit in the very fact of membership of a single currency area, but the point is made expressly in the context of the TFEU; Article 128 TFEU stipulates that the ECB is the sole authority for the issue of bank notes within the euro area.

10.8

Similarly, national authorities and central banks cannot encroach upon the competences that have been entrusted to the ECB. Thus, for example, a national legislature could not seek to confer on its central bank any powers or obligations that detracted from its role as a member of the European System of Central Banks (ESCB), or impacted upon the independence of the central bank.12

10.9

Membership of a single currency area also implies the abolition of all forms of exchange control, for the currency must be freely transferable throughout the territory of the Union. However, this is not expressly stated in the Treaties with respect to the euro area. Instead, reliance is placed on the free movement of capital rules which apply to all EU Member States13 and which are subject to exceptions. This may be regarded as an inconsistency within the terms of the TFEU, but this came to the aid of Greece and Cyprus in the context of the financial crisis.14

10.10

The legal definition of monetary union given above and its consequences are of a rather limited nature. In particular, this formulation ignores economic factors; this is in some respects unrealistic because economic union was the primary policy objective, whilst monetary union was merely one of its servants or agents. In addition, the definition fails to encompass numerous areas that will have an impact on the legal obligations of members of the union, including budgetary and related matters. Nevertheless, it provides a flavour of

10.11

10 This connotes a pooling of foreign reserves and associated liabilities. The latter issue has been contentious in an EU context, because it implies that economically more powerful Member States may have to support weaker members. Germany, in particular, has insisted that the monetary union does not create a transfer union. The latter arrangement would be but a short step away from a political union. 11 The idea of a parallel currency was mooted during the depths of the Greek financial crisis, although ultimately not pursued. 12 Actions of this kind would be inconsistent with Article 131 TFEU. 13 Ie including those that remain outside the euro area. 14 See the discussion in Section VI.

262 LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES the basic legal structure of a monetary union, and will thus be used as a starting point for an analysis of the obligations of euro area Member States.

III. Institutional Obligations with Respect to the Euro 10.12

The present section will consider the Eurogroup, the Euro Summit, the European Central Bank and the national central banks within the Eurosystem.15 The first two bodies are directed towards economic policy coordination,16 whilst the ECB’s/Eurosystem’s roles in relation to monetary policy and related matters are more closely defined by the Treaties.

A. Eurogroup 10.13

When the euro was originally established in 1999, the finance ministers of the participating Member States began to meet informally with a view to discussing areas of common concern. This grouping was not then referred to in the Treaties and thus had no legally established mandate. Subsequently, however, the existence of the so- called Eurogroup was recognized by Article 137 TFEU and an associated protocol. That Protocol notes the need ‘to develop ever-closer coordination of economic policies within the euro area’. Article 1 of the Protocol requires that finance ministers of the euro area Member States ‘shall meet informally . . . when necessary to discuss questions related to the specific responsibilities they share with regard to the single currency’ The closer coordination of economic policies is of course designed to enhance levels of convergence between participating Member States and thereby to enhance the stability of the euro area as a whole.17 The Commission is required to participate in such meetings, and the ECB is invited to do so.

10.14

As just noted, the meetings are specifically described as informal, but the Protocol nevertheless requires that such meetings must take place. Euro area Member States are therefore under an obligation to secure the attendance of their finance ministers when these meetings are scheduled.18 But notwithstanding the importance that is now often attached to the Eurogroup, it must be emphasized that—at least as far as a legal analysis is concerned—its meetings do remain informal and that the Treaties do not ascribe any particular powers to the Group. It is therefore in essence a ‘talking shop’ without a more specific legal role and which is intended to be separate from the more structured EU institutions. Thus, in a case where the Eurogroup had issued a statement about the proposed rescue of Cypriot banks, the General Court noted the Eurogroup’s status as a ‘forum for discussion’ rather than a decision-making body. The judgment also notes that the Eurogroup is not intended to form a part of the Commission or of the ECB, and has received no delegated powers from either 15 ‘Eurosystem’ is the collective expression for the ECB and the national central banks within the euro area. 16 Although it must be said that their mandate has in practice extended to deal with the wider financial crisis in recent years. 17 The financial crises that have engulfed Greece and other so-called ‘peripheral’ Member States have vividly illustrated the dangers that economic divergence poses to the stability of the single currency. 18 These meetings are usually preceded by meetings of a Eurogroup Working Group, which operates as a preparatory body.

Institutional Obligations: the Euro 263 institution.19 As a result, the Eurogroup’s statement on Cyprus could not be attributed or imputed to either of those institutions, and thus could not ground a cause of action against them.20 It is thus possible to conclude that the Finance Ministers can exert significant political power through the Eurogroup whilst at the same time enjoying an effective legal immunity in respect of any action they may elect to take in that forum.

10.15

B. Euro Summit Sitting above the Eurogroup is the Euro Summit, which consists of the Heads of State or Government of countries that have adopted the euro, plus the President of the Commission. Euro Summit meetings must take place at least twice a year and are again stated to be informal, with the result that its deliberations and actions could not be the subject of review by the Court of Justice.21

10.16

As will be apparent, the role of the Euro Summit in some respects mirrors that of the Eurogroup, but it is also expected to provide more strategic direction on economic policies and convergence.22 Once again, euro area Member States are required to participate in Euro Summit meetings for the purposes just described.

10.17

C. European Central Bank The European Central Bank is, of course, the best-known institution that lies at the heart of the structure of the euro area.23 This follows from the role of the ECB and the ESCB in the formulation and implementation of monetary policy, with price stability being the core objective.24

10.18

There appear to be relatively few obligations that are owed by the euro area Member States directly to the ECB itself. As a general matter, Member States must make available the governors of their national central banks to serve on the Governing Council of the ECB.25

10.19

19 Consequently, the Eurogroup is not a body, office or agency of the European Union that is subject to the jurisdiction of the Court under Article 263 TFEU. 20 Case T-327/13 Konstantinos Mallis and Elli Konstantinou Malli v Commission and ECB [2014] ECLI:EU:T:2014:909. An appeal against this decision was dismissed in Joined Cases C-105/15 P to C-109/15 P Konstantinos Mallis and others v Commission and ECB [2016] ECLI:EU:C:2016:702 (hereafter Mallis and others). Nevertheless, there is something of an inconsistency, in that the political status of the Eurogroup significantly outweighs its legal status as a ‘forum for discussion’. It may be added that the Court also rejected an assertion that the decision breached property rights granted by Article 1 of the Protocol No 1 to the European Convention on the Protection of Human Rights, and also Article 14 of that Convention. 21 See the reasoning in Mallis and others (n 20) above, which would seem to apply equally in the present context. 22 For the current provisions governing the Euro Summit, see Article 12 of the Treaty on Stability, Coordination and Governance. Whilst it is not proposed to pursue this point, the legal status of the Euro Summit is rendered unclear because this Treaty was not signed by the United Kingdom or the Czech Republic. The Treaty thus operates outside the framework of the EU Treaties themselves. Given the informality of Euro Summit meetings and their resultant immunity from legal review, it may be that this inconsistency has no real or practical consequences. 23 The initial obligation to transfer foreign reserves to the ECB has already been noted at paragraph 10.5. 24 Article 127 TFEU and Article 2 ESCB Statute. 25 Article 283(1) TFEU and Article 10(1) ESCB Statute.

264 LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES However, perhaps the most substantive—and the most challenging—obligation is the duty of Member States to respect the independence of the ECB and the ESCB. 10.20

In the sphere of monetary policy, it should be recalled that the ECB and the ESCB are required to act independently of Member States. This level of independence is reinforced by a reciprocal obligation on Member States not to seek to influence the conduct of monetary policy. These two principles are both captured within Article 130 TFEU, which provides that: When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB and the ECB, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or the national central banks in the performance of their tasks.

10.21

It should be appreciated that the restriction against seeking to influence the direction of monetary policy is not limited solely to interest rates; whether a particular measure falls within the scope of monetary policy depends principally on the objectives of that measure.26 An attempt to sway ECB decisions on quantitative easing would likewise contravene the prohibition, since this forms an aspect of monetary policy activity.27

10.22

The net result would appear to be that Member States should refrain from issuing proposals as to the desirable direction of monetary policy for, in doing so, they would ‘seek to influence’ the ECB’s functions.28 That position is perhaps understandable, in the sense that numerous participating Member States may have differing views as to appropriate policy, bearing in mind their own respective economic situations. In addition, the ECB was structured to mirror the independence of the Deutsche Bundesbank, which was regarded as a successful model for the Central Bank. The argument in favour of independent central banks rests on the notion that there will be greater confidence in a nation’s monetary policy and currency if this institution operates independently of the domestic political process.29 But monetary policy affects the economies—and electorates—of all participating member

26 Case C-370/12 Thomas Pringle v Government of Ireland and Others [2012] ECLI:EU:C:2012:756 (hereafter Pringle). 27 This follows from the decision of the Court of Justice in Case C-62/14 Peter Gauweiler and others v Deutscher Bundestag [2015] ECLI:EU:C:2015:400 (hereafter Gauweiler and others), which held that the ECB’s proposals for bond purchases—‘Outright Monetary Transactions’—were lawful within the scope of the ECB’s mandate. That decision was subsequently applied by the German Constitutional Court, which had made the original reference: BVerfG, Judgment of the Second Senate of 21 June 2016—2 BvR 2728/13 (OMT). 28 For ease of discussion, and because of the pre-eminence of the subject, the present section focuses on the ECB’s role in the sphere of monetary policy. However, it should be noted that the independence provision applies to all of the ‘tasks . . . powers and duties’ conferred upon the ECB. The independence requirement would thus apply equally in relation to the ECB’s role as a bank supervisor, its foreign exchange operations, its oversight of payment systems and other matters. 29 To the contrary, many have expressed the view that the decisions made by central banks have highly distributive consequences. High interest rates will obviously favour investors and savers, whilst lower rates will favour borrowers and, as a result, decisions of this kind should be made or controlled by those who are politically accountable. That said, the present text is concerned with the law as it currently stands (and not as it might be amended at a later stage).

Institutional Obligations: the Euro 265 countries and it is therefore unrealistic to expect national politicians to maintain a vow of complete silence in this key area. There must accordingly be a fine distinction between discussing monetary policy and seeking to influence its direction. If that is correct, then context must be everything. For example, an occasional comment by a national Finance Minister about the desirable level of interest rates would not amount to a contravention of Article 130 TFEU. On the other hand, repeated statements to this effect released shortly prior to meetings of the ECB to establish interest rates would suggest a coordinated attempt to influence the ECB and to undermine its independence. Such a course of conduct would suggest a contravention of Article 130 TFEU. Of course, politicians may find it easier to refrain from comment under benign economic conditions. But in the context of an on-going financial crisis, it is perhaps asking too much for politicians to adopt such a degree of self-restraint. In recent times, the German government has been a frequent critic of the ECB’s loose monetary policy. At one point, it was claimed that low interest rates were effectively expropriating the assets of thrifty German savers. The President of the ECB delivered a robust response and invoked the independence provision as part of his riposte.30 German criticism of the monetary policy stance became fairly strident and persistent, and this might suggest a contravention of Germany’s own obligations under Article 130 TFEU.

10.23

The independence obligation is difficult in a number of respects. It is likely to be very difficult indeed to prove that one of its decision-making members has taken instructions from, or been influenced by, his/her national government in the performance of his/her duties. It may be that it will be easier to demonstrate attempts by a Member State to exert influence over monetary policy, at least if this takes the form of public pronouncements. But, in the absence of a gross and obvious breach of the obligation, it is difficult to imagine a situation in which formal enforcement proceedings based on Article 130 TFEU would be contemplated. The result is that the principle of the independence of the monetary institutions will only be effective in practice if it is voluntarily respected, rather than coercively enforced.31

10.24

It may finally be noted in contrast that, whilst the Bank of England also enjoys independence in the monetary policy sphere,32 there is no explicit rule prohibiting efforts by politicians to influence the Bank’s decisions.

10.25

D. National Central Banks The national central banks within the euro area are an integral part of the Eurosystem.33 As a result, the obligation of Member States to respect the independence of the ECB also 30 See ‘Mario Draghi defends ECB independence and ultra-low interest rates’ Financial Times (London, 21 April 2016). For a discussion of the independence principle and issues that examples of the problems that arose prior to the 2008 financial crisis, see René Smits, ‘The European Central Bank’s Independence and its Relations with Economic Policy Makers’ (2007) 31 Fordham International Law Journal 1614. 31 On the same theme, see Martin Seidel, ‘Legal Aspects of the European Central Bank versus the National Central Banks in the Eurosystem’ in Detlev Ehrig, Uwe Staroske, and Otto Steiger (eds), The Euro, the Eurosystem and the European Economic and Monetary Union (LIT Verlag 2011). For a work that examines the independence issue both for the ECB and in a wider EU context, see Dominique Ritleng, Independence and Legitimacy in the Institutional System of the European Union (OUP 2016). 32 Section 4(1) Bank of England Act 1946, as amended by the Bank of England Act 1998. 33 See Article 282(1) TFEU and Article 14.3 ESCB Statute.

10.26

266 LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES extends to those central banks.34 At one level, this aspect of the independence obligation is even more important, in the sense that a national central bank is a natural target of influence by its own national government. 10.27

The Treaty attempt to deal with this issue is to be found in Article 131 TFEU, which requires Member States to ensure that legislation governing their central banks is compatible with the Treaties and the terms of the ESCB Statute. Such compatibility is, of course, a pre- condition to entry into the euro area in the first place,35 but Article 131 makes it clear that the maintenance of compliant national legislation is a continuing obligation of participating Member States.

IV. Fiscal and Economic Obligations 10.28

It was noted earlier that monetary union was intended to be the agent of, or vehicle for, economic union. It is relatively easy to create a legal framework for a monetary system—several such unions had existed prior to the creation of the euro. But it is much more difficult to create a manageable set of legal rules for economic conduct, since circumstances can change, sometimes radically and at short notice. Furthermore, in the context of an area as vast and diverse as the euro area, it is inevitable that national economies will not fully converge with each other, and that not all countries will prosper under a single monetary policy. In such a context, a rigid framework would be the enemy of the flexibility that may from time to time be required. However, on the other hand, flexibility will often be the enemy of the certainty required to underpin an economic and monetary union.

10.29

Article 119(1) TFEU—reflecting both the introductory preamble and Article 3 TEU— provides that: [T]‌he activities of the Member States and the Union shall include, as provided in the Treaties, the adoption of an economic policy which is based on the close coordination of Member States’ economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition.

The close link between the economic and monetary aspects of EMU is emphasized by Article 119(2) TFEU, which states that: Concurrently with the foregoing . . . these activities shall include a single currency, the euro, and the definition and conduct of a single monetary policy and exchange rate policy, the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Union, in accordance with the principle of an open market economy with free competition. 10.30

In support of these provisions, Member States must ‘regard their economic policies as a matter of common concern’. Those policies must be coordinated with the Council with a view to securing the success of economic and monetary union. On this basis, the European

34 35

See the wording of Article 130 TFEU, reproduced at paragraph 10.20. See Article 140 TFEU.

Fiscal and Economic Obligations 267 Council formulates broad economic guidelines and a recommendation to Member States. A multilateral surveillance system is established, and a Member State may receive a warning from the Council—on the recommendation of the Commission—if its economic policies jeopardize the functioning of economic and monetary union.36 Allied to these provisions, Article 126 TFEU requires euro area Member States to avoid excessive government deficits. If the Council determines that an excessive deficit exists in any particular Member State, then it may issue a recommendation requiring that the deficit be rectified. A failure of compliance may ultimately lead to a monetary fine and/or other sanctions. Under the terms of the Protocol on the Excessive Deficit Procedure, a Member State will have an excessive deficit if (i) the ratio of the government deficit to GDP exceeds 3 per cent; or (ii) the ratio of government debt to GDP exceeds 60 per cent. There will be no excessive deficit if the relevant ratios are declining, or other conditions are met. These provisions, read together with the supporting rules contained in the Excessive Deficit Regulation37 and the Surveillance Regulation38 are collectively described as the ‘Stability and Growth Pact’.

10.31

It would be fair to say that, in the years that followed the introduction of the euro, the Stability and Growth Pact proved to be disastrously ineffective, not least because early offenders included both France and Germany. The Commission recommended sanctions against both countries, which had excessive deficits. However, the Council instead decided to hold the requirements of the Pact ‘in abeyance’ against undertakings from both countries to improve their deficit positions. The Court of Justice found that the Council could not simply decide to suspend the operation of the Pact, since the Treaties conferred no such power. Equally, however, there was no obligation on the Council to adopt the specific recommendations put to it by the Commission.39 This unedifying episode did little to enhance the credibility of the Pact or of the single currency. The Pact has continued to be controversial over time, with Member States seeking to explore its boundaries or simply failing to comply with the requirements of the Pact, without any effective sanction. The euro area financial crisis from 2008 focussed attention on the Pact and a number of steps were taken. In November 2011, a directive and five regulations were promulgated to reinforce the Pact.40 The new measures were intended to sharpen the surveillance and coordination procedures to provide for the faster application of the Pact and to seek to address macro-economic imbalances. All Member States are, of course, required to cooperate with these processes. Times have however changed as a result of the financial crisis and the Commission has published an Interpretative Communication on Making the Best use of the Flexibility within the Existing Rules of the Stability and Growth Pact,41 but this document has not been approved by some

10.32

36 See Articles 120 and 121 TFEU. 37 Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6. This regulation has been amended on numerous occasions. 38 Council Regulation (EC) 1466/1997 of 7 July 1997 on the strengthening of the surveillance of budgetary provisions and the surveillance and coordination of economic policies [1997] OJ L209/1. 39 Case C-27/04 Commission v Council [2004] ECR I-6649. For a discussion of this decision, see Imelda Maher, ‘Economic Policy Coordination and the European Court: Excessive Deficits and ECOFIN Discretion’ (2004) 29 European Law Review 831. 40 The directive and five regulations were perhaps unhappily labelled the ‘six-pack’. They were subsequently further enhanced by a ‘two-pack’ in 2013. 41 Commission, ‘Communication from the Commission to the European Parliament, the Council, the European Central Bank, the Economic and Social Committee, the Committee of the Regions and the European Investment Bank making the best use of the flexibility within the existing rules of the Stability and Growth Pact’ COM (2015) 12 final.

268 LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES of the more fiscally conservative Member States. However, the very existence of the document perhaps inadvertently acknowledges that the Pact has not been effective, whether under benign or adverse economic circumstances.

V. Stability and Integrity of the Euro 10.33

The preceding section considered the economic obligations of euro area Member States. As will have been apparent, obligations of cooperation are relatively open-textured and, of themselves, will be difficult to enforce. Whilst the Stability and Growth Pact is written in more specific terms and contemplates a legal process culminating in severe penalties. However, a lack of political will has rendered these procedures ineffective in practice.

10.34

These obligations are however supported by more specific Treaty prohibitions that are designed to support the stability and integrity of the euro. In particular, Articles 123, 124, and 125 TFEU deal with monetary financing and associated matters.

10.35

Article 123(1) TFEU prohibits ‘overdraft facilities or any other type of credit facility’ granted by a national central bank ‘in favour of . . . central governments, regional, local or other public authorities . . . or public undertakings of Member States’. This Article prohibits euro area Member States from using their own central banks as a source of financing for their own government deficits.42 At least in part, the theory was that Member States would have to finance those deficits on public debt markets, and that this would help to impose fiscal discipline. This faith in the markets has perhaps not been borne out by subsequent experience, but nevertheless this prohibition against monetary financing had to apply on a pan- euro area basis to support the single currency project.

10.36

The search for the rigours of financial market discipline is continued by Article 124 TFEU, which in turn prohibits ‘any measure, not based on prudential considerations, establishing privileged access by . . . central governments, regional, local or other public authorities . . . or public undertakings of Member States to financial institutions’ In other words, a Member State cannot compel national banks to provide facilities to the government, or require that they be provided on ‘soft’ or preferential terms. This worthy objective has in practice been undermined by the exception for any measure that is ‘based on prudential considerations’. The primary measure within the category has been the EU’s own Capital Requirements Regulation,43 which effectively allows banks to treat euro-denominated borrowings by euro area Member States as risk-free, and to set margins accordingly.44 The consequences of this position both for sovereign borrowers and the lending institutions is readily apparent following the crisis affecting Greece and other participating Member States. 42 By the same token, the provision would also prevent a national central bank from financing the rescue of an insolvent financial institution. Whilst the provision of emergency liquidity assistance to an illiquid bank is permissible, the rescue of an insolvent bank is a responsibility of the national government, rather that its central bank. A rescue by the central bank would thus contravene the monetary financing prohibition in Article 123 TFEU: see, for example, para 2.1 of ECB Opinion of 17 November 2016 on a draft law abolishing the State guarantee provided in connection with emergency liquidity assistance (CON/2016/55). 43 European Parliament and Council Regulation (EU) 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 [2013] OJ L176/1 (hereafter Capital Requirements Regulation). 44 See Article 114(4) Capital Requirements Regulation.

The Euro Area and Mutual Support 269 Article 125 TFEU contains the now well-known ‘no bailout’ clause. So far as relevant in the present context, it provides:

10.37

[The EU and its Member States] shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

This provision was originally presented as a requirement for each euro area Member State to manage its own financial affairs prudently and not to expect financial assistance for that purpose from other Member States or from the EU itself. In practice, matters have turned out rather differently. In particular, in the Pringle case,45 the Court of Justice held that Article 125 did not prevent individual Member States from providing financial support to other Member States, provided that such support does not detract from the overall objective of Article 125—namely, to ensure that Member States are fiscally prudent and are subject to market disciplines in the context of their debt management. Thus, the Member State that receives the support must itself remain responsible for its own financial obligations to its creditors. The Court further held that the European Stability Mechanism (ESM)46 could not be compatible with the Treaties unless (i) the ESM was indispensable for the safeguarding of the financial stability of the euro area as a whole; and (ii) the support in question was subject to strict conditions. Given the importance of the ESM Treaty in addressing the euro area crisis, it is perhaps unsurprising that the court found those two conditions to be met in this case.47

VI. The Euro Area and Mutual Support It now seems to be broadly accepted –even by the most ardent of euro enthusiasts—that the institutional architecture originally put in place for the single currency was inadequate. Whilst a single currency was successfully created, it rested on fragmented, and hence fragile, foundations. It has been belatedly recognized that the euro area needs to create a banking union. This currently remains a work in progress.48 In addition, the Greek debt crisis exposed some of the vulnerabilities of the single currency. The refusal of Germany and other creditors to write-off a portion of Greek government debt has exacerbated the difficulties, but the larger EU countries refuse to allow monetary union to mutate into a transfer union49 by this means.

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At least since 2009, these difficulties and deficiencies have largely been addressed in a crisis or fire-fighting mode, although the approach has perhaps become a little more coherent

10.39

45 Pringle (n 26). 46 The Treaty establishing the ESM is considered at paragraph 10.40. 47 Although not directly relevant to the obligations of euro area Member States, it should be noted that Article 123 TFEU prohibits ‘monetary financing’, ie loans by central banks to their national governments. However, in Gauweiler and others (n 27), the Court of Justice decided that this provision did not prevent the ESCB from purchasing Member State debt in the secondary markets. 48 Whilst the EU has established a single supervisory mechanism and a bank resolution mechanism for failing banks, it has thus far been unable to agree upon an EU-wide deposit protection scheme, although proposals have been put forward to that end. 49 That is to say, a union involving the transfer of financial resources from one State or area to another.

270 LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES in recent years. Initial responses to the Greek crisis included the creation of the European Financial Stabilization Mechanism and the European Financial Stability Facility. The functions of these two structures were subsequently assumed by the European Stability Mechanism (ESM). 10.40

The treaty establishing the ESM (ESM Treaty) was signed at Brussels on 1 February 2012 among the euro area Member States. The adoption of this treaty relied in part on the recently revised Article 136 TFEU, which allowed that: Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.

The last sentence effectively confirms that harsh conditions of austerity will be imposed as the price of any support from the ESM. 10.41

The ESM Treaty notes that the first line of defence against a euro area crisis of confidence should be compliance with the terms of the Stability and Growth Pact and other EU rules on economic governance. Consequently, and as pointed out in its Recitals (4) and (5), the ESM Treaty is complementary to the earlier Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. Nevertheless, in terms of restoring confidence in the euro area, it is clear that the ESM Treaty is the lead document, for it underwrites the funding necessary to deal with any crisis.

10.42

The ESM is established as an international financial institution50 to mobilize funding and to provide stability support for euro area Member States, which are experiencing severe financial problems and the support is indispensable to the financial stability of the euro area as a whole.51 To that end, the ESM may borrow from euro area Member States, from financial institutions or from other third parties.52 There are detailed provisions as to the appointment, powers and voting rights of a Board of Governors and a Board of Directors.53

10.43

Turning to the more direct financial obligations of euro area Member States, the ESM has an authorized capital stock of 700,000 million euro, which is allocated among the signatories on a proportionate basis.54 The initial paid-in capital was to be 80,000 million euro with other shares remaining callable as the occasions demands. Each Member State must pay for its shares on a timely basis when so required.55 However, no Member State can be obliged to contribute beyond its original commitment, nor is any such state liable for the borrowings of the ESM itself.56 Support may be provided by the ESM to the Member States in various ways, including through loans, primary market support facilities or secondary market support facilities.57

50 51 52 53 54 55 56 57

Article 1(1) ESM Treaty. The ESM is thus a self-standing institution with separate corporate personality. Article 3 ESM Treaty, reflecting the enabling provisions of Article 136 TFEU. Article 3 ESM Treaty (final sentence). See Articles 4–7 ESM Treaty. On this point, see Article 8(1) and Annex ESM Treaty. Article 8(2) and (4) ESM Treaty. Article 8(5) ESM Treaty. Articles 12–18 ESM Treaty.

Capital and Exchange Controls 271 As might be expected for a treaty creating a new financial institution, the ESM Treaty contains numerous other protections dealing with financial management, audit, immunities and other matters. But, for present purposes, the key message of the ESM Treaty is that all euro area Member States have undertaken very substantial financial obligations in order to support the euro area through an existential crisis.

10.44

VII. Capital and Exchange Controls It is regrettably necessary to make a few observations about exchange controls within the euro area. This is unfortunate because, in principle, the notion of exchange control within a single monetary area is a contradiction and really ought not to arise.58 Unfortunately, the euro area reality has failed to correspond to this theory. If the currency unit genuinely represents a single monetary system across the entirety of the euro area, then a euro in Greece or Cyprus should at all times display the same attributes and value as a means of payment as a euro in France or Germany would enjoy. But if Greece or Cyprus impose any form of exchange control then the required equilibrium between euros held in different parts of the euro area is disturbed. A holding of euro in France or Germany becomes more attractive, because it is immediately accessible and available for use as a means of payment.

10.45

If the Treaties were silent on the matter then, for the reasons just given, the creation of a monetary union would probably carry with it the necessary implication that Member States could not introduce any form of capital or exchange control.59 However, that is not the position and the rules dealing with the single currency must be read alongside the Treaty provisions dealing with free movement of capital and payments. Article 63 TFEU prohibits all restrictions on the movement of capital and payments as between the Member States themselves, and as between Member States and third countries. Article 63 thus effectively bars the imposition of any form of exchange control, and it is established that Article 63 is directly effective in Member States. However, that prohibition is subject to exceptions that are set out in the ensuing Articles.60

10.46

Articles 64–66 TFEU contain various exceptions to the main Article 63 TFEU obligations. In the present context, the only relevant exception allows a Member State ‘to take measures which are justified on grounds of public policy or public security’. Given that

10.47

58 See Dr Mann’s criteria and associated comments at paragraph 10.6. 59 Whilst the two expressions are often used interchangeably, it may be helpful to note that capital controls generally prevent outflows of capital from the imposing State (eg where depositors move their cash to foreign banks, or loans are provided to foreign borrowers). On the other hand, exchange controls generally regulate the ability of residents to acquire foreign currencies through purchase with the domestic currency. By the same token, exchange controls restricted the purchase and holding of the domestic currency as non-residents. 60 It should be pointed out that the rules on free movement of capital apply to all Member States, whether within or outside the euro area. However, countries outside the euro area can ‘as a precaution, take the necessary protective measures’ if they are confronted by ‘a sudden crisis in the balance of payments’. The right to take such measures is subject to various conditions but this flexibility for non-participating Member States demonstrates that the rules on free movement of capital assume an even greater importance for Member States within the euro area. For the details of the flexibility available to non-participating Member States, see Articles 143 and 144 TFEU.

272 LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES such measures would involve a step back from core EU principles, the Court of Justice has tended to adopt a narrow interpretation of such exceptions. In particular, the public policy/public security clause can only be invoked if there is a real and serious threat to a fundamental interest of the Member State concerned;61 it cannot therefore be used simply as a means of seeking to improve the national economic situation, but it could be used to counter a serious threat to the essential stability of the country’s financial system.62 10.48

It is unfortunate that there is a mismatch between the EU’s rules on free movement of capital and the rules governing the euro area. It might have been better if the free movement of capital rules were re-thought and re-worked in the specific context of the introduction of the single currency. However that may be, we can only work with the Treaties as they stand. From this perspective, it is necessary to consider the exchange control and transfer restrictions that have been introduced by Cyprus and Greece in recent years in an effort to counteract sovereign debt and bank crises respectively.

A. Cyprus 10.49

In March 2013, Cyprus suffered a serious banking crisis and it became apparent that the rescue of the Bank of Cyprus and Laiki Bank would involve the ‘bail-in’ of uninsured deposits. This would almost certainly have led to massive deposit withdrawals and Cyprus thus adopted emergency capital controls to forestall that eventuality, relying on the public policy exemption described above. The EU Commission agreed that this step was justified, although it was necessary continuously to monitor the controls with a view to removing them as soon as possible and, in the meantime, to ensure that the controls were proportionate to the prevailing situation.63 Nevertheless, the Cypriot capital controls represented the first time that such restrictions had been unilaterally imposed by a euro area Member State, and this was naturally an unhappy development in the context of the unity of the single currency.64

10.50

The controls included restrictions on cash withdrawals from banks, payments and the use of credit cards. Thankfully, however, the Cypriot banking system recovered from these setbacks and the Government was able to lift the remaining exchange controls in full in April 2015.

61 Case 36/75 Roland Rutili v Minister for the Interior [1975] ECR 1219; Case C-348/96 Donatella Calfa [1999] ECR I-11. Article 65(3) TFEU prohibits such measures if they would constitute arbitrary discrimination or are a disguised restriction on the free movement of capital and payments. In addition, and in line with established principles, the measures must be appropriate and proportionate to the issue that has arisen. 62 Cf Case C-384/93 Alpine Investments BV v Minister van Financiën [1995] ECR I-1141, where a restriction against ‘cold calling’ to sell complex financial instruments was found to infringe the treaty freedoms but could potentially be justified on the grounds of public policy. 63 On these issues, see Commission, ‘Staff Working Document on the movement of capital and the freedom of payments’ SWD (2015) 58 final. The imposition of new controls by Cyprus also requires the consent of the International Monetary Fund under its Articles of Agreement, but it appears that this was given as the IMF expressed its support for the actions taken by Cyprus. 64 The fate of a court challenge to the Cypriot controls has already been noted; see Mallis and others (n 20).

Obligations of Member States: Derogation 273

B. Greece On 29 June 2015, the situation in Greece likewise compelled its government to introduce capital controls, restrict overseas payments and place a limit on permitted withdrawals from bank accounts and transfers abroad.

10.51

The European Commission issued a statement65 on the same day to the effect that:

10.52

in the current circumstances the stability of the financial and banking system in Greece constitutes a matter of overriding public interest and public policy that would appear to justify the imposition of temporary restrictions on capital flows . . . Whilst the imposed restrictive measures appear necessary and proportionate at this time, the free movement of capital will however need to be reinstated as soon as possible in the interests of the Greek economy, the Eurozone and the European Union’s single market as a whole.

In other words, the Treaty justification for the Greek measures mirrored that which had earlier been adopted in the context of the Cypriot banking crisis.

VIII. Obligations of Member States with a Derogation A. Derogations and accession As is well-known, both the United Kingdom (in the pre-Brexit era) and Denmark are exempted from any obligation to join the Euro.66 Beyond this, however, it is necessary briefly to consider those remaining Member States that have not met the ‘Maastricht criteria’ and thus have not yet acceded to the euro (referred to in the Treaties as ‘Member States with a derogation’).67

10.53

It may be objected that a section on the position of Member States with a derogation is inconsistent with the overall title of this chapter. However, subject to various conditions, Member States within this category are under a positive obligation to accede to the euro area at an appropriate time. This is unsurprising given the centrality of the single currency in the context of the Union’s wider objectives. It is therefore appropriate to discuss the threshold issues that would create an obligation on the part of a Member State to adopt the euro and thus to graduate to the higher-level obligations discussed earlier in this chapter.

10.54

The Commission and the ECB are required to prepare a convergence report for each Member State with a derogation at two-yearly intervals.68 These reports must examine the extent to which the relevant Member State has met the Maastricht criteria, namely: (i) the compatibility of national rules governing the central bank with the Treaty requirements for independence; (ii) the achievement of a high degree of price stability; (iii) the sustainability of the government financial position; (iv) satisfactory participation in the exchange

10.55

65 See Commission, ‘Statement on behalf of the European Commission by Jonathan Hill on the capital controls imposed by the Greek authorities’ (Statement/15/5271, 29 June 2015). 66 See, respectively, Protocols No 15 and 16 TFEU. 67 Article 139(1) TFEU. 68 Article 140(1) TFEU.

274 LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES rate mechanism for a period of at least two years69 and (v) the durability of convergence achieved by the relevant Member State being reflected in long-term interest rate levels.70 10.56

Following a consultation procedure and upon a proposal from the Commission, the Council may abrogate the derogation of the Member State concerned. For these purposes a qualified majority of the Euro area Member States is required.71 It may be noted that the relevant Member State has no influence in this process. Thus, if the Council determines that a derogation should be abrogated, then the relevant Member State is obliged to adopt the Euro. The rate at which the Euro is to be substituted for the outgoing currency must be agreed with the incoming Member State but, beyond that, it has no formal veto over the accession process.

10.57

In view of the above provisions, it can be said that—and Denmark aside—all Member States now have an obligation to accede to the Euro when they are found to have met the necessary criteria. For the more recent accession states, this position is confirmed by stating that ‘[e]‌ach of the new Member States shall participate in Economic and Monetary Union from the date of accession as a Member State with a derogation’.72

B. Sweden 10.58

It might be thought that the provisions discussed above are fairly clear and that a Member State meeting the criteria is under an obligation to adopt the Euro. In practice, however, this has proved not to be the case and the situation of Sweden requires examination in this context.

10.59

The most recent Convergence Report73 identifies various respects in which Sweden does not meet the Maastricht criteria. Specifically: – the Central Bank, Sveriges Riksbank, does not enjoy the necessary level of independence from the Government. In particular (i) the central bank is required to notify the Government in advance of major monetary policy decisions; (ii) the central bank is not sufficiently independent in relation to other activities within the scope of the ESCB; (iii) the allocation of profits of the central bank is to be determined by the Government itself; (iv) the Government retains rights to remove the Governor in certain instances; and (v) the central bank may be required to provide guarantees or the purchase of government bonds in contravention of the prohibition against monetary financing;74 and – Sweden did not fulfil the exchange rate criterion because the Swedish Krona is not participating in the exchange rate mechanism. 69 The exchange rate mechanism involves an obligation to ensure that the national currency observes limited margins of fluctuation vis-à-vis the euro itself. 70 Article 140 TFEU. These so-called ‘Maastricht’ criteria are developed in a Protocol to the TFEU. 71 Article 140(2) TFEU. 72 See Article 4 of the 2003 Act of Accession for the Czech Republic and others [2003] OJ L236/33. A similar provision is to be found in Article 5 of the 2005 Act of Accession for Bulgaria and Romania [2005] OJ L157/203. 73 Commission, ‘Convergence Report 2016’ (2016) Institutional Paper 26 (hereafter Commission, ‘Convergence Report 2016’). 74 In relation to monetary financing, Article 123 TFEU prohibits ‘[o]‌verdraft facilities or any other type of facility with . . . the central banks of Member States . . . in favour of . . . central governments’.

External Obligations 275 It must be said that the issues revolving around the independence of Sveriges Riksbank could be resolved by legislation. Equally, the Swedish government has maintained that membership of the Exchange Rate Mechanism (ERM) II is purely voluntary, and it has elected not to take that step. Yet, as a party to the Treaties without a formal opt-out, this is not an easy position to defend. This is especially the case when it is remembered that (i) states are under a general duty to perform their treaty obligations in good faith; and (ii) more specifically, Article 4(3) TEU provides that:

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The Member States shall take any appropriate measure . . . to ensure fulfilment of the obligations arising out of the Treaties . . . [and] . . . shall facilitate the achievement of the Union’s tasks and refrain from any measure which could jeopardise the attainment of the Union’s objectives.

It must therefore be arguable that Sweden is under an obligation to revise its central bank laws appropriately,75 and to join ERM II when monetary conditions would justify that step. Of course, this may well be correct as a matter of legal theory. In practical terms, however, it is unlikely that European institutions would wish to press the point via European Court of Justice (ECJ) proceedings. An attempt to impose euro membership on a country that had decided not to take that step would plainly be problematic, especially where an advisory referendum had previously voted against adoption of the euro.76 Although theoretically possible, it is difficult to imagine that the Commission would wish to bring such an issue before the Court of Justice. It must be concluded that—regardless of the strict effect of the relevant treaty provisions—it will in practice be extremely difficult to compel a Member State to accede to the euro, even if it complies or could comply with the Maastricht criteria. Given the difficulties that have confronted the euro area over recent years, it may be that other Member States with a derogation will closely examine the Swedish precedent as a means of avoiding or deferring accession to the single currency.77

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IX. External Obligations Finally, it is appropriate to record a few observations about the obligations of euro area Member States in an external context. This issue arises specifically in relation to the membership of all of such countries in the International Monetary Fund (IMF). It is necessary to reconcile the existence of a monetary union with the separate obligations arising under the Articles of Agreement of the Fund.

75 Commission, ‘Convergence Report 2016’ (n 73) 63 refers to Article 131 TFEU and blandly notes that ‘Sweden has been under the obligation to adopt national legislation with a view to integration into the Eurosystem since 1 June 1998. As yet, no legislative action has been taken by the Swedish authorities to remedy the incompatibility described in this and previous reports’. 76 Sweden held such a referendum on 14 September 2003. Nevertheless, as a formal matter, a Member State is not entitled to rely on the outcome of a national referendum as a ground for failing to comply with its treaty obligations. 77 Although it should be said that the Commission’s ‘Convergence Report 2016’ (n 73) found that none of the Member States with a derogation currently fulfils all of the applicable criteria to join the single currency. Apart from Sweden itself, therefore, the specific issue noted in the text has not arisen.

10.62

276 LEGAL OBLIGATIONS OF EURO AREA MEMBER STATES 10.63

The starting point for the present discussion is Article IV of the Articles of Agreement of the IMF. Article IV(1) includes an undertaking by each member country ‘to collaborate with the IMF and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates’. The IMF is then empowered to supervise compliance with these obligations. In particular, Article IV(3) requires the IMF: to exercise firm surveillance over the exchange rate policies of members, and [to] adopt specific principles for the guidance of all members with respect to those policies. Each Member shall provide the Fund . . . with the information necessary for such surveillance and, when requested by the Fund, shall consult with it on the member’s exchange rate policies.

This provision clearly contemplates the traditional situation where each member country would have its own national currency and, hence, its own exchange rate policy for that currency. These fundamental assumptions plainly cannot apply to euro area Member States, which no longer have their own national currencies. How, then, was this position to be reconciled with the IMF membership of euro area countries? How can a euro area country cooperate with respect to exchange rate arrangements? And how can the IMF exercise ‘firm surveillance’ in relation to the exchange rate policies of such countries? 10.64

These challenges are to some extent addressed by the IMF’s Integrated Surveillance Decision (ISD) of 2012, which puts in place a surveillance mechanism for monetary unions.78 Whilst the ISD acknowledges the difficulties, paragraph 8 of the ISD specifically notes that member countries within a monetary area ‘remain subject to all of their obligations under Article IV Section 1 and accordingly, each member is accountable for those policies that are conducted by union level institutions on its behalf ’. In other words, each euro area Member State has made its own decision to delegate monetary sovereignty to EU institutions but cannot thereby escape responsibility for its own separate obligations under the Fund’s Articles of Agreement—each such country remains individually responsible for the consequences of the delegation. Whilst paragraph 8 of the ISD is therefore accurate as a statement of law, it illustrates the tensions in this area. It may be added that the euro area institutions are not members of the IMF in their own right.79 The ECB enjoys observer status at the IMF and may thus participate in decisions relevant to its functions,80 but this does not equate to membership and does not confer on the IMF any form of jurisdiction or control over the functions or activities of the ECB. There is, therefore, an uneasy co-existence between the IMF and the euro area, largely because the area’s monetary institutions are not directly bound into the IMF’s Articles of Agreement.

10.65

In the light of the considerations noted above, the legal relationship between the IMF and the individual euro area countries has not formally changed as a result of the introduction of the single currency. However, in the absence of national currencies, the ECB and the European Commission consult with the IMF, enabling the latter to produce a report on euro area policies. This, in turn, assists in the production of the Article IV assessments for 78 It should be noted that the discussion in the text reflects the current position. Surveillance arrangements were put in place with reference to the original introduction of the euro in 1999 see IMF Decision Nos 12846-(98/125), 12899-(02/19), and 14062-(08/15). 79 This must be the case, since the Fund’s Articles of Agreement restrict membership to countries only. 80 On the ECB’s observer status, see IMF Decision No 11875-(99/1) of 21 December 1998.

External Obligations 277 each individual euro Member State. In practice, therefore, twenty reports cover the nineteen euro area countries.81 The final IMF reports therefore include an assessment of the economic outlook and the financial stability of the euro area as a whole. Pragmatic as these arrangements may be, they illustrate that the delegation of monetary sovereignty by euro area states does not in any way detract from their obligations under Article IV of the IMF’s Articles of Agreement.

81

For a description of these arrangements, see ECB, ‘Economic Bulletin’ (June 2015) 79.

10.66

11

EMU AS CONSTITUTIONAL LAW Bruno de Witte

I. Introduction II. The Constitutional Specificity of EMU Law

A. The detailed nature of primary EMU law B. Prevalence of variable geometry C. A specific institutional regime D. Limited space for legislation

11.1 11.4 11.4 11.5 11.8 11.11

III. The Embedding of EMU Law in the EU Constitution

11.12

IV. The Living Constitution of EMU

11.12 11.17 11.21 11.23 11.27 11.29

A. The division of competences between the EU and its Member States B. Institutional balance C. Judicial review D. Sources of law E. Substantive values and objectives

I. Introduction 11.1

The creation of Economic and Monetary Union (EMU) was an important enterprise of constitutional engineering and expressed a belief in the capacity of constitutional law to accomplish economic objectives.1 The Treaty of Maastricht was prepared by not one but two intergovernmental conferences, namely one on ‘European Political Union’ and another one on ‘European Monetary Union’. The negotiators participating in the latter of the two conferences were given a free hand in drafting a lengthy set of norms that were eventually included in the Maastricht Treaty, either in the body of the new Treaty or in detailed Protocols.2 At the moment of entry into force of the Maastricht Treaty, all EMU law was therefore constitutional law of the European Union, and still today, when many further norms of secondary law have been enacted, an important part of EMU law is still of a formally constitutional nature, by being contained in the text of the Treaty on the Functioning of the European Union (TFEU) and its annexed Protocols. There is thus a consistent body of EMU constitutional law, which is the object of this contribution.3

1 Marijn Van der Sluis, ‘Maastricht Revisited: Economic Constitutionalism, the ECB and the Bundesbank’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), The Constitutionalization of European Budgetary Constraints (Hart Publishing 2014) 105–06. 2 See the classic account by Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union (OUP 1999). 3 This contribution does not discuss the impact of EMU on national constitutional law, both at the time of the Maastricht Treaty and, much later, at the time of the sovereign debt crisis. The national constitutional implications of EMU law, and especially of the Euro crisis reform measures, have been presented, among others, by two edited volumes: Maurice Adams, Federico Fabbrini, and Pierre Larouche, The Constitutionalization of European Budgetary Constraints (Hart Publishing 2014); and Thomas Beukers, Bruno De Witte, and Claire Kilpatrick, Constitutional Change through Euro-Crisis Law (CUP 2017). Bruno de Witte, 11 EMU as Constitutional Law In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0014

Introduction 279 When adopting this formal definition of the constitutional law of the EMU (namely, the norms of primary law relating directly or indirectly to Economic and Monetary Union), the first thing to note is that the many legal or policy changes that happened during the financial crisis period should not all be qualified as constitutional changes. As an illustration of this distinction between constitutional and infra-constitutional change, take the evolution of the European Central Bank’s (ECB) monetary policy. The content of that policy has undeniably changed since 2008, in particular by means of the use of the so-called unconventional measures of intervention on the secondary bond markets.4 The ECB did not articulate this as a constitutional change, but rather as a change of policy within the broad confines of its monetary policy mandate as defined by the Treaties. The applicants in the Gauweiler and Weiss cases5 thought otherwise and argued that this was not a mere policy change, but one which had constitutional effects, making the ECB step outside the limits of its Treaty-defined mandate as laid down in Article 127 TFEU and breaching the prohibition of monetary financing of Article 123 TFEU. The Court of Justice, instead, approved the interpretation proposed by the ECB. In doing so, it showed a considerable amount of judicial deference,6 but that attitude itself may be a reflection of the constitutional choice made at the time of the Maastricht Treaty to assert the independence of the ECB, and therefore also grant it broad discretion in fulfilling its Treaty mandate.7

11.2

Due in part to the circumstances in which Economic and Monetary Union emerged, the constitutional law of EMU forms, in many ways, a sub-system within the European Union’s constitution. From a constitutional perspective, EMU is not just one among the many policies listed and described in Part III of the TFEU, but is institutionally different from all those other policies. In Section II, we will present four such specific constitutional features of EMU law: (a) the detailed nature of the norms of primary law; (b) the prevalence of variable geometry; (c) the very specific institutional regime; and (d) the limited room left for legislation. At the same time, though, the EMU constitution does not entirely stand apart from the rest of European Union (EU) constitutional law. In Section III, we will describe how EMU law is embedded within the overall EU constitution. In particular, it will be seen how EMU law fits within: (a) the system of vertical division of competences between the EU and its Member States; (b) the horizontal division of powers between EU institutions; (c) the general system of judicial protection; (d) the overall regime of sources and instruments of EU law; and (e) the European Union’s substantive values and objectives. Finally, in Section IV, we will propose to qualify the EMU constitution as a living constitution;

11.3

4 This shift was documented, from a legal perspective, by a number of authors, including Thomas Beukers, ‘The New ECB and its Relationship with the Eurozone Member States: Between Central Bank Independence and Central Bank Intervention’ (2013) 50 Common Market Law Review 1579, 1591 ff; Klaus Tuori, ‘Has Euro Area Monetary Policy Become Redistribution by Monetary Means? “Unconventional” Monetary Policy as a Hidden Transfer Mechanism’ (2016) 22 European Law Journal 838; Claire Kilpatrick, ‘Abnormal Sources and Institutional Actions in the EU Sovereign Debt Crisis—ECB Crisis Management and the Sovereign Debt Loans’ in Marise Cremona and Claire Kilpatrick (eds), EU Legal Acts—Challenges and Transformations (OUP 2015) 69, 72–76. 5 Case C-62/14 Peter Gauweiler and Others [2015] ECLI:EU:C:2015:400 (hereafter Gauweiler and Others); Case C-493/17 Heinrich Weiss and Others [2018] ECLI:EU:C:2018:1000 (hereafter Weiss and Others). 6 As noted by many commentators of the Gauweiler judgment, for instance Takis Tridimas and Napoleon Xanthoulis, ‘A Legal Analysis of the Gauweiler Case’ (2016) 23 Maastricht Journal of European and Comparative Law 17, 30ff. 7 Although the Gauweiler judgment does not emphasize ECB independence, it may well be argued that this constitutional norm underlies and supports much of the Court’s reasoning; see Stefania Baroncelli, ‘The Gauweiler Judgment in View of the Case Law of the CJEU on European Central Bank Independence’ (2016) 23 Maastricht Journal of European and Comparative Law 79, 98.

280 EMU AS CONSTITUTIONAL LAW whereas the written rules of primary EMU law were barely changed since their first enactment by the Maastricht Treaty, the institutional practice that developed in those twenty-five years, and particularly at the time of the sovereign debt crisis, has given new substance to the constitutional framework and, in some cases, modified the accepted meaning of certain constitutional norms.

II. The Constitutional Specificity of EMU Law A. The detailed nature of primary EMU law 11.4

The constitutional norms of EMU law are particularly numerous and detailed, compared to those for other fields of EU law. They include the Articles 119–144 TFEU as well as the Protocols Nos 3 and 12–18. This is the legacy of the intergovernmental conference on Monetary Union which was allowed to develop a complete blueprint of monetary and economic policy that was included in the Final Act of the Maastricht Treaty. This is quite a contrast with the often very laconic way in which national constitutions deal with monetary and macro-economic policies. This detailed entrenchment has been criticized as it may lead to a petrification of political options,8 and may reduce politics to the execution of constitutional prescriptions.9 However, it is fair to say that the practice since the entry into force of the Maastricht Treaty has shown that these detailed constitutional rules do not exhaustively determine the content of the EU’s monetary and economic policy. The provisions of primary law leave room for new legislation (as for example, in Article 121(6), on macroeconomic surveillance), for the gradual development of coordination practices, and especially, in the monetary field, for the development of an independent monetary policy by the ECB and the Eurosystem. The minute description of the tasks and procedures of decision-making of the ECB in the TFEU and the Protocols has not affected its capacity for independent monetary policy-making.

B. Prevalence of variable geometry 11.5

The Treaty of Maastricht innovated by allowing some Member States not to participate at all, or in limited ways, in the development of the Economic and Monetary Union. An opt- out was agreed to for the UK but also for Denmark; this opt-out was presented as temporary, although no timeline was laid down for those countries to join the EMU. The Treaty also spelled out what could be called a ‘quasi-accession procedure’, whereby EU Member States could enter the euro area only if they complied with certain convergence criteria and following a procedure set out in the Treaty. This quasi-accession procedure is still in place today, as not all Member States of the EU other than the UK and Denmark have as yet adopted the single currency. This fundamental division between euro-area and non-euro 8 Carlos Closa, ‘The Transformation of Macroeconomic and Fiscal Governance in the EU’ in Serge Champeau and others (eds), The Future of Europe. Democracy, Legitimacy and Justice after the Euro Crisis (Rowman & Littlefield International 2014) 37, 44–48. 9 Dieter Grimm, ‘The Democratic Costs of Constitutionalisation: The European Case’ (2015) 21 European Law Journal 460.

The Constitutional Specificity of EMU Law 281 area Member States is reflected in both the institutional and substantive norms of EMU constitutional law, as some of them apply to all EU states, and others only to the euro area states. The Lisbon Treaty added a new element to this variable geometry by creating a specific regime of enhanced cooperation in the field of economic governance, which was grafted on the existing distinction between euro-area and non-euro-area countries. The legal basis allowing for the adoption of euro-area specific legislation on economic governance (Article 136(1) TFEU) was used for important parts of the ‘six-pack’ and ‘two-pack’ economic governance reforms. More recently, unprecedented forms of variable geometry were adopted for banking supervision; the new ECB-centred mechanism, is legally mandatory only for euro area states, but is also opened up for ‘closer co-operation’ with non-euro states who wish to join.10

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The differentiation within EMU law is not just one between euro and non-euro area countries, but a further differentiation exists within each of those two groups. There is, first, a certain amount of differentiation between the ‘outs’.11 There is the ‘old’ distinction, going back to the Maastricht Treaty, between countries with a formal opt-out laid down in detail in primary law (the UK and Denmark) and the other non-euro area countries, who are considered to have a temporary derogation from euro area membership. Further differentiations have occurred more recently, when some non-euro area states decided to access to the Fiscal Compact and others not, and when the Single Supervisory Mechanism regulation allows for single non-euro states to join the new banking supervision system. A differentiation within the group of ‘ins’ was introduced as a result of the euro crisis, with the emergence of the category of ‘programme countries’ who, on the one hand, benefit from assistance from the ESM and the EFSM, and, on the other hand, are subject to a stricter surveillance of their fiscal and macroeconomic policies under Regulation 472/2013.12

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C. A specific institutional regime The obvious specificity of EMU law, from an institutional perspective, is that this is the sole domain of activity for one of the Union institutions mentioned in Article 13 of the Treaty on European Union (TEU), namely the European Central Bank (ECB). Whereas all the other institutions mentioned there operate in the whole range of EU policies, the powers of the ECB are entirely contained within Chapter 2 of Title VIII TFEU, that is, the chapter on monetary policy. Within that circumscribed domain, the ECB is the dominant institution, as most of the tasks in monetary policy are attributed to it. Unlike what happens in most other EU policy domains, monetary policy does not require complex interaction between 10 See Eilίs Ferran, ‘European Banking Union and the EU Single Financial Market: More Differentiated Integration, or Disintegration?’ in Bruno De Witte, Andrea Ott, and Ellen Vos (eds), Between Flexibility and Disintegration—The Trajectory of Differentiation in EU Law (Edward Elgar Publishing 2017) 252. 11 See Thomas Beukers and Marijn Van der Sluis, ‘Differentiated Integration from the Perspective of the Non- Euro Area Member States’ in Thomas Beukers, Bruno De Witte, and Claire Kilpatrick (eds), Constitutional Change through Euro-Crisis Law (CUP 2017) 143. 12 European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1.

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282 EMU AS CONSTITUTIONAL LAW different institutions (as exemplified most clearly by the ordinary legislative procedure) but is basically exercised by the ECB on its own, and independently, without much interaction with the other EU institutions. This picture is muddled by the curious way in which the text of the TFEU attributes the essential tasks of monetary policy not to the ECB itself but rather to the ESCB, the European System of Central Banks.13 This is rather surprising, as the ESCB is not listed among the EU institutions in Article 13 TEU, but only defined in Article 282(1) TFEU and in the Statute of the ESCB and the ECB, annexed to the TFEU by means of a Protocol.14 In reality, though, the ECSB is governed by the decision-making bodies of the ECB, namely the Governing Council and the Executive Board who act sometimes in the name of the ESCB and sometimes in the name of ‘just’ the ECB itself. In particular, any binding decisions are taken by the ECB rather than by the ESCB, as is confirmed by Article 132 TFEU. This baroque institutional setting is further complicated by the fact that, in many instances, measures of monetary policy are directed only to the euro area Member States, in which case reference is made to the ‘Eurosystem’, as distinguished from the ESCB which includes all the EU Member States. The term ‘Eurosystem’ was first used in EMU practice, and is now included in Article 282 TFEU.15 11.9

Another idiosyncratic institutional feature of monetary policy is the fact that the ECB is the only EU institution that has separate organs (mainly the above-mentioned Governing Council and Executive Board), with a division of powers between those organs laid down directly in the text of the Treaties. Other EU institutions, by contrast, may have preparatory bodies (such as Coreper or the committees of the European Parliament) but the formal decision-making power is held by the institution as a whole and not by its separate sub-organs.

11.10

In the domain of economic policy, we find a more familiar institutional landscape, as the powers are attributed mostly to the general-purpose Union institutions, namely the Council, the Commission, and the European Parliament. As mentioned above, though, the reality of differentiated integration led to the emergence of a formation of the Council which is specific to the euro area countries, namely the Eurogroup, whose existence is mentioned in primary law,16 and whose political importance largely exceeds its diminutive legal status.

D. Limited space for legislation 11.11

A final constitutional characteristic of EMU law is the limited reliance on ‘legislative law’. Whereas in most areas of EU law, the Union’s action takes the form of the adoption of legislative acts, to be further implemented either by the EU itself or, more commonly, by the Member States, this is definitely not the case in the EMU domain. Legislative acts were used sporadically in the course of the years: to define the legal framework for the 13 See Christoph Herrmann and Corinna Dornacher, International and European Monetary Law (Springer 2017) ch 8. 14 Article 1 Protocol on the Statute of the European System of Central Banks and of the European Central Bank. 15 On the emergence of the term ‘Eurosystem’, see Chiara Zilioli and Martin Selmayr, ‘Recent Developments in the Law of the European Central Bank’ (2006) 25 Yearbook of European Law 1, 55–60. 16 Article 137 TFEU and Protocol No 14 on the Euro Group OJ C202/283.

EMU Law in the EU Constitution 283 introduction of the single currency around the turn of the century; to enact and later strengthen the procedures of economic policy coordination; and, finally, to set in place the ECB’s banking supervision role. Most of the time, though, the European Union acts, in this field, through a mixture of soft law (such as the economic policy recommendations of the Commission and the Council), of specific decisions (such as the setting of interest rates by the ECB) and of operational measures (such as the ECB’s purchases of sovereign bonds). In the domain of economic governance, the EU’s intervention is significant but essentially takes the form of ‘a never-ending cycle of budgetary monitoring’,17 in which EU decision-making never crystallizes into the long-term set of rights and obligations that is typical of a legislative act. Even where proper legislative acts are adopted, they mostly set up EU-level mechanisms and do not aim at harmonizing national laws; an exception is formed by the Euro crisis legislation that harmonized to some extent the budgetary procedures of the Member States and also required them to set up independent fiscal institutions.18

III. The Embedding of EMU Law in the EU Constitution A. The division of competences between the EU and its Member States The two branches of EMU law are included in the general system of competence categories established by Articles 2–6 TFEU, with its distinction between exclusive, shared and supplementary competences.

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Monetary policy is listed in Article 3(1)(c)TFEU among the areas of exclusive EU competence, although it is specified that this is only true in respect of the euro area states, which makes it a peculiar exclusive competence indeed. Yet, the choice of the drafters of the Lisbon Treaty to include monetary policy in the list of exclusive EU competences did not raise any controversy, as that exclusive nature seems to follow logically from the scope and extent of the powers granted to the EU institutions (mainly the ECB) in the TFEU chapter dealing with monetary policy. On a closer look, though, EU primary law also attributes powers to the national central banks,19 which could support an argument that monetary policy is not an entirely exclusive EU competence;20 yet, those powers of the national central banks are

11.13

17 Mark Dawson, ‘The Legal and Political Accountability Structure of “Post-Crisis” EU Economic Governance’ (2015) 53 Journal of Common Market Studies 976, 982 (hereafter Dawson, ‘The Legal and Political Accountability Structure’). 18 See respectively Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41; and European Parliament and Council Regulation (EU) 473/2013 of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficits of the Member States in the euro area [2013] OJ L140/11. On the implementation of the latter obligation, see Diane Fromage, ‘Creation and Reform of Independent Fiscal Institutions in EU Member States: Incomplete and Insufficient Work in Progress?’ in Thomas Beukers, Bruno De Witte, and Claire Kilpatrick (eds), Constitutional Change through Euro-Crisis Law (CUP 2017) 108. 19 See in particular Article 14.4 Protocol on the Statute of the European System of Central Banks and of the European Central Bank. 20 See, for this argument, Michael Waibel, ‘Monetary Policy: An Exclusive Competence Only in Name?’ in Sacha Garben and Inge Govaere (eds), The Division of Competences between the EU and its Member States (Hart Publishing 2017) 90, 106–08.

284 EMU AS CONSTITUTIONAL LAW controlled by the ECB and can therefore be seen as the decentralized exercise of EU competence rather than a sharing of competence. 11.14

Economic policy is not part of the general three-tiered system of Articles 2–6 TFEU, with its distinction between exclusive, shared and supplementary competences. Together with employment and social policy, it is described in a separate Article 5. However, the text of Article 5 TFEU is rather deceptive in describing the Union’s role as being some kind of passive container within which Member States ‘co-ordinate their economic policies’. In fact, on a closer look at the economic policy chapter of the TFEU (Articles 120–126), it appears that this is a very complex competence domain, where most legal bases provide for coordination activities, but some legal bases provide for true law-making activities of the EU.21 Therefore, some parts of economic policy fall within the domain of shared rather than supplementary competences. The policy response to the Euro crisis stimulated the development of a hybrid system combining rule-based and coordination-based forms of governance within a complex architecture of economic policy, in which the dividing line between shared and supplementary competences is very much blurred.

11.15

The competences of the EU in relation to Economic and Monetary Union (EMU) are thus carved up, according to the typology of the Lisbon Treaty, in two very different parts: the monetary policy part which is among the EU’s exclusive competence and the economic policy part which is a peculiar mixture of supporting and shared competences, but certainly not an exclusive competence. As the euro crisis reform measures were adopted, shortly after the Lisbon Treaty’s typology had been put in place, new issues arose about where to trace the dividing line between monetary and economic policy (and therefore between an exclusive and a shared or supporting EU competence). This question emerged in two high-profile cases submitted to the Court of Justice. In Pringle, one of the arguments made by the applicant was that the euro area states, when establishing the European Stability Mechanism (ESM) by means of a separate international agreement, had failed to respect the EU’s exclusive competence in the area of monetary policy. The Court was therefore led to explore the distinction between monetary and economic policy and concluded, convincingly in our opinion, that the creation of a financial support mechanism for governments was a measure of fiscal (ie economic) policy, rather than monetary policy, even though it has an impact on monetary stability. Therefore, the subject matter was not within the EU’s exclusive competence and could be dealt with by the Member States, acting together by means of the international treaty creating the ESM.22 A similar question on where to trace the line between monetary and economic policy competence was put before the Court of Justice in the Gauweiler case, referred by the German Constitutional Court. Here, the challenge made by the applicants (and very much endorsed by the Constitutional Court) was the opposite from that in Pringle, namely that the European Central Bank, whose competence is essentially confined to the domain of monetary policy, had strayed into the field of economic policy by announcing its Outright Monetary Transactions programme. The Court of Justice rejected that challenge by stating that both the measure itself (namely, buying sovereign 21 See, for example, Article 121(6) TFEU and Article 122(2) TFEU. 22 Case C-370/12 Thomas Pringle v Government of Ireland and Others [2012] ECLI:EU:C:2012:756, paras 94–98 (hereafter Pringle). For discussion of the part of the judgment dealing with the monetary/economic policy delimitation, see Bruno De Witte and Thomas Beukers, ‘The Court of Justice Approves the Creation of the European Stability Mechanism outside the EU Legal Order: Pringle’ (2013) 50 Common Market Law Review 805, 830–34.

EMU Law in the EU Constitution 285 bonds on secondary markets) and the objective pursued (namely, ensuring smooth monetary transmission) were essentially matters of monetary policy.23 The Treaty rules attributing specific EMU competences have not much changed since Maastricht, except for the fact that a ‘dormant competence’ created by the Maastricht Treaty was effectuated in 2013 by means of the regulation establishing the Single Supervisory Mechanism.24 Article 127(6) TFEU allowed the Council to decide by unanimity to confer specific tasks of banking supervision to the ECB. This decision of the Council is often presented as a ‘transfer of competences on banking supervision’,25 although, from an EU constitutional law perspective, it seems better to say that the transfer already took place at the time of the Maastricht Treaty but became effective only at the time the Council considered it necessary to exercise the competence.

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B. Institutional balance The CJEU mostly uses the term institutional balance as shorthand for the set of Treaty rules that happen to apply to the particular institutional dispute in front of it. Thus, the notion of the institutional balance does not, despite its frequent use, add much to the rule (which is now inscribed in Article 13(2) TEU) that ‘each institution shall act within the limits of the powers conferred on it in the Treaties, and in conformity with the procedures, conditions and objectives set out in them’. Indeed, both norms (the written Treaty norm of limited powers and the unwritten Court-coined norm of institutional balance) are often used in one breath and seemingly interchangeably in the Court’s case law.26 The notion of institutional balance allows the Court to present the complex division of powers between the EU institutions, which varies widely from one policy domain to another, as somehow corresponding to a rational design rendered by the word ‘balance’.

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In several cases, the CJEU firmly rejected arguments that the Treaty rules on the division of powers between the institutions should, if necessary, be disregarded in view of an unwritten higher principle of institutional balance. The manner in which the Treaty text allocates powers to the various institutions may sometimes seem strange or inconsistent, but the Court is not prepared to correct the choices made by the authors of the Treaties. As the Court observed in one of the cases dealing with inter-institutional disputes, ‘the powers of the institutions . . . are not always based on consistent criteria’,27 and it refused to establish institutional consistency across policy sectors when the drafters of the Treaties had chosen not to be consistent. Thereby, the Court accepted and approved the phenomenon of institutional variation across policy fields, which marked the European Community at that time and still marks the European Union today. Institutional variation means that the allocation of powers between the European institutions is not determined in sweeping terms

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23 Gauweiler and Others (n 5). 24 Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63. 25 See for instance Pedro Gustavo Teixeira, ‘The Legal History of the Banking Union’ (2017) 18 European Business Organization Law Review 535, 546. 26 See for example in Case C-133/06 European Parliament v Council [2008] ECR I-3189, paras 44 and 57; and Case C-660/13 Council v Commission [2016] ECLI:EU:C:2016:616, para 46. 27 Case 242/87 Commission v Council [1989] ECR I-1425, para 13.

286 EMU AS CONSTITUTIONAL LAW (as is typically the case in national constitutions) but is determined in a piecemeal fashion and varies from one policy sector to the next. Therefore, the particular division of powers between the institutions that we find in monetary policy and in economic policy entirely fits within the overall constitutional system of the EU that allows for institutional variation across policy fields. 11.19

In the field of monetary policy, the powers of the ECB are generally quite separate from those of the other institutions, so that there seem to be few opportunities for inter-institutional disputes to be brought before the CJEU. In some limited areas, though, the division of powers between the ECB and the other institutions is fuzzier, and could therefore lead to contestation. In one such case, the General Court found that the ECB had overstepped its mandate by regulating systems facilitating the smooth operation of payment systems, which is a matter that should be regulated (if at all) by the EU legislator.28 In the field of economic policy, we have seen one inter-institutional dispute before the Court of Justice, opposing the Commission to the Council.29 It did not concern the division of powers between the two institutions but rather the way in which the Council had exercised its powers, which the Commission argued to be in breach of primary law.

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The ESM Treaty may seem problematic from the institutional balance perspective, in that it creates its own parallel institutional structure of decision-making outside the EU framework. The formal decision-making power relating to stability support schemes is put in the hands of the Board of Governors or the Board of Directors. In personal terms, the members of these Boards are the very same people who compose the Ecofin formation of the Council and its working groups, but when acting within the ESM framework they are not subject to the normal constraints of EU law, such as the Commission’s power of initiative, parliamentary control, and judicial review.

C. Judicial review 11.21

The general EU system of judicial protection applies, in principle, also to EMU law. In particular, the legal acts of the European Central Bank are subject to judicial review by the CJEU, either directly (through an action for annulment or an action for damages), or indirectly (through preliminary references questioning the validity of such acts). Actions for annulment face the usual standing conditions that severely limit the access of individuals to the CJEU. In practice, general measures of monetary policy cannot be challenged directly by them before the European Court, but only indirectly, as happened famously in the two preliminary references made by the German Constitutional Court.30 Individual decisions of the ECB can be directly challenged before the General Court by those who are concerned by them, as is the case with the ECB’s decisions in the domain of banking supervision,31 28 Case T-496/11 United Kingdom v European Central Bank [2015] ECLI:EU:T:2015:133. For other examples of where the powers of the ECB overlap with those of other EU institutions, see Chiara Zilioli, ‘La Corte, giudice costituzionale delle competenze attribuite alle istituzioni dell’Unione: il caso della Banca Centrale Europea’ in Liber Amicorum Antonio Tizzano—De la Cour CECA à la Cour de l’Union: le long parcours de la justice européenne (G Giappichelli Editore 2018) 1051, 1060–65. 29 Case C-27/04, Commission v Council [2004] ECR I-6649. 30 In Gauweiler and Others (n 5) and Weiss and Others (n 5). 31 Case T-733/16 La Banque Postale v European Central Bank [2018] ECLI:EU:T:2018:477 (hereafter La Banque Postale).

EMU Law in the EU Constitution 287 or concerning access to documents.32 The ECB, from its side, is entitled to bring actions for the annulment of measures adopted by other EU institutions, but only, as the third paragraph of Article 263 TFEU specifies, for the purpose of protecting its own ‘prerogatives’. EU measures in the field of economic policy are also subject, in principle, to judicial review, but there are two important limitations which reduce the practical importance of judicial review: the fact that many EU measures take the legal form of non-binding recommendations which are, in principle, non-reviewable acts under Article 263 TFEU; and the fact that the norms applied by the EU institutions are usually couched in very broad terms which hampers the practical realization of judicial review. At the same time, though, the European Courts have made it clear that the usual standards of review of EU law also apply to the EMU domain, including to the monetary policy measures adopted by the ECB. Thus, in the Gauweiler case, the Court of Justice examined compliance by the ECB with the principle of proportionality and with the duty to give reasons;33 and in the recent Banque Postale case, the General Court annulled a banking supervision decision of the ECB after a searching scrutiny of the Central Bank’s reasoning.34

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D. Sources of law Sources of EMU law have some specific features, even though they are clearly embedded within the general system of sources of EU law. Special arrangements regarding legal instruments are contained in Article 132 TFEU, which lists the categories of acts of the European Central Bank (ECB), namely regulations, decisions, recommendations and opinions (so, directives are not included in the list). The Statute of the ECB also gives it the power to issue guidelines and instructions addressed to central banks, which are therefore ‘internal sources’ within the European System of Central Banks. They are binding legal instruments despite what their denomination may seem to imply.35

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In the field of economic policy, no special rules apply, except that—like in all other policy areas—the specific legal basis articles may impose the use of particular instruments. This is very clearly the case in the field of economic governance where several articles of the TFEU require the use of recommendations, ie non-binding acts. In other policy fields, recommendations, when addressed to the Member States, act as a kind of surrogate directive; they often lay down very detailed standards and encourage the Member States to comply with them, but any ‘implementing’ national legislation is adopted on a voluntary basis. In the field of economic governance, recommendations are being given an enhanced authority. When the Council addresses recommendations on budgetary or macroeconomic policy to a Member State, that state has a procedural obligation to respond and explain. Also, at the

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32 Case T-590/10 Gabi Thesing and Bloomberg Finance LP v European Central Bank [2012] ECLI:EU:T:2012:635 (hereafter Thesing and Bloomberg Finance LP). 33 Gauweiler and others (n 5) paras 67ff. 34 La Banque Postale (n 31). 35 Article 12 and Protocol 14.3 on the Statute of the European System of Central Banks and of the European Central Bank. Regarding legal instruments in the field of monetary policy, see Chiara Zilioli and Martin Selmayr, The Law of the European Central Bank (Hart Publishing 2001) 91ff; Fabian Amtenbrink, ‘Economic and Monetary Union’ in Pieter Jan Kuijper and others (eds), The Law of the European Union (5th edn, Kluwer Law International 2018) 883, 949–50.

288 EMU AS CONSTITUTIONAL LAW very end of the procedures, but only with respect to euro area states, there is the possibility for the Council to impose financial sanctions. Although this possibility has never been used so far, its existence gives an important twist to the, in principle, soft law nature of recommendations. One could say that, within the field of economic policy, recommendations have acquired a hybrid soft-hard legal character. 11.25

Important elements of the euro crisis reforms were put in place by means of the eight pieces of EU legislation on economic governance known as the ‘six-pack’ (2011) and ‘two-pack’ (2013). In each case, the adoption of binding legislation was clearly permitted by the text of the TFEU, and confirmed the fact that, as argued earlier, the EU’s economic policy competence is a shared competence allowing in some cases for the adoption of binding legislation and the harmonization of national laws (in this case, national budgetary laws).

11.26

A distinctive legal source of EMU law came to the fore as part of the response to the sovereign debt crisis, namely the conclusion of agreements under international law between large groups of EU Member States. Three such agreements were concluded. First an informal agreement: a Decision of the Representatives of the euro area countries of 10 May 2010 to set up the European Financial Stability Facility (EFSF); and later two formal international treaties: the Treaty establishing the European Stability Mechanism (ESM Treaty), and the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (commonly known as ‘Fiscal Compact’). These ‘satellite agreements’, situated outside the EU legal order, but closely connected to the policies of EMU, have been the object of much political and scholarly controversy. Many saw them as indicating a general turn to intergovernmentalism in the European integration process, but there were also more contingent and technical reasons explaining the recourse to international law in each of those cases.36 From an EU constitutional point of view, inter se international agreements between two or more Member States of the EU are allowed in principle, but within limits set by EU law obligations. Indeed, a number of serious allegations of conflict with EU law were made, in relation to the EFSF agreement, the ESM Treaty and/or the Fiscal Compact, such as: encroachment by the Member States on (exclusive) EU competences; conflict with specific norms of primary and secondary EU law; and the unjustified ‘use’ of EU institutions in the implementation of those international agreements, particularly the ESM Treaty.37 The Court of Justice examined and rejected some of these allegations in the Pringle judgment.38 In fact, the path towards the conclusion of the ESM Treaty had been constitutionally cleared by an amendment of Article 136 TFEU (the only post-Lisbon amendment

36 For a discussion of the reasons for the use of international side agreements in the context of the euro crisis, see Bruno De Witte and Thibault Martinelli, ‘Treaties between EU Member States as Quasi-Instruments of EU Law’ in Marise Cremona and Claire Kilpatrick (eds), EU Legal Acts—Challenges and Transformations (OUP 2015) 157, 170–81. 37 For discussions of these issues in the legal literature, see among others Paul Craig, ‘The Stability, Coordination and Governance Treaty: Principle, Politics and Pragmatism’ (2012) 37 European Law Review 231 (who finds a number of inconsistencies between the Fiscal Compact and EU law); Alberto de Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis: The Mechanisms of Financial Assistance’ (2012) 49 Common Market Law Review 1613, 1635–40 (who concludes on the absence of conflict with EU law); and Angelos Dimopoulos, ‘The Use of International Law as a Tool for Enhancing Governance in the Eurozone and its Impact on EU Institutional Integrity’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), The Constitutionalization of European Budgetary Constraints (Hart Publishing 2014) 41 (who highlights the long-term negative impact of those inter se treaties on the EU’s institutional system). 38 Pringle (n 22).

EMU Law in the EU Constitution 289 of EMU constitutional law) stating that: ‘The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole.’39 The closeness of the new organization to the European Union was expressed in various ways: by means of references in the Preamble to the EU’s economic governance rules and to the amendment of Article 136 TFEU, and by several provisions of the treaty entrusting supporting roles to three EU institutions, the Commission, the ECB, and the Court of Justice. The European Stability Mechanism Treaty, and the decisions adopted by the organs of the ESM, can thus be considered to be a semi-connected part of EMU law, even though it is, politically speaking, strongly embedded in the EU’s economic governance regime.

E. Substantive values and objectives EU constitutional law is mostly dealing with the competences of the EU, with the powers of the single EU institutions, and with judicial protection; but it also contains many substantive constitutional norms. Most prominent among them are the fundamental rights contained in the EU Charter of Fundamental Rights, and the basic values listed in Article 2 TEU and the basic objectives listed in Article 3 TEU. All those norms apply to the field of EMU law in the same way as to other fields of Union law. In particular, the ECB has a duty to respect and promote the rights of the Charter,40 and the same is true for the EU institutions and the Member States when adopting or implementing measures of economic policy. However, the Court of Justice of the European Union (CJEU) (and also the European Court of Human Rights) have so far been quite reluctant in exercising a fundamental rights review of economic governance measures,41 in contrast with the more activist role played by some national constitutional courts when examining national austerity measures.42

11.27

The EU’s overall objectives, defined in Article 3 TEU, include the establishment of ‘an economic and monetary union whose currency is the euro’, which is therefore an objective of the Union as a whole and not just of the euro area. The EMU chapters, whilst embedded in this overall framework, set out a number of specific policy objectives and substantive norms, but this is not conceptually different from the way in which other EU policy domains are also made subject to specific objectives and norms. The general EU objectives and the specific EMU objectives interact with each other. This is clearly

11.28

39 As for the reason why an amendment of the TFEU was considered necessary for the creation of the ESM, see Bruno De Witte, ‘The European Treaty Amendment for the Creation of a Financial Stability Mechanism’ (2011) SIEPS European Policy Analysis No 6. 40 Court cases in which it was alleged that the ECB had breached Charter rights include: Thesing and Bloomberg Finance LP (n 32) (right of access to documents) and Joined Cases C-8/15 P to C-10/15 P Ledra Advertising Ltd and Others v European Commission and European Central Bank [2016] ECLI:EU:C:2016:701 (right to property). 41 See, eg, the assessments by Anastasia Poulou, ‘Financial Assistance, Conditionality and Human Rights Protection; What is the Role of the EU Charter of Fundamental Rights?’ (2017) 54 Common Market Law Review 991; and by James Fraczyk, ‘EU Fundamental Rights and the Financial Crisis’ in Sionaidh Douglas-Scott and Nicholas Hatzis (eds), Research Handbook on EU Law and Human Rights (Edward Elgar Publishing 2017) 468. 42 For a comparative study of this national constitutional case law, see Claire Kilpatrick, ‘Constitutions, Social Rights and Sovereign Debt States in Europe: A Challenging New Area of Constitutional Inquiry’ in Thomas Beukers, Bruno De Witte, and Claire Kilpatrick (eds), Constitutional Change through Euro-Crisis Law (CUP 2017) 279.

290 EMU AS CONSTITUTIONAL LAW expressed by Article 127 TFEU whose first sentence mentions price stability as the primary objective of monetary policy, whereas the next sentence of that same Treaty article adds that the ESCB ‘shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union’. Those objectives, to be taken into account of the ESCB, include—to name just a few that may be relevant—full employment and social progress, and solidarity among Member States. A similar mixture of general and specific objectives is contained in Article 120 TFEU, the first article of the Treaty chapter dealing with economic policy. That Treaty chapter famously contains some substantive constitutional norms, including the feebly formulated norm that ‘Member States shall avoid excessive government deficits’ (Article 126), and the more strongly worded norm that neither the Union nor the Member States shall be liable or assume the commitments of central governments and other public authorities (Article 125). As previously mentioned, the inclusion of such substantive norms, giving direction to the content of EU policies, is quite common in the European Treaties and is therefore not a specific characteristic of EMU constitutional law.

IV. The Living Constitution of EMU 11.29

The basic features of the EMU constitution, as put in place at Maastricht, are still with us today. They have, to a large extent, weathered the storm of the financial crisis that started in 2008. Today, as at the time of Maastricht, there still is a constitutional separation between monetary policy and (macro)economic policy. The former is an exclusive EU competence that is institutionally entrusted to the ECB together with the national central banks, whereas the latter is a partly coordinating and partly shared competence of the EU, but with the main choices still being taken at the national level. There is thus a strong argument for emphasizing the continuity in EMU constitutional law from the time of the Maastricht Treaty until today. The institutional innovations brought by the responses to the euro crisis could, from this perspective, appear as ‘more of the same’ rather than as a radical transformation of the EU institutional system. The variation of EMU institutional rules from the EU’s mainstream institutional rules was pushed further in a number of ways, but always within the limits and potential offered by the Maastricht template. Economic law-making and monetary policy competences have been interpreted extensively; differentiation between the euro area and the rest of the EU was extended; international side agreements have been used more actively than in most previous periods of European integration. Yet, none of those interstitial institutional changes directly contradicted the text of the EU Treaties, the unwritten constitutional principles, or the overall institutional structure of the EU legal order. This legal analysis ties in with the views of those political scientists who emphasize the gradual nature of the institutional change between pre- crisis and post-crisis rules on Economic and Monetary Union, the importance of path dependency, and the attempt by political actors to minimize institutional innovation to what seemed strictly necessary.43

43 See, adopting this perspective, Amy Verdun, ‘A Historical Institutionalist Explanation of the EU’s Responses to the Euro Area Financial Crisis’ (2015) 22 Journal of European Public Policy 219.

The Living Constitution of EMU 291 However, on another view, we have effectively witnessed a metamorphosis of the EMU’s constitution, as argued (along with many others) by Amtenbrink.44 According to this author, ‘viewed in combination, the scope of the Six Pack, Two Pack, TSCG, and ESM arguably verify the hypothesis that today’s economic governance framework has in many regards outgrown the tight legal framework provided by primary Union law’. Other authors go further and argue that these legal changes not only transformed EMU law, but led to an overall mutation of the European Union’s constitutional regime.45

11.30

The two perspectives, that of continuity and that of transformation, can be reconciled if one accepts that constitutional change does not only happen, in the European Union, by means of formal changes in the text of primary law, but also by means of changing judicial interpretation of the norms of primary law, or by institutional practice that transforms the significance or effect of written norms of primary EU law. In the case of the Euro crisis, most of this potentially transformative work has been done by institutional practice. Judicial interpretations of EMU law were relatively rare during the euro crisis years. Only two CJEU judgments could qualify as setting out novel constitutional interpretations, namely Pringle and Gauweiler,46 and they consisted essentially in the endorsement by the Court of legal reforms and policy innovations that had been initiated by the political institutions and by the ECB. So, if we focus on the institutional rather than judicial practice, a number of relevant measures were taken by those institutions during the financial crisis. The EU institutions exploited the competence resources offered by primary law: in particular, Article 127(6) TFEU allowing to entrust the ECB with financial supervision tasks has been activated, and the special regime of enhanced cooperation for the Eurozone, provided by Article 136 TFEU, was used for the adoption of some of the Six-Pack and Two-Pack legislative measures. Some authors have argued that the EU legislator exceeded the limits of the competence given by Article 136 TFEU when enacting some of the reforms, such as the introduction of a sanction mechanism within the macroeconomic coordination regime applicable to Eurozone countries.47 Also, primary EU law was complemented with a set of international agreements concluded by groups of Member States. Informal bodies mentioned in the Treaty, such as the Eurogroup, played, in practice, a more important role than may have been envisaged when they were first created. The Commission used its constitutional role as ’facilitator’ of economic policy coordination in order to impose much stricter guidance on national fiscal and macroeconomic policies, and it allowed the content of that guidance to fluctuate ‘by stealth’ in function of its assessment of the crisis and its consequences.48 Indeed, the most convincing element of constitutional mutation is probably that

11.31

44 Fabian Amtenbrink, ‘The Metamorphosis of European Economic and Monetary Union’ in Damian Chalmers and Anthony Arnull (eds), The Oxford Handbook of European Union Law (OUP 2015) 719. 45 Agustin Menéndez, ‘The Crisis of Law and the European Crises: From the Social and Democratic Rechtsstaat to the Consolidating State of (Pseudo-)technocratic Governance’ (2017) 44 Journal of Law and Society 56; Christian Kreuder-Sonnen, ‘Beyond Integration Theory: The (Anti-)Constitutional Dimension of European Crisis Governance’ (2016) 54 Journal of Common Market Studies 1350. 46 Pringle (n 22); Gauweiler and Others (n 5). 47 European Parliament and Council Regulation (EU) 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8. For a refutation of the argument that the limits of the EU’s competences were breached on that occasion, see Wolfram Cremer, ‘Auf dem Weg zu einer europäischen Wirtschaftsregierung?’ (2016) 51 Europarecht 256, 276ff. 48 For a discussion of the Commission’s changing practice under constant rules in the field of economic governance, see Vivien A Schmidt, ‘Reinterpreting the Rules ‘by Stealth’ in Times of Crisis: A Discursive Institutionalist Analysis of the European Central Bank and the European Commission’ (2016) 39 West European Politics 1032, 1043ff.

292 EMU AS CONSTITUTIONAL LAW we have seen a shift of the institutional balance in the field of economic governance, marked by a reinforcement of the intergovernmental method in deciding the overall direction of policy change,49 combined with a strengthening of the role of the supranational institutions (the Commission, but also occasionally the ECB) in controlling the implementation of the new policies.50 11.32

The constitutional law of EMU can thus be considered as a living constitution which is ‘capable of growth and development over time to meet new social, political and historical realities often unimagined by its framers’.51 This assessment of the EMU constitutional law as a living constitution is important for the future of this policy domain. As amendments of the European Treaties are not likely to happen in the foreseeable future, further reforms of EMU law will need to be accomplished within the constraints and limits imposed by existing primary law.52 However, this does not mean that major reforms are legally unfeasible. Recent reform initiatives show awareness of the flexibility of EMU constitutional law, and advocate the use of the existing institutions, and existing legal bases, for achieving reforms such as the incorporation of the ESM into EU law53 or the creation of a budgetary capacity for the euro area.54

49 Alicia Hinarejos, ‘Intergovernmentalism in the Wake of the Euro-Area Crisis’ in Robert Schütze (ed), Globalisation and Governance—International Problems, European Solutions (CUP 2018) 376. 50 See, for an elaboration of this argument, Dawson, ‘The Legal and Political Accountability Structure’ (n 17). For explanations of why intergovernmental negotiations resulted in a strengthening of the Commission’s monitoring powers, see Brigid Laffan and Pierre Schlosser, ‘Public Finances in Europe: Fortifying EU Economic Governance in the Shadow of the Crisis’ (2016) 38 Journal of European Integration 237; and Renaud Dehousse, ‘Why Has EU Macroeconomic Governance Become More Supranational?’ (2016) 38 Journal of European Integration 617. 51 Aileen Kavanagh, ‘The Idea of a Living Constitution’ (2003) 16 Canadian Journal of Law and Jurisprudence 55, 55. 52 For an overall view of the constitutional obstacles to further reform, see Alicia Hinarejos, The Euro Area Crisis in Constitutional Perspective (OUP 2015) ch 9. 53 Commission, ‘Proposal for a Council Regulation on the establishment of the European Monetary Fund’ COM (2017) 827. 54 See the discussions of those legal options, existing under current EU law, by René Repasi, ‘Legal options for an additional EMU fiscal capacity’ (PE 474.397, European Parliament’s Committee on Constitutional Affairs 2013); and by Luca Lionello, ‘Establishing a Budgetary Capacity in the Eurozone. Recent Proposals and Legal Challenges’ (2017) 24 Maastricht Journal of European and Comparative Law 822.

12

NON-E U LEGAL INSTRUMENTS (EFSF, ESM, AND FISCAL COMPACT) Francesco Martucci

I. The Responses to the Crisis, Time of Experimentation

A. Genesis B. The first rescue scheme C. Financial assistance to Greece (Greek Loan Facility and haircut) D. Principles of financial assistance

II. The ESM

A. A permanent crisis management mechanism

12.3 12.3 12.6 12.10 12.12 12.19

B. The functioning of the ESM C. The ESM and EU law

12.26 12.44

III. Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union 12.62 A. The legal hybridity B. Strengthen the fiscal discipline

IV. Conclusion

12.63 12.72 12.80

12.19

‘Another Legal Monster?’ That was the question asked by the Law Department of the European University Institute on 16 February 2012 in a debate about the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), also known as the Fiscal Compact Treaty.1 On 2 March 2012, twenty-five Member States of the European Union minus the United Kingdom and the Czech Republic signed the TSCG. A month before, on 2 February 2012, the euro area Member States signed the Treaty Establishing the European Stability Mechanism (ESM Treaty), another legal monster. In both cases, the monstrosity lies in the fact that Member States have preferred to conclude an international treaty, rather than to use the European Union (EU) institutional system. Why did the European Commission not propose a legislative act to establish a financial assistance mechanism in the Eurozone and strengthen the fiscal discipline in the EU? Does this mean the end of community method and a victory for the intergovernmental method?2 As Herman Van Rompuy commented about the crisis; ‘often the choice is not between the community method and the intergovernmental method, but between a co-ordinated European position and nothing at all’. In 2010, Angela Merkel defended her vision of a new ‘Union Method’ in a speech held at the College of Europe.3 This approach can be defined by the following 1 Loïc Azoulai and others, ‘Another Legal Monster? An EUI Debate on the Fiscal Compact Treaty’ (2012) EUI Working Paper 2012/9. 2 See Edoardo Chiti and Gustavo Teixeira, ‘The constitutional implications of the European responses to the financial and public debt crisis’ (2013) 50 Common Market Law Review 683–708. Georgios Maris and Pantelis Sklias, ‘Intergovernmentalism and the New Framework of EMU Governance’ in Federico Fabbrini, Ernst Hirsch Ballin, and Han Somsen (eds), What Form of Government for the European Union and the Eurozone (Bloomsbury Publishing 2015) 57–75. 3 Speech by Federal Chancellor Angela Merkel at the opening ceremony of the sixty-first academic year of the College of Europe in Bruges on 2 November 2010. Francesco Martucci, 12 Non-EU Legal Instruments (EFSF, ESM, and Fiscal Compact) In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0015

12.1

294 NON-EU LEGAL INSTRUMENTS description: ‘co-ordinated action in a spirit of solidarity—each of us in the area for which we are responsible but all working towards the same goal’. Each of us means the European institutions and Member States. The new ‘Euro-international’ treaties (or inter se treaties) raise a number of questions regarding their compatibility with EU law, implications for the Union legal system, institutional balance, national sovereignty and democratic accountability.4 These questions are all the more important because international treaties raise a number of questions on their compatibility with EU law, implications for the Union legal system and institutional balance.5 12.2

The first purpose of the contribution is to explain the reasons why the two treaties were signed. The establishment of the European Stability Mechanism (ESM) and the strengthening of fiscal discipline were the European and national responses to the crisis which affected the Member States, especially the Eurozone between 2009 and 2015. The second purpose is to study the legal aspects of international treaties which reflects a specific method of (dis?-)integration.6 Paradoxically, the ESM and the TSGC have been useful to deepen European integration.

I. The Responses to the Crisis, Time of Experimentation A. Genesis 12.3

The sovereign debt crisis of the Eurozone started in Greece in 2009.7 The newly elected Prime Minister Papandreou declared that the previous government had provided the European Commission with false statistics. In October 2009, the deficit-to-Gross Domestic Product (GDP) was 12.7 per cent and the debt-to-GDP 112 per cent. The financial markets did react disproportionately to this announcement. The rating agencies downgraded the Greek rating and cut Greece to the brink of junk debt status. The three-month spreads literally exploded, and Greece borrowed at such high rates, which created a snowball effect. Despite this dramatic situation, the Eurozone did not react immediately because of an opposition between two positions. In the ‘hawk versus dove’ debate, Member States such

4 See Christian Calliess, ‘The Governance Framework of the Eurozone and the Need for a Treaty Reform’ in Federico Fabbrini, Ernst Hirsch Ballin, and Han Somsen (eds), What Form of Government for the European Union and the Eurozone (Bloomsbury Publishing 2015) 37–56. Paul Craig, ‘Economic Governance and the Euro Crisis: Constitutional Architecture and Constitutional Implications’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), The Constitutionalization of European Budgetary Constraints (Hart Publishing 2016) 19– 40. Paul Craig, ‘The Financial Crisis, the EU Institutional Order and Constitutional Responsibility’ in Federico Fabbrini, Ernst Hirsch Ballin, and Han Somsen (eds), What Form of Government for the European Union and the Eurozone (Bloomsbury Publishing 2015) 17–36. Alexandre De Streel, ‘La gouvernance économique européenne réformée’ (2013) 49 Revue trimestrielle de droit européen 455–81. 5 See Franz-Christoph Zeitler, ‘The European Public Debt Crisis and the Institutional Framework of the Monetary Union: Experience and Adjustments’ in Wolf-Georg Ringe and Peter M Huber (eds), Legal Challenges in the Global Financial Crisis (Hart Publishing 2013) 245–48. 6 See Bruno de Witte, ‘The law as tool and constraint of differentiated integration’ (2019) EUI Working Papers RSCAS 2019/47. Angelos Dimopoulos, ‘The Use of International Law as a Tool for Enhancing Governance in the Eurozone and its Impact on EU Institutional Integrity’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), The Constitutionalization of European Budgetary Constraints (Hart Publishing 2016) 41–63 (hereafter Dimopoulos, ‘The Use of International Law as a Tool for Enhancing Governance in the Eurozone’). 7 See Annamaria Viterbo and Roberto Cisotta, ‘La crisi della Grecia, l’attacco speculativo all’euro e le risposte dell’Unione europea’ (2010) 15 Il Diritto dell’Unione Europea 961–94.

The Responses to the Crisis 295 as Germany insisted on the moral hazard principle and the risk that helping Greece would pave the way for a deterioration of public finances in the Eurozone.8 Other Member States, such as France and Italy, addressed concerns that a Greek default would impact the entire Eurozone. After a few months of hesitation, Member States finally decided to react by establishing a rescue scheme for Greece and a mechanism for the Eurozone. During the first week of May 2010, the President of the European Central Bank (ECB), Jean-Claude Trichet, called on the Heads of State or Governments and stated that the situation had become dramatic, and if nothing was done to help Greece and provide financial assistance to euro area Member States, the single currency would disappear. Nicolas Sarkozy, former French President, asked to lawyers ‘to be creative’.9 Indeed, the drafters of the Maastricht Treaty were not mindful of the need for a financial assistance mechanism within the Eurozone.10 For this reason, European Institutions and Member States of the euro area had to set up news mechanisms in order to manage the unprecedented crisis. Paradoxically, during the financial crisis, financial assistance had been granted to three Member States with a derogation (Hungary, Latvia, and Romania). According to Article 143 of the Treaty on the Functioning of the European Union (TFEU), the EU shall grant such mutual assistance to a Member State with a derogation, which is in difficulties or is seriously threatened with difficulties as regards its balance of payments. The procedures applicable to the mutual assistance facility provided for in Article 143 TFEU are established by the Council Regulation 332/2002 of 18 February 2002 establishing a facility providing medium-term financial assistance for Member States’ balance of payments,11 as amended by Council Regulation 431/2009 of 18 May 2009.12

12.4

The mutual assistance is granted through a three-stage process. Initially, the Council adopts 12.5 a decision granting mutual assistance for the Member concerned on the basis of Article 143 TFEU. Furthermore, by a second decision adopted on the basis of Regulation 332/2002, the Council provides Union medium-term financial assistance for concerned Member States, mainly in the form of loans. The Commission is mandated by the Council to negotiate with concerned Member States an agreement containing the conditionality. This agreement between the EU and the Member State concerned on an economic programme, which takes the form of a Memorandum of Understanding (MoU), enabling them to benefit from medium- term financial assistance for Member States’ balance of payments. It contains a number of economic policy requirements, to which the granting of that financial assistance is subject, and which were agreed by the Commission and the national authorities concerned, in accordance with the provisions of the Council decision adopted on the basis of Regulation 332/2002. For instance, under Council Decision 2009/458/EC of 6 May 2009 granting mutual assistance for Romania,13 the European Union granted mutual assistance for Romania 8 On moral hazard and ECB’s action, see Paul Yowell, ‘Why the ECB Cannot Save the Euro’ in Wolf-Georg Ringe and Peter M Huber (eds), Legal Challenges in the Global Financial Crisis (Hart Publishing 2013) 99–110 (hereafter Yowell, ‘Why the ECB Cannot Save the Euro’). 9 European Council, ‘Press Conference given by Nicolas Sarkozy’ (Brussels, 29 October 2010). 10 Päivi Maria Leino- Sandberg and Tuomas Saarenheimo, ‘Fiscal Stabilisation for EMU: Managing Incompleteness’ (2018) 43 European Law Review 623–47. 11 Council Regulation (EC) 332/2002 of 18 February 2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments [2002] OJ L53/1. 12 Council Regulation (EC) 413/2009 of 18 May 2009 amending Regulation (EC) 332/2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments [2009] OJ L128/1. 13 Council Decision 2009/458/EC of 6 May 2009 granting mutual assistance for Romania [2009] OJ L150/6.

296 NON-EU LEGAL INSTRUMENTS on the basis of Article 143 TFEU. Furthermore, through Council Decision 2009/459/EC of 6 May 2009 providing Community medium-term financial assistance for Romania,14 the European Union made available to Romania a medium-term loan amounting to a maximum of 5 billion euro. In accordance with these decisions, the European Commission and Romanian authorities concluded a Memorandum of Understanding on 23 June 2009. Under Article 143 TFEU, Member States whose currency is the euro are not eligible for mutual assistance and Union medium-term financial assistance. For this reason, Greece did not benefit from this assistance and a rescue scheme had to be implemented in the Eurozone.

B. The first rescue scheme 12.6

On May 2010 a comprehensive package of measures was decided on to rescue Member States dealing with financial difficulties. Given the silence of the Treaties, the Eurozone must invent a solution to save not only Greece but also the Member States impacted by the crisis, at that time, Ireland and Portugal. The first rescue-mechanism was made up of two key elements.15

12.7

On the one hand, the Council adopted Regulation 407/2010 of 11 May 2010 establishing a European Financial Stabilization Mechanism (EFSM).16 This Regulation established the conditions and procedures under which Union financial assistance may be granted to a Member State which is experiencing, or is seriously threatened with, a severe economic or financial disturbance caused by exceptional occurrences beyond its control. The financial assistance had been granted only to Member States whose currency is the euro, because the Regulation considered the possible application of the existing facility providing medium-term financial assistance for non-euro area Member States’ balances of payments, as established by Regulation 332/2002. However, Regulation 407/2010 was based on Article 122(2) TFEU which apply to all Member States.17 For this reason, the loans granted to Member States of the Eurozone under the EFSM were guaranteed by the general budget of the European Union. Due the structural weakness of the EU-budget, the EFSM had the authority to raise up to 60 billion euro.18 This amount was not enough to face a crisis of an amplitude with no precedent in the short history of the EU.

12.8

What is more, the Member States of the Eurozone set up the European Financial Stability Facility (EFSF) in order to financially support euro area Member States in difficulties. On 7 June 2010, the EFSF has been created as a société anonyme incorporated in under 14 Council Decision 2009/459/EC of 6 May 2009 providing Community medium-term financial assistance for Romania [2009] OJ L150/8. 15 See Alberto de Gregorio Merino, ‘Legal developments in the Economic and Monetary Union during the debt crisis: The mechanisms of financial assistance’ (2012) 49 Common Market Law Review 1613–45. 16 Council Regulation (EU) 407/2010 of 11 May 2010 establishing a European financial stabilization mechanism [2010] OJ L118/1. 17 Sideek Seyad, ‘A Legal Analysis of the European Financial Stability Mechanism’ (2011) 26 Journal of International Banking Law and Regulation 421, 424–26. 18 Commission, ‘Communication from the Commission on the European Financial Stabilisation Mechanism’ COM (2010) 713 final, 4: ‘At the time of the adoption of the Regulation, it was estimated that, with careful management of the repayment schedules, a volume of up to EUR 60 billion for the EFSM could be accommodated below the ceiling in addition to the volume of EUR 35 billion which remains available under the Balance of Payments facility’.

The Responses to the Crisis 297 Luxembourg law, whose shareholders are the euro area Member States.19 Therefore, it was able to issue bonds for an amount of 460 billion euro. The euro area Member States and the EFSF concluded a Framework Agreement which set out the terms and conditions upon which EFSF may grant financial assistance.20 The European Financial Stability Facility (EFSF) and the European Market Surveillance Forum (EMSF) assisted Ireland, Portugal, and Greece during the period 2010–12 for a disburse total of 254.5 billion euro.21 On behalf of the EMSF and the EFSF, the European Commission and these three countries agreed a Memorandum of Understanding (MoU) which contained the conditionality linked to the financial assistance.

12.9

C. Financial assistance to Greece (Greek Loan Facility and haircut) Greece benefited of a special treatment in the form of the Greek Loan Facility (GLF). It consisted initially of 80 billion euro in bilateral loans granted by the euro area Member States and of a 30 billion euro loan from the International Monetary Fund (IMF) under a stand-by arrangement. Except Slovakia which decided not to participate in the GLF, all Member States of the Eurozone granted bilateral loans. However, Ireland and Portugal stepped down from the GLF as they requested financial assistance themselves. The total amount had been divided between these Member States using the ECB capital subscription key as follows: Belgium: 2.4 per cent, 1.942 billion euro; Cyprus: 0.1 per cent, 110 million euro; Germany: 18.9 per cent, 15.165 billion euro; Finland: 1.3 per cent, 1004 million euro; France: 14,2 per cent, 11.389 billion euro; Ireland: 1.1 per cent, 347 million euro; Italy: 12.5 per cent, 10.008 billion euro; Luxembourg: 0.2 per cent, 140 million euro; Malta: 0.1 per cent, 51 million euro; Netherlands: 4.0 per cent, 3.194 billion euro; Austria: 1.9 per cent, 1.555 billion euro; Portugal: 1.8 per cent, 1.102 billion euro, Slovenia: 0.3 per cent, 243 million euro; Spain: 8,3 per cent, 6.650 billion euro. While the bilateral loans were financed by Member States, the European Commission had been involved in the implementation of the Greek loan facility as coordinator, administrator, and disbursement counter on behalf of the Member States. Initially the Greek Loan Facility was a three-year programme laid down for the period May 2010 until June 2013 regarding the disbursement of loans in tranches.

12.10

In March 2012, a second rescue programme had been decided for Greece. The new programme consisted on granting the undisbursed amounts of the Greek Loan Facility plus an additional 130 billion euro for the years 2012–14. The period was later extended to 30 June 2015 and the programme foresaw total assistance of 144.7 billion euro provided by the EFSF. However, while the Greek Loan Facility was based on bilateral loans, euro area Member States agreed that the second programme would be financed solely by the EFSF.22 For this

12.11

19 EFSF, ‘Société anonyme, Statuts coordonnés au 23 avril 2014’ accessed 17 February 2020. 20 EFSF Framework Agreement accessed 17 February 2020. 21 For details, see accessed 17 February  2020. 22 ‘The Second Economic Adjustment Programme for Greece, March 2012’ (2012) European Economy Occasional Papers No 94.

298 NON-EU LEGAL INSTRUMENTS reason, the Greek loan facility amounted up to 52.9 billion euro, instead of 80 billion euro originally planned. The IMF was involved in this programme and committed to contribute 19.8 billion euro. The second programme included a private sector involvement (PSI) in the form a so-called ‘Greek haircut’.23 After intensives and secret negotiations with the owners of Greek bonds (mainly private banks) and the European Commission, the Greek government announced a voluntary agreement with private creditors which consisted on the only sovereign debt restructuring ever carried out in the euro area.24 This Greek debt swap or ‘haircut’ consisted in a debt sovereign restructuration in which the Greek bonds had been exchanged with a fall in the value of 50 per cent of their original claims. With counterpart, the new Greek bonds included of collective action clauses (CACs) under English Law. Out of a total of 205.6 billion euro in bonds eligible for the exchange offer, 95.7 per cent have been exchanged for a total amount of approximately 197 billion euro.

D. Principles of financial assistance 12.12

12.13

EFSF and EMSF were built on common principles. They provided financial assistance through market instruments and relied on a strict conditionality which explains the involvement of European institutions. In accordance with Article 136(3) TFEU, the granting of any financial assistance in the euro area ‘will be made subject to strict conditionality’. Therefore, as ‘guardians of the Treaties’, the European Commission has to be able to examine whether the conditions referred in Article 136(3) TFEU are complied with.

1. Market instruments The financial assistance within the Eurozone cannot be covered by the European Union budget for two reasons. On the one hand, the amount of this budget is too low to deal with market speculations which stress sovereign bonds. On the other hand, Article 125 TFEU prohibits bail-outs financed directly by the EU. For both reasons, the choice was made to exploit the market logic. EFSF and EMSF borrowed funds on the financial markets which would then be re-loaned to the Member States with financial difficulties. Since EFSF and EMSF enjoyed a good reputation in the market, they could borrow funds at attractive conditions. Indeed, the loans of the EFSF were guaranteed by Member States, while those of the EMSF were guaranteed by the EU budget. Therefore, Member States with financial difficulties had taken advantages from these conditions.25 At the end of the loan terms, the loans must be repaid by the concerned Member States. This market logic is not wholly unprecedented. In the framework of macro-financial assistance to third countries, borrowing and lending operations have ever been required by the European Community and Union. The 23 Ibid,  47–48. 24 See Eurogroup, ‘Statement on Greece by Vice-President Rehn’ (MEMO/12/122, 21 February 2012) accessed 17 February 2020; Yannis Manuelides, ‘Overview: Restructuring of Greek Sovereign Debt’ (2017) The European, Middle Eastern and African Restructuring Review accessed 17 February 2020. Nikolaos Zahariadis, ‘Complexity, coupling and policy effectiveness: the European response to the Greek sovereign debt crisis’ (2012) 32 Journal of Public Policy 99–116. 25 According to the Pringle case, the EFSF and EMSF would grant loans to the Member States, so that the first rescue programme did not violate Article 125 TFEU. See Section II.A.2.

The Responses to the Crisis 299 whole point of these market instruments is that the borrowing-and-lending operations are not incorporated in the EU budget (ie all Member States). So were the EFSM’s borrowing and lending operations. As the EFSF was a private structure entirely independent from the European Union, the European budget had never been concerned.

2. Conditionality Borrowing and lending operations are risk-bearing operations for the lenders. For this reason, the first rescue scheme was based on the principle of conditionality, which was largely inspired by the IMF’s system. As defined by the IMF’s notes, conditionality means:

12.14

When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid from the international community. These loan conditions also serve to ensure that the country will be able to repay the Fund so that the resources can be made available to other members in need.26

When a country requests a financial assistance, it has to negotiate with the IMF the terms of the conditionality. When the IMF decided to grant assistance, it concludes with the concerned country an agreement that provides the conditions of the loans. Any financial assistance must be disbursed in tranches in order to examine whether the country laid down the measures implied by the agreement.27 Any financing under the EFSM and the EFSF needed to be subject to very strong policy conditionality which contained all the necessary measures requested from the concerned Member State to restore fiscal sustainability and competitiveness in the medium-term. The conditionality seems necessary to minimize moral hazard. The aim of the conditionality was for the concerned Member State to implement a deep adjustment programme to correct imbalances and to seek market financing as soon as feasible. The programmes contained the conditionality were formalized by a Memorandum of Understanding concluded between the Member State concerned and the European Commission on behalf of the EU (EFSM) or of the euro area Member States (EFSF).

3. The involvement of European Institutions As an EU Law instrument, the EFSM regulation provided for the involvement of European Institutions. Pursuant to Article 3 Regulation 407/2010, Union financial assistance shall be granted by a decision adopted by the Council, acting by a qualified majority on a proposal from the Commission. This decision lays down the general economic policy conditions of the assistance. In case of necessity, the Council shall decide on any adjustments to be made to the initial general economic policy conditions. As intergovernmental instrument, the EFSF responded to a different institutional logic. The decision of granting assistance was taken by the board of directors of EFSF which was composed of representatives of euro area Member States. 26 IMF, ‘Factsheet Conditionality’ accessed 17 February 2020. 27 See Joseph Gold, ‘Conditionality’ (1979) IMF Pamphlet Series No 31, 59. See also C Dominique Carreau and Patrick Juillard, Droit international économique (Dalloz-Sirey 2010) Nos 1022 and 1594; Rosa M Lastra, ‘IMF conditionality’ (2002) 4 Journal of International Banking Regulations 167–82; Jean-Marc Sorel, ‘Sur quelques aspects juridiques de la conditionnalité du F.M.I. et leurs conséquences’ (1996) 7 European Journal of International Law 42, 44–53; Claus D Zimmermann, A Contemporary Concept of Monetary Sovereignty (OUP 2013) 64–76.

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300 NON-EU LEGAL INSTRUMENTS 12.17

In fact, the European Commission played a central role in the implementation of both instruments. In the liaison with the ECB, it discussed with the Member State seeking Union financial assistance an assessment of financial needs of the state and a draft adjustment programme. The beneficiary Member State and the European Commission concluded a Memorandum of Understanding detailing the conditionality. In the liaison with the ECB, the European Commission and the IMF verified at regular intervals whether the economic policy of the beneficiary Member State accords with the MoU. If the Member States did not respect the conditionality, the assistance disbursed in tranches could be suspended or deleted.

12.18

During the sovereign debt crisis, the ECB performed a dual role.28 In addition to this participation at the ‘troika’, it acted as a monetary authority adopting so-called ‘unconventional monetary policy measures’.29 Two kinds of such measures are linked to sovereign bonds. Bonds issued by Member States under financial assistance had been accepted as collateral by the ECB and had been bought on the secondary market by the Eurosystem. On the one hand, the ECB decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the Greek government (ECB announces change in eligibility of debt instruments issued or guaranteed by the Greek government, 3 May 2010). On the second hand, the ECB announced interventions in the euro public debt securities markets to ensure depth and liquidity in those market segments which are dysfunctional.30 It adopted the SMP Program under which the ECB and the NCB’s purchased on the secondary market debt instruments issued by Member States whose currency is the euro.31 In fact, Greek, Italian and Spanish bonds were purchased on the secondary market during the first phase of the crisis. From a legal point of view, the purchase of debt instruments issued by Member States grounded on Article 18 of the European System of Central Banks (ESCB) are compatible with the Treaty so far as the ECB acted in order to achieve the objective of price stability in the due respect of Article 127(1) TFEU. The European Court of Justice ruled the conditions under which the ECB and the NCB’s may purchase sovereign bonds on the secondary market in the Gauweiler and Weiss cases. Retrospectively, it is not sure that the purchases through the SMP would be compatible with these conditions.32 From an economic point of view, the effects of both measures had been

28 Peter M Huber, ‘The Rescue of the Euro and its Constitutionality’ in Wolf-Georg Ringe and Peter M Huber (eds), Legal Challenges in the Global Financial Crisis (Hart Publishing 2013) 9–26. Christoph Ohler, ‘A Governance Crisis? Treaty Change, Fiscal Union and the ECB’ in Wolf-Georg Ringe and Peter M Huber (eds), Legal Challenges in the Global Financial Crisis (Hart Publishing 2013) 121–30. Armin Steinbach, ‘The Lender of Last Resort in the Eurozone’ (2016) 53 Common Market Law Review 361–84. 29 ECB, ‘The ECB’s non-standard measures—impact and phasing-out’ (Monthly Bulletin, July 2011) 55– 69. Francesco Martucci, L’ordre économique et monétaire de l’Union européenne (Bruylant Collection Droit de l’Union—Thèses 2015) 599–608 (hereafter Martucci, L’ordre économique et monétaire de l’Union européenne); Alexander Thiele, Das Mandat der EZB und die Krise des Euro (Mohr Siebeck 2013) XII-105; Yowell, ‘Why the ECB Cannot Save the Euro’ (n 8) 81–84. See further Chapter 22. 30 Martin Seidel, ‘Der Ankauf nicht markt-und börsengängiger Staatsanleihen, namentlich Griechenlands, durch die Europäische Zentralbank und durch nationale Zentralbanken: rechtlich nur fragwürdig oder Rechtsverstoß?’ (2010) 21 Europäische Zeitschrift für Wirtschaftsrecht 521. 31 ECB Decision of 14 May 2010 establishing a securities markets programme (ECB/2010/5) [2010] OJ L124/8. 32 See Matthias Ruffert, ‘The EMU in the ECJ: A New Dimension of Dispute Resolution in the Process of European Integration’ in Luigi Daniele, Pierluigi Simone, and Roberto Cisotta (eds), Democracy in the EMU in the Aftermath of the Crisis (Springer 2017) 335–52.

The ESM 301 to permit Member States facing difficulties to maintain their positions in a whole range of financial markets since their access to interbank funding would be severely restricted.

II. The ESM A. A permanent crisis management mechanism 1. The successor of EFSF The EFSM and the EFSF were set up as temporary solutions to offer a line of defence for three years (2010–13). The Greek Loan Facility ended in 2012 and was replaced by the EFSF, in the due respect of Article 40 of the Treaty Establishing the European Stability Mechanism (ESM Treaty).33 In accordance with the EFSF Framework Agreement, euro area Member States may only request and enter into Financial Assistance Facility Agreements in the period commencing on June 2010 and ending on 30 June 2013. At the meeting of the European Council of 28 and 29 October 2010, the Heads of State or Government agreed to establish a European Stability Mechanism (ESM) in the euro area as a whole. The ESM was set up in October 2012 at the height of the crisis as a permanent mechanism which replaced the EFSM and the EFSF from 1 July 2013.34 A transition period was necessary to permit the repayment of loans disbursed by the temporary mechanisms. From a legal point of view, the EFSM still exists so far as the Regulation 407/2010 has not been abrogated. However, it had been operational to provide financial assistance conditional to Ireland and Portugal between 2011 and 2014 and short-term bridge loans to Greece in July 2015. When euro area Member States and European Institutions decided the third rescue programme for Greece, it was necessary to resort to the EFSM because of lack of liquidity. The EFSF remains in place until all its outstanding claims have been repaid. However, after June 2013, any tranches of loan facilities that were undisbursed and unfunded must be paid out under the ESM.35

2. The constitutional framework: Article 136(3) TFEU There are economic, law and political reasons to establish the ESM as a permanent financial assistance mechanism within the Eurozone.36 On 21 October 2010, in a report addressed to the European Council, a ‘task force’ insisted on the ‘need to establish a credible crisis resolution framework for the euro area capable of addressing financial distress and avoiding contagion’.37 The sovereign debt crisis showed that a more robust and permanent framework for crisis management was needed. The events within the Eurozone demonstrated 33 Article 40 ESM Treaty has established the modalities of the transfer of EFSF support to the ESM. 34 Recital (1) ESM Treaty: ‘[the] European Stability Mechanism (“ESM”) will assume the tasks currently fulfilled by the European Financial Stability Facility (“EFSF”) and the European Financial Stabilisation Mechanism (“EFSM”) in providing, where needed, financial assistance to euro area Member States’. 35 ESM, ‘ESM becomes sole mechanism for new financial assistance programmes to euro area Member States’ (Press Release, 1 July 2013); EFSF Consolidated Articles of Association (n 19). European Financial Stability Facility (EFSF) accessed 17 February 2020. 36 See further Chapter 42 regarding the future of the ESM. 37 Report of the Task Force to the European Council, ‘Strengthening economic governance in the EU’ (Brussels, 21 October 2010) 2.

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302 NON-EU LEGAL INSTRUMENTS that financial distress in one Member State can threaten financial stability of the zone as a whole, because the national economies are closely intertwined. From the economic point of view, the ESM would manage moral hazard and prevent financial instability. Furthermore, there were strong concerns on the compatibility with EU law of the EFSF and of the EFSM.38 According to Article 125 TFEU, the Union nor the Member States shall not be liable for or assume the commitments of a Member State. They were doubts, whether the temporary financial assistance within the Eurozone infringed this so-called no-bail out clause.39 Finally, from a political point of view, it had become apparent that Member States need to establish a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole without appealing to the IMF. 12.22

On 16 December 2010, the Belgian Government submitted, in accordance with Article 48(6) first subparagraph of the Treaty on European Union (TEU), a proposal for the revision of Article 136 TFEU40. The purpose of this proposal was to add a paragraph under which the Member States whose currency is the euro may establish a stability mechanism. Such constitutional recognition of the mechanism for the Eurozone shall constitute a derogation from the no-bail out clause, allowing Member States to grant financial assistance in accordance with the Treaty. At the meeting of the European Council on 16–17 December 2010, the Heads of State or Government agreed to add a new paragraph to Article 136 TFEU via the simplified revision procedure. On the basis of Article 48(6) of the TEU, the European Council adopted the decision adding to Article 136 TFEU a third paragraph according to which: The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.41

That decision entered into force on 1 January 2013, after it was approved by the all Member States in accordance with their respective constitutional requirements. 12.23

However, the Supreme Court of Ireland made a reference for preliminary ruling under Article 267 TFEU concerning Decision 2011/199/EU. Indeed, Mr Pringle—a Member of the Irish Parliament—brought before the national court an action against the Government of Ireland, in support of which he claimed that was not lawfully adopted because of an alteration of the competences of European Union, a violation of provisions of Treaties concerning EMU and with general principles EU law. In November 2012, the European Court of Justice ruled that the Decision did not infringe the EU Law in a

38 See Matthias Ruffert, ‘The European Debt Crisis and European Union Law’ (2011) 48 Common Market Law Review 1787–88 (hereafter Ruffert, ‘The European Debt Crisis’); Martin Seidel, ‘Die “No-Bail-Out”-Klausel des Artikel 125 AEUV als Beistandsverbot’ (2011) 22 Europaïsche Zeitschrift für Wirtschafsrecht 529–30. Contra, see Jean-Victor Louis, ‘Guest Editorial: the no-bailout Clause and Rescue Packages’ (2010) 47 Common Market Law Review 971–86; Tim Middleton, ‘Not Bailing Out . . . Legal Aspects of the 2010 Sovereign Debt Crisis’ in A Man for All Treaties, Liber Amicorum en l’honneur de Jean-Claude Piris (Bruylant 2012) 421–39. 39 See further Chapter 41. 40 Procedure Reference 2010/0821(NLE). 41 European Council Decision 2011/199/EU of 25 March 2011 amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro [2011] OJ L91/1.

The ESM 303 decision which establishes the constitutional framework of financial assistance within the euro area.42 Firstly, the ESM Treaty does not breach the ‘no bail-out’ clause in Article 125 TFEU.43 According to this disposition, neither the European Union nor a Member State ‘shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project’. The European Court of Justice (ECJ) has interpreted Article 125 TFEU as meaning that it is not contrary to a financial assistance mechanism. Indeed, the objective pursued by that Article, as given by the preparatory work related to the Maastricht Treaty, is to ensure that Member States follow a sound budgetary policy in order to contribute ‘at Union level to the attainment of a higher objective, namely maintaining the financial stability of the monetary union’ (paragraph 135). The granting of financial assistance is legal when two conditions are fulfilled. First, the Member State benefiting from this assistance must remain responsible for its commitments to its creditors. The instruments for stability support implemented under the ESM Treaty demonstrate that the ESM will not act as guarantor of the debts of the recipient Member State which remain solely responsible to its creditors for its financial commitments. Second, the conditions attached to such assistance are such as to encourage that Member State to implement a sound budgetary policy. On the basis of Article 136(3) TFEU, the financial assistance by the ESM may be activated only if it is indispensable to safeguard the stability of the euro area as a whole and is subject to strict conditionality.

12.24

Secondly, the ESM Treaty allocates a role to European institutions in the implementation of financial assistance, especially to ensure that assistance is granted with due respect to the condition of a strict conditionality. The ECJ decided that Article 13 TEU does not prevent Member States from allocating tasks to the European Commission and the ECB. The Pringle judgment confirmed the well-established case-law according to which the Member States are entitled, in areas which do not fall under the exclusive competence of the Union, to entrust tasks to the institutions, outside the framework of the Union, such as the coordination of a collective action undertaken by the Member States or managing financial assistance,44 provided that those tasks do not alter the essential character of the powers conferred on those institutions by the EU and FEU Treaties.45 The ESM Treaty allocates various tasks to the Commission and to the ECB with due regard to these principles.

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42 Case C‑370/12 Thomas Pringle v Government of Ireland and others [2012] ECLI:EU:C:2012:756 (hereafter Pringle). Paul Craig, ‘Pringle and Use of EU Institution outside the EU Legal Framework: Foundations, Procedure and Substance’ (2013) 9 European Constitutional Law Review 263–84. Bruno de Witte and Thomas Beukers, ‘The Court of Justice approves the creation of the European Stability Mechanism outside the EU legal order: Pringle’ (2013) 50 Common Market Law Review 805–48. Francesco Martucci, ‘La Cour de justice face à la politique économique et monétaire: du droit avant toute chose, du droit pour seule chose. Commentaire de l’arrêt CJUE, 27 nov. 2012, Pringle’ (2013) 49 Revue trimestrielle de droit europeen 239–65. 43 Annamaria Viterbo, ‘The Impact of Sovereign Debt on EU monetary affairs’ in Thomas Cottier and others (eds), The Rule of Law in Monetary Affairs (CUP 2014) 254–55. 44 Joined Cases C-181/91 and C-248/91 European Parliament v Council of the European Communities and Commission of the European Communities [1993] ECR I-3685 (hereafter Parliament v Council and Commission); Case C-316/91 Parliament v Council [1994] ECR I-625 (hereafter Parliament v Council). 45 Opinion 1/92 [1992] ECR I-2821; Opinion 1/09 [2011] ECR I-1137.

304 NON-EU LEGAL INSTRUMENTS

B. The functioning of the ESM 12.26

1. Membership The ESM is established under public international law by a Treaty signed by euro area countries. It is an international financial institutional governed by the specialty principle. According to Article 3 ESM Treaty, the purpose of the ESM is to raise funding and provide stability support to the benefit of ESM Members which 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 particularity of the ESM relies on the fact that it is composed of the nineteen EU Member States of the euro area. EU Member States should become an ESM Member with full rights and obligations following their adoption of the euro.46

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According to Article 2 ESM Treaty, membership in the ESM is open to other Member States as from the entry into force of the decision of the Council to abrogate their derogation from adopting the euro. In 2012, seventeen countries of the euro area became the founding Members of the ESM. Latvia and Lithuania have joined the ESM since they have adopted the single currency. Both states have applied for membership to the ESM’s Board of Governors which approved the application for accession, in accordance with Article 44 ESM Treaty. Subsequently, Latvia and Lithuania ratified the ESM Treaty.47

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As shareholders, each Member contributes to the ESM authorized capital based on each country’s respective share of the EU total population and gross domestic product.48

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2. Governance The Board of Governors and the Board of Directors are the two organs of the European Stability Mechanism (ESM). The first takes the most important decisions (decisions on capital structure, decisions to provide stability support by the ESM, including the economic policy conditionality as stated in the memorandum of understanding, etc)49 The second is responsible for specific tasks delegated by the Board of Governors. Pursuant to Article 5 ESM Treaty, the Board of Governors is composed of nineteen Governors appointed by each ESM Member State. Each Governor is the government representative of his Member State with responsibility for finance, ie the Minister of Economy and Finance. As provided for in Article 5(2) ESM Treaty, the Board of Governors decided to appoint the President of the Eurogroup as Chairperson. The Board was consecutively chaired by Jean-Claude Juncker (2012–13), Jeroen Dijsselbloem (2013–18), and Mário Centeno (2018–present). According to Article 5(3) ESM Treaty, the ‘Member of the European Commission in charge of economic and monetary affairs and the President of the ECB, as well as the President of the Euro Group (if he or she is not the Chairperson or a Governor) may participate in the meetings of the Board of Governors as observers’. This provision must be interpreted in the way that the European Commissioner and the 46 Article 44 ESM Treaty. 47 Latvia officially became the ESM’s eighteenth Member on 13 March 2014. Lithuania ratified the ESM Treaty on 3 February 2015. 48 Article 42 ESM Treaty. 49 Article 5 ESM Treaty.

The ESM 305 President of the ECB have the right to participate in the meetings, without voting rights. It is worth pointing out that the ESM’s Board of Governors and the Eurogroup have the same composition, which has consequences for the ESM’s accountability and liability. The most important decisions50 are taken by mutual agreement which requires the unanimity of the members participating in the vote. Other decisions are taken by qualified majority or simple majority as specified in this Treaty.51 The Board of Directors is composed of senior civil service officials appointed as Director by each ESM Member from among people of high competence in economic and financial matters. The European Commissioner and the President of the ECB appoint one observer each. Such appointments shall be revocable at any time. The Managing Director is responsible for conducting the current business of the ESM under the direction of the Board of Directors. He is appointed by the Board of Governors and assisted by the Management Board which is in charge to prepare the decisions of the Board of Governors and the Board of Directors and to see to their implementation.

3. Capital As a financial institution, the ESM has authorized capital stock of 704.8 billion euro subscribed by its Members. Indeed, ESM Members irrevocably and unconditionally undertake to provide their contribution to the authorized capital stock, in accordance with their contribution key. Pursuant to Article 11 ESM Treaty the contribution to this capital for each ESM Member is based on the ECB’s capital key. According to Article 29 of the Statute of the European System of Central Banks and of the European Central Bank (ESCB Statute), the ECB’s capital key reflects Member State’s shares in total population of the Union and gross domestic product of the EU. In cases of new adhesion—which happened with the entry of Latvia and Lithuania—the contribution keys changes mechanically.

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Unlike the EFSF which had just a minimum amount of share capital to cover operational costs, the ESM does have 80.5 billion euro of paid-in capital provided by ESM Members to allow it to act as an issuer. The ESM’s paid-in capital supports ensure the ESM to have a security buffer for its bond emissions. In the case beneficiary ESM Member would have to default on a loan payment, paid-in capital could be used to pay bondholders. Consequently, the ESM’s creditors would not be affected by the default. The other part of subscribed capital—nearly 625 billion euro—is in the form of committed callable capital. Pursuant to Article 9 ESM Treaty, the Board of Governors may call in authorized unpaid capital at any time, in case of need. In view of these financial conditions, the ESM lending capacity is capped at 500 billion euro.

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Despite its international organization nature, the ESM acts as a purely financial institution whose tasks enable it to take risks on the market. In order to protect the ESM’s capital and to ensure its highest creditworthiness, the Managing Director implements a prudent investment policy for the ESM, in accordance with guidelines adopted by the Board of Directors,

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50 For instance, Article 5(6) ESM Treaty allows decisions to provide stability support by the ESM, including the economic policy conditionality as stated in the memorandum of understanding to give a mandate to the European Commission to negotiate, in liaison with the ECB, the economic policy conditionality attached to each financial assistance. 51 See Article 5(7) ESM Treaty.

306 NON-EU LEGAL INSTRUMENTS the so-called ‘ESM Guidelines on Investment Policy’.52 All the operations comply with the principles of sound financial and risk management.

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4. The instruments In the due respect of Article 136(3) TFEU, the ESM provides financial assistance to euro area Member States which are facing financing difficulties.53 It may provide stability support through the instruments lay down in Articles 14–18 ESM Treaty. Thus, six financial instruments are available in the ‘ESM toolbox’.

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Only one of these instruments has a preventive nature: precautionary financial assistance. Indeed, as a preventive measure, the ESM may grant assistance in the form of a precautionary conditioned credit line or of an enhanced conditions credit line (Article 14 ESM Treaty). The stability support takes mostly the form of loans granted in the due respect of Article 16 ESM Treaty. The drafters of the ESM Treaty have reproduced the model of the ‘Balance of Payment Regulation’ laid down by the before-mentioned Regulation 332/2002 to provide medium-term financial assistance for EU countries that do not use the euro. On the behalf of the EU, the Council empowers the European Commission to raise up to 50 billion euro and to lend it to the beneficiary countries. It is the role of the Council to decide whether to grant a loan or appropriate financing facility. However, the IMF has a broader range of financial instruments which seem more sophisticated and adapted to the specific difficulties faced by poor and rich countries. For instance, low-income countries may borrow currently at zero interest rates on concessional terms through facilities available under the Poverty Reduction and Growth Trust (PRGT) while the IMF assistance provided through Stand-By Arrangements (SBAs) is more adapted to emerging and advanced market economies in crisis.

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While initially financial assistance was provided solely by means of a loan facility agreement or a credit line, the ESM may grant assistance in the form of new instruments, which do not belong traditionally to the toolkit of international financial institutions, such as the IMF. Drawing on the experience of the EFSF, the ESM may grant financial assistance for the recapitalization of financial institutions of a Member State (Article 15 ESM Treaty). In July 2012, Spain faced a severe banking crisis and requested financial assistance from the EFSF in order to recapitalize some credit institutions. Two disbursements were made in December 2012 and in February 2012 to the Spanish government that reinjected funds to the concerned banks. It shows the strong correlation between financial assistance and banking Union. Thus, in return for the recapitalization of banks, Germany asked to strengthen the banking supervision in the Eurozone. One year later, the Council adopted the Regulation establishing the Single Supervisory Mechanism as the first pillar of the Banking Union54. The bank recapitalization must be decided in the due respect of Articles 107 and 108 TFEU, as it constitutes state aid. Indeed, according to the European Commission, it is also considered a transfer of state resources in sense of Article 107(1) TFEU, if the resources are at the joint disposal of several Member States who decide jointly on the use of those resources 52 ESM Investment Guidelines (3 May 2019) accessed 17 February 2020. 53 Article 3 ESM Treaty. 54 Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63.

The ESM 307 and this is the case for the funds from the ESM.55 According to Article 15 ESM Treaty, the financial sector is targeted by two instruments: the financial assistance for recapitalization of financial institutions (‘indirect recapitalization’) and the ‘direct recapitalization instrument’ (DRI). The ESM may also decide to arrange for the purchase of bonds of euro area Member States on the primary (Article 17 ESM Treaty) and secondary markets (Article 18 ESM Treaty) at market price. Such purchases allow Member States to restore their relationship with the investment community and therefore to reduce the risk of a failed auction. These purchases should have the same effects as those performed by the Eurosystem solely on the secondary market. Unlike the Eurosystem, the ESM is not a central bank. It may thus purchase bonds also on the primary market. As the European Court of Justice ruled in the Pringle case, the purchase by the ESM of bonds even on the primary market does not constitute prohibited monetary financing.56 It must be remembered that Article 123 TFEU is addressed specifically to the ECB and the national central banks (NCBs). Since the Member States are acting via the ESM, they are not derogating from the prohibition laid down in Article 123 TFEU. The ESM is not a central bank in the meaning of the Treaty, so that it is not subject to this prohibition. So far, only two instruments—loans and the ‘indirect recapitalization’ instrument—have been used. The financial terms and conditions of each ESM stability support shall be specified in a financial assistance facility agreement, signed by the ESM (represented by the Managing Director) and the Member State (represented by the Minister of Finance).

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Table 12.1 EFSF and ESM lending Assistance

Start date

End date

Amount Agreed

Disbursed

Repaid

Ireland (EFSF)

Dec 2010

Dec 2013

€17.7bn

€17.7bn

Portugal (EFSF)

June 2011

May 2014

€26bn

€26bn

Spain

Nov 2012

Dec 2013

€41.3bn

€41.3bn

€17.6bn

Cyprus Greece

Apr 2013 Aug 2015

Mar 2016 Aug 2018

€9bn €86 bn

€ 6.3bn €61.9bn

€2bn

Source: ESM Financial Assistance, February 2019

5. Conditionality Conditionality is the heart of the ESM. First of all, it constitutes a legal obligation for Member States. According to Article 136 TFEU, the granting of any required financial assistance under a stability mechanism established by the Member States whose currency is the euro is strictly conditioned on the implementation of policy measures. In addition,

55 Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union [2016] OJ C262/1, point 59. 56 Pringle (n 42) paras 123–28.

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308 NON-EU LEGAL INSTRUMENTS Article 3 ESM Treaty specifies that the purpose of the ESM is to ‘mobilise funding and provide stability support under strict conditionality’. 12.40

Whereas the financial aspects of stability are detailed by the financial assistance facility agreement, the conditionality is established and detailed by Memoranda of Understanding (MoU)57 concluded by the European Commission and the concerned Member State. In liaison with the ECB and, where possible, together with the IMF, the European Commission is entrusted by the Board of Governors of the ESM to negotiate the content of the MoU, ie the conditionality attached to the financial assistance facility.58 However, the European Commission acts on behalf of the ESM which gives to it a mandate of negotiations. For this reason, the MoU does not form part of the EU legal order and the ECJ does not have jurisdiction to rule on the compatibility with EU law of the conditionality detailed by the MoU.59 The European Commission, in liaison with the ECB and, where possible, together with the IMF, is also entrusted with monitoring compliance with the conditionality attached to the financial assistance facility.60 In the case where a Member State does not correctly implement the MoU, the ESM may decide to suspend or to revoke the financial assistance. To the extent that the financial assistance is released in successive tranches, the disbursement of each of them is conditional on the achievements of clear and measurable macroeconomic performance and structural adjustment criteria, based on the economic programmes of the beneficiary countries. The European Commission, in liaison with the ECB and, where possible, together with the IMF, carries out to review the conditionality before the disbursement of each tranche. In practice, in order to conclude each review, the European Commission issues an interim (or final) compliance report with the MoU. This report is prepared by the Commission staff in liaison with ECB staff, when ESM staff are also consulted. The compliance report is submitted to the Eurogroup which decides politically that the MoU is properly implemented. However, from a legal point view, the board of Governors is solely empowered to decide whether the programme should be continued, suspended or ended.

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The conditionality contains the macro-economic adjustment programme required from the Member State. The spirit of the ESM is to facilitate a country’s return to the market. Financial assistance must only be used as a last resort when the situation of a Member State has already so deteriorated to the extent that it has become impossible for national authorities to borrow directly from the financial market at acceptable financial conditions. When a Member State is facing with financial difficulties, the market operators react by requiring a more elevated risk premium. The Member State continues to borrow, but at even higher rates of interest to the point that the debt becomes no more sustainable. It has significant financing needs and, to a large extent, has lost access to market financing. The purpose of conditionality is to re-establish the macroeconomic stability required by the market. For this reason, the MoU contains a range of austerity measures which impact the economic and social situation of the Member State. Furthermore, conditionality varies with the nature of the financial instrument. The content of the MoU reflects the severity of the weaknesses 57 In practice, the European Commission and the concerned Member States reach an agreement on a Technical Memorandum of Understanding accompanying the MoU of the ESM programme. 58 Article 13(3) ESM Treaty. 59 See further Chapter 41 regarding the (ECJ’s approach to the) legal status of MoUs. 60 Article 13(7) ESM Treaty.

The ESM 309 to be addressed and the financial assistance instrument chosen. In the due respect of Article 136(3) TFEU, ‘strict conditionality’ is attached to the necessity to safeguard the financial stability of the euro area as a whole. Therefore, conditionality is not matter of solidarity between Member States and must be based on budgetary restriction and structural reforms.

6. Accountability and judicial review However, while the ESM provides financial assistance only under the condition of strict conditionality, the questions of its accountability and judicial review must be raised. The Treaty does not provide mechanisms other than audit and dispute settlement. From a management point of view, Article 30 ESM Treaty establishes a Board of Auditors which is the independent oversight body of the ESM. The tasks of the Board of Auditors are to draw up independent audits, inspect the ESM accounts and verify that the operational accounts and balance sheet are in order. The Board of Auditors submits, on an annual basis, a report to the Board of Governors. This report shall be communicated to national parliaments and supreme audit institutions of the ESM Members, as well as to the European Court of Auditors and the European Parliament. Article 37 ESM Treaty sets up a double-test dispute settlement. In the first phase, the Board of Governors is to decide on any dispute arising between an ESM Member and the ESM, or between ESM Members, in connection with the interpretation and application of the ESM Treaty, including any dispute about the compatibility of the decisions adopted by the ESM on the basis of that treaty. In the second phase, any ESM Member may contest this decision and the dispute has to be submitted to the Court of Justice of the European Union which jurisdiction is based on Article 273 TFEU. In the Pringle case, the ECJ held that the allocation by Article 37 ESM Treaty of jurisdiction to the Court satisfies the conditions laid down in Article 273 TFE (ECJ, Pringle, points 170–77).61 So far, no case has been brought before the ECJ.

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C. The ESM and EU law Despite the fact that the ESM is a Treaty-based intergovernmental institution, it contains close links to EU law.

1. The EU constitutional framework When the first rescue mechanism had been established in 2010, serious doubts arose on its compatibility with the EU Treaty, especially with the no-bail out clause. According to some authors, the loans granted to Greece, Ireland and Portugal in 2010 by the Eurozone directly by Member States (bilateral loans to Greece) or indirectly through the EFSF would have infringed Article 125 TFEU which prohibits Union and Member States to be liable for or assume the commitments of any Member State.62 On the contrary, financial assistance could be considered the ‘joint execution of a specific project’ within the meaning of Article 125 61 Rudolf Streinz, ‘The Limits of Legal Regulation—Will the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union Have a Real Legal Effect?’ in Wolf-Georg Ringe and Peter M Huber (eds), Legal Challenges in the Global Financial Crisis (Hart Publishing 2014) 242–43. 62 See Ruffert, ‘The European Debt Crisis’ (n 38).

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310 NON-EU LEGAL INSTRUMENTS TFEU.63 The amendment of Article 136 TFEU aimed to increase legal certainty of financial assistance within the euro area (see Section III.A.2). 12.46

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As the Court of Justice ruled in the Pringle case,64 Article 136(3) TFEU does not confer any new competence to the Union. The amendment of Article 136 TFEU has created no legal basis for the Union to be able to undertake any action. The ESM has been established by Member States in a field—economic policy—outside the competence of the Union. With due regard to the principle of the attribution of competence, competences not conferred upon the Union in the Treaties remain with Member States (Article 4(1) and 5(2) TEU). However, Article 136 TFEU sets out the constitutional framework within which euro area Member States may grant financial assistance. Member States nevertheless exercise their powers in a way that is compatible with EU law, which conditions the financial assistance with ‘strict conditionality’. As confirmed by the Court of Justice in the Pringle case,65 the ESM Treaty contains express provisions according to which the conditionality provided for in the ESM Treaty, which is not an instrument of economic policy coordination, ensure that the ESM’s activities are compatible with EU law and EU coordination measures.

2. The European Institutions On the one side, although Article 136 TFEU itself provides only for the establishment of a stability mechanism by Member States and is silent on any possible role for the Union’s institutions in the implementation of financial assistance, ‘strict conditionality’ justifies the involvement of the Commission and the ECB, as provided by the ESM Treaty. According to Article 13 ESM Treaty, the Commission, in the liaison with ECB, is empowered to negotiate the conditionality and to monitor compliance with the MoU of national measures. The ECJ rules that Member States are entitled to entrust tasks to the institutions, outside the framework of the Union, such as the coordination of a collective action undertaken by the Member States or the management of financial assistance. However, three conditions must be fulfilled.66 First, tasks must concern areas which do not fall under the exclusive competence of the Union. It is obvious that the activities of the ESM fall under economic policy, an area in which Member States still have competence. Secondly, the duties conferred on EU institutions may not imply any decision-making power of their own. According to the ESM Treaty stipulations, the Commission, in liaison with the ECB, acts on the behalf of the ESM and its activities are the sole responsibility of the international organization. Thirdly, the essential nature of the powers conferred on those institutions by EU law is not to be called into question. The objective of the ESM Treaty is to ensure the financial stability of the euro area as a whole. Therefore, the Commission promotes the general interest of the Union when it acts on behalf of the ESM, in due respect of Article 17(1) TEU. By having legal personality in internationally, the ECB may participate in international monetary institutions and establish relations with organizations (Article 6.2 and 23 ESCB Statute).

63

See Martucci, L’ordre économique et monétaire de l’Union européenne (n 29) 723–24. Pringle (n 42) paras 71–76. 65 Ibid, paras 111–12 and 142–43. 66 Ibid, para 158; Parliament v Council and Commission (n 44) para 16; Parliament v Council (n 44) para 26. 64

The ESM 311 It must be added that the Commission’s involvement is needed to ensure articulation between the financial assistance granted by the ESM and the budgetary discipline required by the TFEU. Regulation 472/2013, the so-called ‘two-pack’, lays down provisions to strengthen the economic and budgetary surveillance of Member States whose currency is the euro, where those Member States request or receive financial assistance. For this reason, it is necessary to ensure compatibility of the MoU with the enhanced surveillance exercised by the Commission and the Council pursuant to Article 121, 126, and 136 TFEU.67 According to Article 7 Regulation 472/2013, the European Commission shall ensure that the Memorandum of Understanding signed by the Commission on behalf of the ESM or of the EFSF is fully consistent with the macroeconomic adjustment programme approved by the Council.

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Although the Eurogroup is completely ignored by the ESM Treaty,68 in practice it plays a major role in the financial assistance. It is no accident, therefore, that the Board of Governors is chaired by the President of the Eurogroup. From a legal point of view, the decisions of the ESM are taken by the Board of Governors or by the Board of Directors. From a political point of view, since both boards are composed of representatives of Member States whose currency is the euro, the decision is taken by the Eurogroup or, for the most important decisions, by the Euro Summit. Thus, all decisions concerning the financial assistance to Greece had been ‘politically’ taken by the Eurogroup, before they had been formally and legally accepted and decided by the Board of Governors. Indeed, according to Article 137 TFEU and Protocol No 14, these Eurogroup meetings remain informal and, therefore, the Ministers of the Member States do not adopt any legal decision within this informal forum. As the ECJ held in the Mallis case, ‘the Eurogroup is a forum for discussion, at ministerial level, between representatives of the Member States whose currency is the euro, and not a decision-making body (so that) a statement by it cannot be regarded as a measure intended to produce legal effects with respect to third parties’.69 For example, regarding the third support programme, the Greek government made a formal request for stability support from the ESM on 8 July 2015. The European Commission and the ECB made a positive assessment of the request and provided an assessment of the sustainability of Greece’s public debt and financing needs, which was discussed by the Eurogroup and at the Euro summit on 12–13 July 2015. Member States of the euro area then agreed in principle that they were ready to start negotiations on an ESM assistance, provided a number of strict conditions would be met before negotiations formally began. The political agreement had been reached by the Eurogroup on 14 August 2015. The Memorandum of Understanding was

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67 European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1. 68 Article 136(1) TFEU: 1. In order to ensure the proper functioning of economic and monetary union, and in accordance with the relevant provisions of the Treaties, the Council shall, in accordance with the relevant procedure from among those referred to in Articles 121 and 126, with the exception of the procedure set out in Article 126(14), adopt measures specific to those Member States whose currency is the euro: (a) to strengthen the coordination and surveillance of their budgetary discipline; (b) to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance. 69 Joined Cases C-105/15 P to C-109/15 P Mallis and others v Commission and ECB [2016] ECLI:EU:C:2016:702, paras 47 and 49.

312 NON-EU LEGAL INSTRUMENTS thereafter concluded on 19 August 2015 between Greece and the European Commission, acting on behalf of the ESM. The compliance of Greek measures with conditionality laid down in the Memorandum of Understanding had been reviewed four times. For each review, Eurogroup adopted a purely political statement by which it welcomed the implementation of all the agreed prior actions for the review of the ESM programme, based on the compliance report submitted by the European institutions. 12.51

In the Mallis case, Cypriot applicants claimed that the General Court should the annulment of the Euro Group’s statement of 25 March 2013 related to the restructuring of the banking sector in Cyprus which took part of the financial assistance granted to Cyprus by the euro area.70 The Euro Group decided that the financial assistance requested should be provided by either the EFSF or the ESM in the context of a macroeconomic adjustment programme. This had to be defined in a memorandum of understanding negotiated between the Commission together with the ECB and the IMF, on the one hand, and the Cypriot authorities, on the other hand. The General Court dismissed the application as inadmissible, on the grounds of the fact that a statement made by the Group cannot be regarded as a measure intended to produce legal effect with respect to third parties, within the meaning of ECJ’s jurisprudence regarding Article 263 TFEU. Indeed, the Euro Group cannot be regarded as a decision-making body and, therefore, the provisions governing its operation do not allow it to adopt legally binding measures. The General Court added that Cyprus received financial assistance, as provided for in Article 12(1) of the ESM Treaty. For this reason, the decision to grant or refuse the assistance requested and to conclude the Memorandum fell not within the sphere of the Euro Group’s powers but within the competence of the Board of Governors of the ESM. Upholding the judgment of the General Court, the ECJ ruled that the fact that the Commission and the ECB participate in the meetings of the Eurogroup did not alter the nature of the latter’s statements and cannot result in the statement at issue being considered to be the expression of a decision-making power of those two EU institutions.

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Nonetheless, when acting under provisions of the ESM Treaty, the EU institutions shall respect EU law. As the ECJ ruled in the Ledra case,71 it is stated in Article 17(1) TEU that the Commission ‘shall promote the general interest of the Union’ and ‘shall oversee the application of Union law’.72 ‘Furthermore, the tasks allocated to the Commission by the ESM Treaty oblige it, as provided in Article 13(3) and (4) thereof, to ensure that the memoranda of understanding concluded by the ESM are consistent with EU law. In exercising its role of guardian of the Treaties as resulting from Article 17(1) TEU, the Commission should avoid signing a memorandum of understanding which it doubts is in conformity with EU law. Therefore, according to Articles 268 and 340 TFEU, an action for compensation based on the illegality of the memorandum of understanding could be brought against the Commission. The ECJ does have jurisdiction to find that the memorandum of understanding constitutes a ‘sufficiently serious breach’ of EU law for the Commission to incur liability. In the Ledra case, the ECJ examined whether the Commission contributed to a sufficiently serious breach of the appellants’ right to property, within the meaning of Article 17(1) of the Charter, in the context of the adoption of the Memorandum of Understanding

70

Ibid. See further Chapter 41. Joined Cases C‑8/15 P to C‑10/15 P Ledra Advertising v Commission and ECB [2016] ECLI:EU:C:2016:701. 72 Pringle (n 42) para 163. 71

The ESM 313 of 26 April 2013. According to the Judgment of the Grand Chamber, the Commission has not been considered to have contributed to a breach of the appellants’ right to property.73 In theory, the European institutions are bound to respect the fundamental rights of the Charter and general principles of EU law. Thus, in addition to the right to property, economic fundamental rights like freedom to choose an occupation and right to engage in work (Article 15) or freedom to conduct a business (Article 16) may be invoked.

3. The implementation of conditionality by Member States and the respect of fundamental rights ‘Strict conditionality’ as required by Article 136(3) TFEU means that Member States implement the Union law, within the meaning of Article 51(1) of the Charter, when they grant financial assistance. In this regard, the Pringle case must not be misinterpreted. It is true that the ECJ ruled that: the Member States are not implementing Union law, within the meaning of Article 51(1) of the Charter, when they establish a stability mechanism such as the ESM where, . . . the EU and FEU Treaties do not confer any specific competence on the Union to establish such a mechanism.74

However, there should be no confusion between the establishment of the ESM and the granting of the assistance. Regardless of whether the ESM Treaty falls under national competence in the field of economic policy, ‘strict conditionality’ is an obligation imposed by the Treaties on Member States. Therefore, it must be concluded that Member States implement Article 136(3) TFEU when ESM decide the conditionality provided for in the Memorandum of Understanding. In the Florescu case, the European Court of Justice ruled that the Memorandum of Understanding concluded between the EU, represented by the Commission, and Romania was based in law on Article 143 TFEU and, therefore, must be regarded as an act of an EU institution.75 In the case of the financial assistance within the euro area, the Memorandum of Understanding is concluded between the ESM, represented by the Commission, and the concerned Member States, in accordance with the ESM Treaty. Hence, the Memorandum of Understanding provided for in Article 13 ESM Treaty is governed by international law and the European Court of Justice does not have jurisdiction to assess its compatibility with Union law. However, in accordance with the cooperation principle laid down in Article 4(3) TEU, Member States should respect the EU law, especially Article 136(3) TFEU. By doing so, they implement the EU Treaty within the meaning of Article 51(1) of the Charter, so that the compliance of conditionality with general principles of EU law and fundamental rights could be controlled by the ECJ or national courts. Thus, in the judgment of the case regarding Portuguese judges, the applicants were challenging the fact that the Portuguese legislature has, under the law, temporarily reduced the remuneration of a number of office holders and employees performing duties in the public sector, especially the judges of the Tribunal de Contas (Court of Auditors).76 That the Portuguese State has discretion in implementing its budgetary policy guidelines, acknowledged by the

73

See Edouard Dubout, Les droits de l’homme dans l’Europe en crise (Pedone 2018) 25–47. Pringle (n 42) para 180. 75 Case C-258/14 Eugenia Florescu and others [2017] ECLI:EU:C:2017:448, paras 29–36. 76 Case C-64/16 Associação Sindical dos Juízes Portugueses v Tribunal de Contas [2018] ECLI:EU:C:2018:117. 74

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314 NON-EU LEGAL INSTRUMENTS EU institutions, does not relieve it, however, of its obligation to respect the general principles of EU law, which includes the principle of judicial independence, applicable both to Courts of the European Union and national courts. Therefore, Member States have to comply with Article 19(1) TEU when adopting measures to implement austerity restraint. 12.55

Furthermore, national authorities are accountable for the implementation of the conditionality in their constitutional order. Implementation measures may be challenged in an action brought before a national court by relying on infringement of constitutional rules. For instance, the Plenary Assembly of the Greek Council of State ruled that the austerity measures of the first Memorandum (2010) measures were compatible with the Constitution and the international conventions, especially first Protocol of the European Convention on Human Rights (ECHR).77 In 2014, the Greek Court declared that the labour law measures implementing the second MoU (2012) did not infringe the Greek Constitution, the TFEU, the ECHR, the European Social Charter and also the ILO Conventions Nos 87, 98 and 154.78 On several occasions, cases had been brought before the Portuguese Constitutional Court regarding the implementation of the Memorandum of Understanding concluded between the Portuguese government, the European Union and the IMF. In one case, the social measures laid down to implement the MoU had been declared to be unconstitutional, because they had been adopted in violation of the principle of equality that requires the just distribution of public costs.79

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Finally, national implementation of conditionality may be challenged before the ECHR. However, all the applications have been declared inadmissible, as in the case Da Conceição Mateus v Portugal and Santos Januário v Portugal regarding Portugal’s cuts to public sector pensions following the financial crisis which, according the European Court of Human Rights (ECtHR), were not disproportionate and therefore did not infringe Article 1 of Protocol No 1.80 The ECtHR declared also inadmissible applications filed against Greece relating to a number of austerity measures, including reductions in the remuneration, benefits, bonuses and retirement pensions of public officers. It considered that these measures were not such as to expose to subsistence difficulties incompatible with Article 1 of Protocol No 1.81 In contrast, the European Committee of Social Rights decided several collective complaints concerning austerity measures in Greece, in which it found violations of the European Social Charter.82 77 Greek Council of State, Decision Nos 668/2012, 1283/2012, 1284/2012, 1285/2012, 1286/2012, 1623/2012, and 1972/2012. 78 Greek Council of State, Decision No 2307/2014. See also Mariana Canotilho, Teresa Violante, and Rui Lanceiro, ‘Austerity measures under judicial scrutiny: The Portuguese constitutional case-law’ (2015) 11 European Constitutional Law Review 155–83. 79 Portuguese Constitutional Court, Acórdão Nº187/13, judgment of 5 April 2013; see Christina Fasone, ‘Constitutional Courts Facing the Euro Crisis. Italy, Portugal, and Spain in a Comparative Perspective’ (2014) EUI Working Paper MWP 2014/25; Roberto Cisotta and Daniele Gallo, ‘The Portuguese Constitutional Court Case Law on Austerity Measures: A Reappraisal’ (2014) LUISS Guido Carli Working Paper 4/2014, 11. 80 ECHR, Case of Da Conceição Mateus and Santos Januário v Portugal (dec) (Application No 62235/12 and 57725/12) ECLI:CE:ECHR:2013:1008DEC006223512 or in the case ECHR, Case of da Silva Carvalho Rico v Portugal (Application No 13341/14) ECLI:CE:ECHR:2015:0901DEC001334114. 81 ECHR, Case of Koufaki and Adedy v Greece (dec) (Application Nos 57665/12 and 57657/12); about the hair cut, see, ECHR, Case of Mamatas and Others v Greece (Application Nos 63066/14, 64297/14, and 66106/14). 82 General Federation of Employees of the National Electric Power Corporation (GENOP-DEI) and Confederation of Greek Civil Servants’ Trade Unions (ADEDY) v Greece (No 66/2011); Federation of employed pensioners of Greece (IKA-ETAM) v Greece (No 76/2012); Panhellenic Federation of public service pensioners v Greece (No 77/2012); Pensioner’s Union of the Athens-Piraeus Electric Railways (I.S.A.P.) v Greece (No 78/2012); Panhellenic Federation of pensioners of the public electricity corporation (POS-DEI) v Greece (No 79/2012); and Pensioner’s Union of the

The ESM 315

4. The way to integration The pressure of events at the crisis time led to an intergovernmental solution to establish the ESM. As anticipated by the European Commission in 2012, the ESM could be integrated within the framework of the EU Treaties.83 In fact, intergovernmental solutions should therefore only be considered on an exceptional and transitional basis where an EU solution would necessitate a Treaty change. Although the ESM Treaty contains no provision concerning the integration into EU law, the European Commission has adopted a proposal for a Council regulation on the establishment of the EMF.84 Already in 2015, the Five Presidents’ Report had proposed the integration of the ESM in the EU law framework by 2025. The Commission’s proposal is one of the initiatives announced in the Commission’s Communication on ‘Further steps towards completing the economic and monetary union’.85 In its proposal, the Commission considers transforming the European Stability Mechanism to create an EMF anchored within the EU’s legal framework. The Regulation provides for the establishment of the EMF within the EU framework and the succession and replacement of the ESM. In order to allow the Fund succeed to the ESM, and replace it, including in its legal position, with all its rights and obligations, the Regulation will be supplemented by an intergovernmental agreement for euro area Member States to agree among themselves on the transfer of funds from the ESM to the EMF. Three reasons are given by the European Commission to justify the establishment of the EMF: unity, efficiency and democratic accountability.86

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Firstly, the unity of the EU legal system requires the integration of financial assistance provided within the euro area. The intergovernmental way (ESM Treaty) was chosen to deal with the emergency of crisis. However, the Monetary Union is conceived by the EU Treaties for and with those Member States that are expected to join the euro in the future. Furthermore, it is not compatible with the unity requirement to maintain a permanent multi-speed Europe. For the Commission, ‘The EU’s political and economic integration, of which the single market is the core, means that the futures of both euro and non-euro Member States are already intertwined, and a strong and stable euro area is key to its members as well as to the EU as a whole’87. Otherwise, the EMF would be strictly linked to the Banking Union, as the euro area Member States through the EMF can provide a backstop for the Single Resolution Board. This is necessary to allow the Single Resolution Board to use such backstop if necessary for undertaking successfully a resolution action in the Banking Union.88

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Secondly, efficiency does mean that a stronger EMU requires more efficient use of available resources. The ESM is the result of a patchwork of decisions taken to face a major crisis. The

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Agricultural Bank of Greece (ATE) v Greece (No 80/2012). See also Steering Committee for Human Rights (CDDH), ‘The impact of the economic crisis and austerity measures on human rights in Europe’ (11 December 2015) 46. 83 Commission, ‘Blueprint for a Deep and Genuine Economic and Monetary Union’ COM (2012) 777 final. 84 Commission, ‘Proposal for a Council regulation on the establishment of the European Monetary Fund’ COM (2017) 827 final. 85 Commission, ‘Completing Europe’s economic and monetary union, The Commission’s Contribution to the Leaders’ Agenda’ (24 January 2018). 86 Commission, ‘Proposal on the establishment of the European Monetary Fund’ COM (2017) 827 final, 2. 87 Ibid. 88 See also ECB Opinion of 11 April 2018 on a proposal for a regulation on the establishment of the European Monetary Fund, CON/2018/20 [2018] OJ C220/2, para 2.

316 NON-EU LEGAL INSTRUMENTS intergovernmental agreement is a source of complexity and led to an excessive sophistication of rules. It is difficult to articulate intergovernmental action of the Member States with the powers conferred on the Union institutions in the field of economic policy. The existence of a permanent intergovernmental mechanism, such as the ESM, leads to a fragmentation of the EU system that threatens the rule of law and the democracy. The ESM is not being particularly effective, because the intergovernmental decision-making process requires national procedures which slow down the process of financial assistance. Furthermore, all modifications to the ESM Treaty, even minor, must be accepted by all contracting parties and approved by national Parliaments. The envisaged integration into the EU legal framework is expected to lead to significant simplification of the existing mechanism. 12.60

Thirdly, it became obvious that the ESM suffers from a democratic deficit.89 As the Commissioner Moscovici himself admitted, the ‘Eurogroup’s decisions ‘behind closed doors’ on the Greek bailout was a scandal in terms of democratic processes’90. In 2017, the NGO Transparency International EU issued a report on ESM transparency and accountability in which it proposed a number of concrete recommendations to make the ESM accountable.91 In 2019, the same NGO issued a new report on the informal nature of the Eurogroup and the limited transparency of its decision-making.92 As international organization, the ESM is not democratically accountable, while the Eurogroup does not adopt any legal decision. When it acts on behalf of the ESM, the European Commission is not accountable to the European Parliament because the political decisions of ESM are laid down by the Member States. However, on 13 March 2014, MEP’s adopted a resolution on the enquiry on the role and operations of the Troika (ECB, Commission, and IMF) with regard to the euro area programme countries which noted that the financial assistance within the euro area had ‘been perceived as being unclear and lacking in transparency and democratic oversight’.93 Moreover, the European Parliament pointed out ‘that procedure whereby the Eurogroup confers a mandate on the Commission is not specified in EU law, as the Eurogroup is not an official institution of the European Union’ and stressed ‘that despite the Commission acting on behalf of the Member States, the ultimate political responsibility for the design and approval of the macroeconomic adjustment programmes lies with EU finance ministers and their governments’ and, therefore, deplored ‘the absence of EU-level democratic legitimacy and accountability of the Eurogroup when it assumes EU-level executive powers’.94 With a view to respect the Meroni case-law of the Court of Justice,95 the proposal of regulation provides for the introduction of an approval process by the Council for decisions taken by the EFM which exhibit political discretion. Furthermore, the EFM 89 See Antonia Baraggia, ‘Conditionality measures within the euro area crisis: a challenge to the democratic principle?’ (2015) 4 Cambridge Journal of International and Comparative Law 268–88. 90 Sarantis Michalopoulos, ‘Moscovici: Greek bailout was a “scandal” for democratic procedures’ (EURACTIV. com, 4 September 2017) accessed 17 February  2020. 91 Cornel Ban and Leonard Seabrooke, ‘From crisis to stability. How to make the European stability mechanism transparent and accountable?’ (Transparency International EU, March 2017). 92 Benjamin Braun and Marina Hübner, ‘Vanishing act: The Eurogroup’s accountability’ (Transparency International EU, February 2019). 93 European Parliament on the enquiry on the role and operations of the Troika (ECB, Commission and IMF) with regard to the euro area programme countries (2013/2277(INI)) para 48. 94 Ibid, para 50. 95 Case C-9/56 Meroni v Haute autorité [1958] ECR I-133.

The ESM 317 would be accountable to the European Parliament and to the Council for the execution of its tasks. In this same context, it is laid down that national Parliaments may address their reasoned observations on the annual report adopted by the EMF. The Commission has based its proposal for the establishment of an EMF on Article 352 TFEU. In its proposal, the Commission points out that ‘several significant decisions paving the way towards the establishment of the Economic and Monetary Union have been based on the equivalent of Article 352’96 (ie the European Monetary Co-operation Fund, the European Currency Unit and the first balance of payment mechanisms). The choice of Article 352 TFEU as the legal base can be discussed, bearing in mind the Pringle ruling of the ECJ. It is obvious that Article 136(3) TFEU does not appear to be an adequate legal basis, since the revision of the Treaty by Decision 2011/199 has not increased the competences conferred on the Union.97 Therefore, Member States have the power to conclude between themselves an agreement for the establishment of a mechanism such as the ESM Treaty provided that the commitments undertaken by the Member States who are parties to such an agreement are consistent with European Union law98. According to the Commission’s proposal: [A]‌rticle 352 allows for the integration of the European Stability Mechanism into the Union framework, as this action is necessary for the financial stability of the euro area and the Treaties have not provided any other legal basis for the EU to reach this precise objective.99

As the ECJ has ruled in the Pringle case, the ESM contributes at Union level to the attainment of a higher objective, namely maintaining the financial stability of the monetary union.100 The necessity of having a body like the ESM to safeguard the stability of the euro area is confirmed by Article 136(3) TFEU. Moreover, the second recital of the ESM Treaty refers to the current ESM as ‘a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole’. Lastly, the ECJ held: As to whether the Union could establish a stability mechanism comparable to that envisaged by Decision 2011/199 on the basis of Article 352 TFEU, suffice it to say that the Union has not used its powers under that article and that, in any event, that provision does not impose on the Union any obligation to act.101 However, since the French-German Declaration of Meseberg,102 the legislative procedure had been suspended, so that the ESM will still remain an intergovernmental Mechanism. On December 2019, Member States of the Eurozone reached an agreement to reform the ESM Treaty, which is subject to the conclusion of national procedures.103

96 COM (2017) 827 final, 5. 97 Pringle (n 42) para 75. 98 Pringle (n 42) para 109. 99 COM (2017) 827 final, 5. 100 Pringle (n 42) para 135. 101 Pringle (n 42) para 67. 102 ‘Meseberg Declaration: Renewing Europe’s promises of security and prosperity’ (19 June 2018). 103 Draft revised text of the treaty establishing the European Stability Mechanism as agreed by the Eurogroup on 14 June 2019. See, Eurogroup, ‘Remarks by Mário Centeno following the Eurogroup meeting of 4 December 2019’ (Press Release 5 December 2019).

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318 NON-EU LEGAL INSTRUMENTS

III. Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union 12.62

On 16 February 2012, twenty-five Member States signed the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union (TSCG). Without doubt, the TSCG constitutes a non-identified legal object: an international treaty agreed by Member States in order to change national law.104 This legal hybridity has been guided by the purpose to strengthen the fiscal discipline within the euro area.

A. The legal hybridity 12.63

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1. Nationalization of budgetary rules Although the TSCG is not integrated in the EU law framework, it has been concluded to strengthen the economic pillar of the EMU laid down by the TFEU. However, against all appearances, the TSCG does not reflect the implementation of a purely intergovernmental method. A closer look reveals the dynamic of the integration process, mixing an international treaty, EU acts and national law. By this Treaty, the contracting parties have agreed, as Member States, to adopt a set of rules in order to promote the budgetary discipline required by the TFEU. Thus, two new ‘methods’ of integration through international law have been used by the contracting parties in the so-called ‘Fiscal compact’ provided by Title III TSCG.105 Through Article 3 TSCG, Member States have undertaken to apply budgetary rules. Pursuant to Article 3(2) TSCG, these rules: shall take effect in the national law of the Contracting Parties at the latest one year after the entry into force of this Treaty through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes.

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The Fiscal Compact has triggered a ‘nationalization’ of European budgetary rules, ie budgetary rules necessary to the financial stability within the Eurozone.106 Until then, some Member States adopted, on a voluntary basis, so-called ‘national stability pacts’ the legal force of which has differed from Member State to Member State. Thus, several Members States already had such rules embedded in the constitution (Austria, Germany, and Spain).107 Since the entry in force of the TSCG, Member States have inserted provisions requiring the respect of the budgetary rule provided for in Article 3(2) TSCG. These provisions must be binding and permanent and must be such that they effectively limit the 104 Paul Craig, ‘The Stability, Co-ordination and Governance Treaty: Principle, Politics and Pragmatism’ (2012) 37 European Law Review 231ff. 105 See Roberto Baratta, ‘Legal Issues of the “Fiscal Compact”. Searching for a Mature Democratic Governance of the Euro’ in Bruno de Witte, Adrienne Héritier, and Alexander H Trechsel (eds), The Euro Crisis and the State of European Democracy (EUI 2013) 31–63 (hereafter Baratta, ‘Legal Issues of the “Fiscal Compact” ’). 106 Dimopoulos, ‘The Use of International Law as a Tool for Enhancing Governance in the Eurozone’ (n 6) 41–63. 107 See Giacomo Delledonne, ‘A Legalization of Financial Constitutions in the EU? Reflections on the German, Spanish, Italian and French Experiences’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), The Constitutionalization of European Budgetary Constraints (Hart Publishing 2016) 181–204.

THE TSCG 319 freedom of the budgetary authorities when adopting annual budgets. To that end, all the contracting parties completed the domestic ratification process, adopting national provisions. Twelve Member States adopted the budgetary rule at the level of their national Constitution or a special legal instrument having a higher status than budgetary law. Of those countries, some provided a general rule inserted in their Constitution, completed by associated legislation giving more details on the implementation. Others made use of legal mechanisms that are superior to ordinary law. In the other states, laws had been passed by national Parliaments in accordance with their respective constitutional requirements. However, Ireland decided to submit the treaty ratification to referendum which took place on 31 May 2012. Cyprus ratified the TSCG via an act of the Council of Ministers. The Treaty entered into force on 1 January 2013, after its ratification by at least twelve euro area Member States, in accordance Article 14(2) and (3) TSCG.108 Table 12.2 General overview: Calendar of ratifications Austria

Approved by Nationalrat 04/07/2012 Approved by Bundesrat 06/07/2012 Ratification completed 30/07/2012

Belgium

Adopted by the Senate 23/05/2013 Adopted by the Chamber 25/06/2013 Royal assent 26/06/2013

Bulgaria

Adopted by the Parliament 28/11/2013 Presidential assent 03/12/2013

Cyprus

Approved 20/04/2012 (act of the Council of Ministers) Ratification completed 26/07/2012

Denmark

Approved by Folketinget 31/05/2012 Ratification completed 19/07/2012 Added interpretative declaration & observation

Estonia

Approved by Riigikogu on 17/10/2012 Presidential assent granted 5/11/2012 Ratification completed 05/12/2012

Finland

Approved by Eduskunta 18/12/2012 Ratification completed 21/12/2012

France

Approved by the National Assembly 9/10/2012 Approved by the Senate 11/10/ 2012 Presidential Assent granted 22/10/2012 Ratification completed 26/11/2012

Germany

Adopted by Bundestag and Bundesrat 30/06/2012 Presidential assent 4/09/2012 Ratification completed 27/09/2012

Greece

Approved by the Parliament 28/03/2012 Ratification completed 10/05/2012

Hungary

Submitted to the Parliament March 2013 Approved on 25/03/2013 Ratification completed 15/05/2013

Ireland

Ratified by referendum on 31/05/2012 Constitutional amendment 28/06/2012 Ratification completed 14/12/2012

Italy

Approved by the Senate 12/07/2012 Approved by the Chamber 19/07/2012 Presidential Assent 23/07/2012 Ratification completed 14/09/2012

Latvia

Approved by Saemas 31/05/2012 Ratification completed 22/06/2012

Lithuania

Approved by Seimas 28/06/2012 Ratification completed 06/09/2012 (continued)

108 For Member States which have not adopted the euro, see Marek Antoš, ‘Fiscal Stability Rules in Central European Constitutions’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), The Constitutionalization of European Budgetary Constraints (Hart Publishing 2016) 205–22.

320 NON-EU LEGAL INSTRUMENTS Table 12.2 Continued Luxembourg

Submitted to the Chamber 10/07/2012 Adopted by Chamber, 1st vote 27/02/ 2013 Dispensed of second vote 15/03/2013 Ratification completed 08/05/2013

Malta

Approved by the Parliament 11/06/2013 Ratification completed 28/06/2013

Netherlands

Approved by Tweedekamer 26/03/2013 Approved by Eerste Kamer 25/06/2013 Royal Assent 26/06/2013 Ratification completed 01/11/2013

Poland

Approved by the Government 20/11/2012 Adopted by the Sejm 19/02/2013 Adopted by the Senate 26/02/2013 Ratification completed 08/08/2013

Portugal

Approved by Assembleia 13/04/2012 Ratification completed 13/04/2012

Romania

Adopted by the Chamber 08/05/2012 Adopted by the Senate 21/05/2012 Presidential assent granted 20/06/2012 Ratification completed 06/11/2012 + declaration

Slovakia

Submitted to Narodna Rada 16/11/2012 Approved by Narodna Rada 18/12/2012 Ratification completed 17/01/2013

Slovenia

Ratification completed 30/05/2012

Spain

Approved by the Congreso 21/06/2012 Approved by the Senado 18/07/2012 Royal Assent 25/07/2012 Ratification completed 27/09/2012 Submitted 22/11/2012 Adopted by Riksdag on 07/03/2013 Ratification completed 30/07/2012

Sweden

Source: European Parliament1 1European Parliament, ‘Article 136 TFEU, ESM, Fiscal Stability Treaty, Ratification requirements and present situation in the Member States’ (12 December 2013).

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In order to ensure the compliance with the budgetary rule, a special procedure is provided involving European institutions. Under the provisions of Article 8 TSCG, the European Commission presented a report assessing the compliance of the national provisions adopted by each Member State in relation to Article 3(2) TSCG. According to the Commission, all contracting parties have given effect to the Fiscal Compact through national provisions that were adopted by means of one or more of the forms of legal norm available in their respective domestic legal orders. Hence, no action has been brought before the European Court of Justice. Indeed, according to Article 8 TSCG, ‘where a Contracting Party considers, independently of the Commission’s report, that another Contracting Party has failed to comply with Article 3(2), it may also bring the matter to the Court of Justice’.

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On the basis of Article 3 TSCG, contracting parties shall introduce in their national legal orders a balanced budget rule which must be accompanied by a correction mechanism to be triggered automatically in the event of significant observed deviations, as well as by the presence of national independent institutions monitoring compliance. On 21 June 2012, the Ministers of Finance of the Contracting Parties endorsed common principles, proposed by the European Commission, that ought to be respected when carrying out correction mechanisms.109 109 Commission, ‘Common principles on national fiscal correction mechanisms (Communication)’ COM (2012) 342 final.

THE TSCG 321

2. Integration intro EU framework The TSCG is closely linked to the EU legal order. It has been agreed by Contracting Parties, acting as EU Member States. According to Article 2 of the TSCG, Contracting Parties shall apply the TSCG in conformity with EU Treaties. Furthermore, the provisions of the TSCG apply insofar as they are compatible with Union law and they do not encroach upon the competences of the Union to act in the area of the economic union. Even if Member States are competent to conclude the TSCG, they are bound by the principle of loyal cooperation under Article 4(3) TEU. For this reason, the ratification and the implementation of the TSCG shall be in accordance with EU law. In fact, the TSCG does not constitute a threat to EU legality. On the contrary, despite being an intergovernmental agreement outside the EU legal framework, the TSCG is conceived as an extension of the existing EU regulations. In fact, some of its provisions use the same institutional framework and governance instruments already created within the EU in the three areas. Firstly, the purpose of the Fiscal Compact provided by Title III (Articles 3–8) is to enhance budget discipline enforced by the two pillars of the Stability and Growth Pact (preventive and corrective arms).110 Secondly, the provisions of the Title IV are bound to the economic coordination provided by Article 121 TFEU, since they are intended to promote the proper functioning of the Economic and Monetary Union and economic growth through increased convergence and competitiveness. Thirdly, in addition to Articles 136 and 137 TFEU, Title IV TSCG provides for Euro Summit meetings (Article 12) and for parliamentary cooperation within the euro area.

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The TSCG can be considered a new form of differentiation between EU Member States, but outside the EU (so-called ‘inter-se agreements’).111 When twenty-five Member States have signed this treaty, the Fiscal Compact binds solely the nineteen euro area Member States as well as Bulgaria, Denmark, and Romania. Pursuant to Article 14 TSCG, Hungary, Poland, and Sweden—which are Contracting Parties to the TSCG—have declared that they are not bound by the Fiscal Compact.112 Although an intergovernmental agreement was preferred to an enhanced cooperation, there is a close connection between the TSCG and the mechanism of reinforced cooperation. According to Article 10 TSCG, the Contracting Parties have declared to stand ready to make active use of enhanced cooperation as provided for in Article TEU and in Articles 326–334 TFEU.

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Furthermore, such a differentiation seems all the more original that the TSCG has been conceived, in fact, as a temporary solution. The Contracting Parties are legally committed to incorporate the substance of that Treaty into Union law five years after its entry into force. Thus, according to Article 16 TSCG:

12.70

within five years at most following the entry into force of this Treaty, on the basis of an assessment of the experience with its implementation, the necessary steps shall be taken, in compliance with the provisions of the [EU Treaties], with the aim of incorporating the substance of this Treaty into the legal framework of the European Union. 110 See further Chapter 28. 111 See Lucia Serena Rossi, ‘ “Fiscal Compact” e Trattato sul Meccanismo di Stabilità: aspetti istituzionali e conseguenza dell’ integrazione differenziata nell’ UE’ (2012) 17 Il Diritto dell’Unione Europea 293–307. See further Chapter 28. 112 Title III TSCG.

322 NON-EU LEGAL INSTRUMENTS 12.71

In December 2017, the European Commission set out a Roadmap for deepening Europe’s Economic and Monetary Union, containing a proposal to integrate the substance of the TSCG into the Union legal framework.113 Based on Article 126(14) TFEU, the future directive will incorporate into Union law the main elements of the Treaty in order to support sound fiscal frameworks at national level and is fully in line with existing rules defined in primary and secondary legislation. This directive will apply to the Member States whose currency is the euro and any other Member State that will notify its intention to be bound by this secondary law act. According to the Commission’s proposal, only the Fiscal compact will be integrated into EU law as a so-called ‘fiscal responsibility and medium-term budgetary orientation’.114 The other provisions of the TSCG will continue to produce legal effects.

B. Strengthen the fiscal discipline 12.72

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1. The fiscal rules Title III TSCG provides for two fiscal rules for the Fiscal Compact.115 On the one hand, Article 3(1) sets out the balanced budget which is respected ‘if the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised Stability and Growth Pact’. On the one hand, it fixes lower limit of -0.5 per cent of GDP for the medium-term objective (MTO). On the other hand, according to Article 4, when the ratio of debt exceeds 60 per cent of GDP, Member States shall reduce it at an average rate of one-twentieth per year. When the Member State has not reached the structural balance as defined by national provisions, rapid convergence towards this MTOs has to be ensured. The government must adopt the convergence path to reach the limit of -0.5 per cent of GDP, which may extend over several years. For instance, the French Parliament passed the so-called ‘Law on Programming of Public Finances for the Period 2018–2022’116. According to Article 2 of this law, France has a deficit declining from 2.2 per cent in 2017, to 2.1 per cent in 2018 and to 1.9 per cent in 2019. In 2022, France should seek a situation of budgetary balance. In the case where the government debt ratio is significantly below 60 per cent and long-term sustainability risks of the public finances are low, the lower limit is -1.0 per cent of GDP. Furthermore, Member States may temporarily deviate from their medium-term objective or the adjustment path towards it only in exceptional circumstances, provided that the temporary deviation does not put at risk fiscal sustainability in the medium-term. According to Article 3(3) TSCG, exceptional circumstances refer to the case of an unusual event outside the control of the state concerned ‘which has a major impact on the financial position of the general government or to periods of severe economic downturn’. Member States shall trigger automatically 113 Commission, ‘Proposal for a Council directive laying down provisions for strengthening fiscal responsibility and the medium-term budgetary orientation in the Member States’ COM (2017) 824 final. 114 Ibid. Article 1 of the directive laying down provisions for strengthening fiscal responsibility and the medium- term budgetary orientation in the Member States. 115 See Federico Fabbrini, ‘The Fiscal Compact, the “Golden Rule” and the Paradox of European Federalism’ (2013) 36 Boston College International and Comparative Law Review 1–38. 116 Loi n°2018-32 du 22 Janvier 2018 de programmation des finances publiques pour les années 2018 à 2022.

THE TSCG 323 a correction mechanism to face significant observed deviations from the MTO or the adjustment path towards it. The SCG Treaty pays more attention to the debt criteria. While the 3 per cent reference has always been applied by the Commission and the Council, Member States have had debt that exceeds 60 per cent without having been subject to the Article 126 TFEU procedure. Due to the ‘six-pack’ reform, the amended Stability and Growth Pact makes the debt reference operational. In principle, if the 60 per cent reference is not respected, the Member State concerned will be put in the excessive deficit procedure, even if its deficit is below 3 per cent. However, the Council makes a decision after taking into account all relevant factors and the impact of the economic cycle. The ratio of the government debt to GDP shall be considered sufficiently diminishing and approaching the reference value at a satisfactory pace ‘if the differential with respect to the reference value has decreased over the previous three years at an average rate of one twentieth per year as a benchmark, based on changes over the last three years for which the data is available’.117 The highest ratios of government debt to GDP at the end of the third quarter of 2018 were recorded in Greece (182.2 per cent), Italy (133.0 per cent), Portugal (125.0 per cent), Cyprus (110.9 per cent), and Belgium (105.4 per cent). However, none of these states is in excessive deficit under Article 126(6) TFEU. Except Belgium, all these states had been affected by the sovereign debt crisis. For this reason, Article 4 TSCG provide that when the ratio of debt exceeds the 60 per cent reference, the Member States shall reduce it at an average rate of one twentieth per year as a benchmark.

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From an institutional point of view, one significant progress is the establishment of independent institutions responsible at a national level for monitoring the observance of the budgetary rules.118 With due regard to the principle of institutional autonomy, each Member State has designated their monitoring institutions and assigned to them specific TSCG-related mandates. The European Commission has defined the common principles required from the Member States to safeguard their independence in terms of statutory regime, freedom from interference, capacity to communicate publicly, nomination based on experience and competence, and adequacy of resources and of access to information.119 In its directive proposal, the Commission has confirmed the key role played by independent bodies for monitoring compliance. These bodies shall provide public assessments to ensure the compliance with the MTO, the government expenditure path and the occurrence or cessation of any exceptional circumstances. Furthermore, the independent bodies shall call upon budgetary authorities to activate the correction mechanism and monitor its implementation. However, Article 3 of the proposal puts in place two new elements. Firstly, the national budgetary authorities shall comply with the recommendations of the independent bodies or publicly justify the decision not to comply with those recommendations. Secondly, whereas the common principles governing the independence of these bodies are

12.75

117 Article 2 Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6, amended by Regulation (EU) 1177/2011 of 8 November 2011 amending Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2011] OJ L306/33. 118 See Baratta, ‘Legal Issues of the “Fiscal Compact” ’ (n 105) 31–63. 119 Commission, ‘Common principles on national fiscal correction mechanisms (Communication)’ COM (2012) 342 final; see also Commission, ‘Report from the Commission presented under Article 8 of the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union’ C (2017) 1201 final, para 3.4.

324 NON-EU LEGAL INSTRUMENTS set by ‘soft law’, they would be enshrined in national law, since Member States shall ensure that the independent bodies: (a) are established by a statutory regime grounded in national laws, regulations or binding administrative provisions; (b) do not take instructions from the budgetary authorities of the Member State concerned or from any other public or private body; (c) have the capacity to communicate publicly in a timely manner; (d) are made up of members who are nominated and appointed on the basis of their experience and competence in public finances, macroeconomics and budgetary management, and by means of transparent procedures; (e) have adequate and stable own resources to carry out their mandate in an effective manner; (f) have extensive and timely access to information to fulfil their given tasks.120

12.76

2. The EU decision-making process The TSCG does not replace the governance mechanisms enshrined in EU law. Indeed, the European institutions implement the Stability Growth Path as provided by Council Regulations (EC) 1466/97 and 1467/97, amended and completed by the ‘six-pack’ and the ‘two-pack’ legislation.

12.77

According to Article 5 TSCG, the Member States that are subject to an excessive deficit procedure shall put in place a budgetary and economic partnership programme. The aim of this programme is to detail the structural reforms which must be put in place and implemented to ensure an effective and durable correction of their excessive deficits. However, the content and format of these programmes are defined in Article 9 Regulation (EU) 473/ 2013 of the European Parliament and of the Council of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area.

12.78

On the basis of Article 7 TSCG, the Member States have undertaken to support the proposals or recommendations submitted by the Commission where it considers that a Member State of the euro area is in breach of the deficit criterion in the framework of an excessive deficit procedure. Thus, this obligation completes the ‘reverse qualified majority voting’ that has been provided by Regulation (EU) 1173/2011 of the European Parliament and of the Council of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area. However, this obligation shall not apply where it is established that a qualified majority of Member States are opposed to the decision proposed or recommended.

12.79

Furthermore, Member States shall report ex ante on their public debt issuance plans to the European Commission and to the Council (Article 6 TSCG). This obligation has been copied by Article 8 Regulation 473/2013, although Member States report to the Commission and the Eurogroup. The purpose of this provision is to enhance the coordination of the national debt issuance. It is a first step in a long-term process that might lead to a common debt issuance within the euro area. However, as long as Member States have not reached agreement on the mutualization of sovereign debt, eurobonds will remain a utopia.121 120 Article 3(7) of the Directive laying down provisions for strengthening fiscal responsibility and the medium- term budgetary orientation in the Member States: see above (n 102). 121 Eurobonds: concepts and implications, Compilation of Notes for the Monetary Dialogue of March 2011. See also Frédéric Allemand, ‘La faisabilité juridique des projets d’euro-obligations’ (2012) 48 Revue trimestrielle de droit européen 553–94. Paul De Grauwe and Wim Moesen, ‘Gains for All: A Proposal for a Common Euro Bond’

Conclusion 325

IV. Conclusion The ESM and TSCG are not legal monsters. From the beginning of the European construction, pragmatic solutions have been drawn up towards deeper integration. Among these solutions are the international law treaties, the provisions of which are set out in EU law. The Schengen Agreement was a prominent example of this phenomenon. It was signed originally by only five Member States to promote the free movement of persons. In other words, Member States concluded an international treaty to contribute to the achievement of the common market. Finally, the Amsterdam Treaty integrated the so-called ‘Schengen acquis’ in the EU legal order. EMU Inter-se Agreements have been a laboratory for strengthening integration in the euro area. Although it is intergovernmental, the TSCG foresees incorporating its provisions into Union law. The Commission is already working with the European Parliament and the Council to integrate some of the TSCG elements into EU law applicable to euro area Member States through a proposal of directive. It has seized the opportunity to propose a regulation in order to turn the ESM into the European Monetary Fund. It will confirm that the euro area constitutes a subsystem of the EU legal order.

(2009) 44 Intereconomics 132–41; Jacques Delpla and Jakob von Weitsäcker, ‘The Blue Bond Proposal’ (2010) Bruegel Policy Brief 2010/03. Commission, ‘Green Paper on the Feasibility of Introducing Stability Bonds’ COM (2011) 818 final; and Niels Gilbert, Jeroen Hessel, and Silvie Verkaart, ‘Towards a Stable Monetary Union: What Role for Eurobonds?’ (2013) DNB Working Paper No 379.

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13

THE EMU AND THE EUROPEAN SOCIAL DIMENSION Francesco Costamagna

I. Introduction II. The European Social Dimension from Rome to Lisbon III. The Relationship Between the EMU and the European Social Dimension: The Early Days IV. Strengthening Economic Policy Coordination (and Budgetary Discipline) While Weakening the European Social Dimension in Response to the Crisis

13.1 13.3

13.14

13.20 A. Making EU intervention more intrusive by combining hard and soft processes 13.20 B. Subordinating social objectives to EMU-related ones 13.27

V. Financial Assistance, Strict Conditionality, and the European Social Dimension A. Key features of conditionality policy in the context of financial assistance packages B. The impact of conditionality on the European Social Dimension

13.32 13.32 13.41

VI. EU Structural and Investment Funds as Instruments Contributing to the Strengthening of the EMU 13.47 VII. Recent Attempts at Strengthening the European Social Dimension: Some Conclusive Remarks 13.51

I. Introduction 13.1

The Economic Monetary Union (EMU) has been famously portrayed as a ‘metaphor for the European Union’, involving high stakes for the integration process as a whole.1 Since its origins, the creation of the EMU was an eminently political project, with a direct bearing on the prospects of the European Union (EU) as a polity, its social model, and its constitutional identity. Yet, the main political aspects of the project were mostly discarded in the process that led to the establishment of the EMU’s institutional structure and its substantive rules. The creation of the common currency was not accompanied by the establishment of supranational institutions with a strong political mandate to accommodate conflicting interests, while the exercise of political autonomy at national level has been increasingly seen as a potential danger for the stability of the whole edifice. The crisis and the ensuing reform of the European economic governance consolidated the technocratic character of the EMU architecture and hardened its grip on national political processes. 1 Francis Snyder, ‘EMU—Metaphor for European Union? Institutions, Rules and Types of Regulation’ in Renaud Dehousse (ed), Europe after Maastricht: An Ever Closer Union? (Law Books in Europe 1994) 63–99. Francesco Costamagna, 13 The EMU and the European Social Dimension In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0016

European Social Dimension from Rome to Lisbon 327 This evolution has profound implications in the social domain, where EU institutions stepped well inside national competences pushing for the adoption of structural reforms allegedly aimed at fortifying the common currency. The chapter analyses the impact of this evolution on the European social dimension and its relationship with the EMU. The analysis starts from elaborating a working definition of the notion of ‘European social dimension’, identifying its main constitutive elements, and then tracking its evolution within the EU legal framework. Subsequently, the chapter looks at the early debate about the potential impact that the creation of the EMU could have had on the European social dimension. The analysis then turns to the materialization of early concerns with the post-crisis reform of the European economic governance, by focusing on the structure and the functioning of the European Semester and the recourse to conditionality in the context of financial assistance programmes. In particular, this part of the chapter considers the impact of these measures on the content and function of the European social dimension. The chapter also deals with the implications of the above-described evolution on the EU institutions’ exercise of redistributive functions, by examining the relationship between Structural and Investment Funds and the pursuit of EMU-related objectives. Lastly, the chapter concludes by critically engaging with recent attempts aimed at strengthening the social dimension within the EMU.

13.2

II. The European Social Dimension from Rome to Lisbon The European social dimension is an elusive concept in both the academic literature and the political debates on the integration process. This chapter considers it as a composite construct made of two interrelated, and sometimes conflicting, clusters of elements.2

13.3

The first component of the European social dimension is the set of rules and principles that govern the relationship between, on the one hand, the economic integration process and, on the other, national welfare systems and labour market policies. These rules and principles serve an organizational function, allocating powers and responsibilities between supranational and national authorities in the social domain, and an ideational one, articulating economic and social objectives within the EU legal framework.

13.4

The second constitutive element of the European social dimension encompasses EU policies pursuing a social purpose through the adoption of regulatory or redistributive measures. First of all, this is the case of social policy measures adopted by EU institutions under Article 153 of the Treaty on the Functioning of the European Union (TFEU) to achieve the rich set of objectives contained in Article 151 TFEU, as well as pieces of legislation that, despite being adopted on the basis of internal market provisions,3 have a strong social content.

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2 See generally, Maurizio Ferrera, ‘Social Europe and its Components in the Midst of the Crisis’ (2014) 37 West European Politics 827–28. In response to the vagueness of the concept, some scholars proposed to go beyond it, by embracing the more clear-cut notion of ‘European Social Union’. The proposal is intellectually stimulating, but it is still unclear whether the use of a different notion will make any difference from a more practical perspective. See Catherine Barnard, Geert de Baere, and Frank Vandenbroucke, A European Social Union After the Crisis (CUP 2018). 3 One of the best-known examples in this regard is the European Parliament and Council Directive 96/71/EC of 21 January 1997 concerning the posting of workers in the framework of the provision of services [1996] OJ L18/ 1 (hereafter Posted Workers Directive), which has been adopted on the basis of then Article 57 and 66 EC (now Articles 53 and 62 TFEU). Recourse to internal market legal bases to adopt social policy measures reflects the idea

328 THE EMU AND THE EUROPEAN SOCIAL DIMENSION Second, this group also comprises redistributive schemes directly funded by the EU budget, such as European Structural and Investment Funds. Third, this element includes the rules and principles that entitle EU citizens to have access to national welfare states, as well as those promoting the coordination of national social security systems to facilitate the free movement of citizens. Each component of the European social dimension has undergone profound changes over time. 13.6

In the early days of the European integration process, the social dimension was conspicuous by its apparent absence. Indeed, its defining trait was the European Economic Community’s lack of competences in the social field. The compromise reached during the negotiations that led to the adoption of the 1957 Treaty of Rome was to leave social matters in the realm of Member States exclusive competence, while opening the economic sphere to the process of supranational integration. Rather than an expression of the founding fathers ‘social frigidity’,4 the double-track model aimed at safeguarding, and even strengthening, national social spaces’ ability to perform their functions. The compromise rested on the assumption that the creation of an integrated market would increase national authorities’ redistributive capabilities and contribute to the levelling up of social standards. As observed by Giubboni, this institutional framework was: totally in line with the cornerstone of embedded liberalism: the gradual institutionalization . . . of free market principles at transnational level would be based on the guarantee, no less secure for being implicit, of the preservation of strong and deeply rooted national welfare-state systems.5

13.7

The rigid division of labour between the supranational and the national levels suffered only few exceptions. The Treaties conferred to the Community the power to intervene in the social sphere only in so far as this was necessary to complement the creation of an integrated market. For instance, the Council was entitled to adopt measures for the coordination of national social security systems, so as to facilitate the free movement of workers. Such competence was first exercised through the adoption of Regulations 3/19586 and 4/1958,7 which have been subsequently replaced in 1971.8 Furthermore, in the 1970s the European legislator adopted a series of directives that, although having an internal market legal basis, addressed social policy issues with the aim of ‘prevent[ing] specific distortions that endangered fair competition on the market’.9 An apt example in this regard is Council Directive that setting social standards is a way to regulate the market, avoiding the distortions caused by unfettered regulatory competition in the social domain. See generally Simon Deakin, ‘Labour Law as Market Regulation: The Economic Foundations of European Social Policy’ in Paul Davies and others (eds), European Community Labour Law: Principles and Perspectives (Clarendon 1996) 87. 4 Giuseppe F Mancini, ‘Principi fondamentali di diritto del lavoro nell’ordinamento delle Comunità europee’ in Il lavoro nel diritto comunitario e l’ordinamento italiano (CEDAM 1988) 33. 5 Stefano Giubboni, Social Rights and Market Freedoms (CUP 2006) 55. 6 Council Regulation (EEC) 3/1958 of 16 December 1958 concernant la sécurité sociale des travailleurs migrants [1958] OJ L30/561. 7 Council Regulation (EEC) 4/1958 of 16 December 1958 fixant les modalités d’application et complétant les dispositions du règlement no 3 [1958] OJ L30/597. 8 Council Regulation (EEC) 1408/71 of 5 July 1971 on the application of social security schemes to employed persons and their families moving within the Community [1971] OJ L149/2. 9 Floris De Witte, ‘The Architecture of the EU’s Social Market Economy’ in Panos Koutrakos and Jukka Snell (eds), Research Handbook on the Law of the EU’s Internal Market (Edward Elgar Publishing 2017) 123 (hereafter De Witte, ‘The Architecture’).

European Social Dimension from Rome to Lisbon 329 75/117/EEC of 10 February 1975 on the application of the principle of equal pay for men and women.10 The Directive implemented a principle that had been explicitly included in the Treaty of Rome to allay the concerns of certain Member States—France, in particular— fearing that their commitment towards gender equality might disadvantage their undertakings vis-à-vis their competitors. The original compromise began to falter in the 1970s due to dramatic changes in the economic and political landscape. The deterioration of the economic situation and the failure of expansionary policies to cope with it paved the way for the consolidation of the neoliberal political project, which garnered support from both conservatives and social democrats.11 In this context, market liberalization was seen as the main way out of the economic recession and it returned to the top of political agendas.

13.8

In the EU legal order, this evolution materialized in a strong push towards the completion of the common market. In 1985, the Commission published a White Paper that singled out non-tariff barriers as the main obstacles for achieving this goal.12 The Single European Act of 1986 introduced qualified majority voting for the adoption of internal market measures under Article 100a of the Treaty establishing the European Economic Community (‘EEC’). Such a reform strengthened the capacity of the supranational legislator to constrain Member States’ autonomy in fields connected to the internal market, such as the social one.13 The Court of Justice of the European Union (‘CJEU’) played a major role in this context, by first elaborating the principle of mutual recognition14 and subsequently extending its scope of application well beyond the free circulation of goods. This contributed to the infiltration of internal market law into the social sphere:15 in particular, since the early 1990s, the CJEU began to assess the compatibility of key components of national labour and welfare regimes with EU rules on free circulation of services and competition. By so doing, the CJEU abandoned the double-track model, explicitly subjecting Member States’ choices in the social field to supranational control.

13.9

The judicially-induced infiltration of internal market law into the social domain was perceived as a force potentially encroaching upon the functioning of social solidarity institutions. Consequently, Member States sought to reconfigure the relationship between the economic and the social dimensions in the EU legal order, tentatively addressing what Scharpf lamented as the ‘constitutional asymmetry between policies promoting market efficiencies and policies promoting social protection and equality’.16 These reforms enhanced the predominantly defensive character of the European social dimension, whose primary

13.10

10 Council Directive 75/117/EEC of 10 February 1975 on the approximation of the laws of the Member States relating to the application of the principle of equal pay for men and women [1975] OJ L45/19. 11 Matthias Goldmann, ‘The Great Recurrence: Karl Polanyi and the Crises of the European Union’ (2017) 23 European Law Journal 277. 12 Commission, ‘Completing the Internal Market: White Paper from the Commission to the European Council’ COM (85) 310 final. 13 Claus-Dieter Ehlermann, ‘The “1992 Project”: Stages, Structures, Results and Prospects’ (1990) 11 Michigan Journal of International Law 1103. 14 Case 120/78 Rewe-Zentral AG [1979] ECR 649, para 8. 15 Gérard Lyon-Caen, ‘L’infiltration du droit du travail par le droit de la concurrence’ [1992] Droit ouvrier 313–59. 16 Fritz Scharpf, ‘The European Social Model: Coping with the Challenges of Diversity’ (2002) 40 Journal of Common Market Studies 645–70.

330 THE EMU AND THE EUROPEAN SOCIAL DIMENSION aim turned out to be insulating national social prerogatives ‘from the pressures generated by the functioning of the internal market’.17 13.11

This defensive logic is very much evident in the reaffirmation that redistributive functions and the regulation of labour markets still fall, barring few exceptions, within the Member States’ exclusive competences.18 In that regard, little has changed since the Treaty of Rome: the EU institutions’ capacity to intervene in the social field has certainly increased over time, but it has still an ancillary character. For instance, Article 153 TFEU lists a long series of fields where the EU can intervene, but only to ‘support and complement the activities of the Member States’ and, in any case, not to harmonize their laws and regulation.

13.12

The same logic also reverberates in other primary law provisions that aim at reconciling economic and social objectives within the EU constitutional architecture. In particular, Article 3 TEU, as modified by the Treaty of Lisbon, enhances the visibility of social objectives, establishing, inter alia, that the EU ‘shall work for the sustainable development of Europe based on . . . a highly competitive social market economy, aiming at full employment and social progress’, and it ‘shall combat social exclusion and discrimination, and shall promote social justice and protection, equality between women and men, solidarity between generations and protection of the rights of the child’. Despite being hailed as ‘une reorientation majeure des objectifs de l’Union’,19 this proclamation is vacuous if read in light of the choice not to confer on the EU any new legal power to pursue them. The added value of this provision lies in the choice to put these aims on a par with the economic ones. As recognized by the CJEU in a case concerning the compatibility of the Greek legislation on collective redundancies with Article 49 TFEU, the granting of equal constitutional status to the two sets of objectives requires balancing ‘the rights under the provisions of the Treaty on the free movement of goods, persons, services and capital . . . against the objectives pursued by social policy’.20 This duty is expressly codified in the so-called ‘horizontal social clause’ contained in Article 9 TFEU. This provision establishes that: [I]‌n defining and implementing its policies, the Union shall take into account requirements linked to the promotion of a high level of employment, the guarantee of adequate social protection, the fight against social exclusion and a high level of education, training and protection of human health.

The clause has been called ‘the most important innovation of the Lisbon Treaty’, marking the ‘appearance within the constitutional arena of [a]‌potentially strong [anchor] that can induce and support EU institutions . . . in the task of finding an adequate (and more stable) balance between economic and social objectives’.21 This assessment sounds overly 17 De Witte, ‘The Architecture’ (n 9) 124–28. 18 Loïc Azoulai, ‘The Court of Justice and the social market economy: The emergence of an ideal and the conditions for its realization’ (2008) 45 Common Market Law Review 1337–38. 19 Nicolas Sarkozy, ‘Conférence de presse finale à l’occasion du Conseil européen’ (Brussels, 21–22 June 2007) accessed 27 January  2020. 20 Case C-201/15 AGET Iraklis [2016] ECLI:EU:C:2016:972, paras 76–77. However, the CJEU found that the Greek legislation was incompatible with Article 49 TFEU for imposing criteria for the authorization of collective redundancies that are too imprecise and, thus, for failing to comply with the proportionality principle. For a rightly critical account of the judgment see Stefano Giubboni, ‘The Rise and Fall of EU Labour Law’ (2018) 24 European Law Journal 15–16. 21 Maurizio Ferrera, ‘Modest Beginnings, Timid Progresses: What’s Next for Social Europe?’ in Bea Cantillon, Herwig Verschueren, and Paula Ploscar (eds), Social Inclusion and Social Protection in the EU: Interactions Between Law and Policy (Intersentia 2011) 29.

European Social Dimension from Rome to Lisbon 331 optimistic if measured against the uncertain language used in the provision to define the obligations on EU institutions. Yet, at least the clause clarifies that the need to strike a balance between economic and social objectives is at the core of the European legal order.22 The EU Charter of Fundamental Rights and, in particular, the social rights contained therein may perform a similar function. This recognition is admittedly accompanied by many doubts as to the scope of the legal obligations descending from the Charter’s provisions on social rights, due to, inter alia, the timid wording of several provisions and the uncertainty surrounding the possibility to consider social rights as fully-fledged rights and not just as principles.23 This notwithstanding, the status acquired by the Charter enables social rights to act, at least on paper, as balancing factors vis-à-vis the disruptive effects that the application of EU law may have on the functioning of national social systems. The same defensive logic informed a number of legislative interventions touching upon key social issues. This is the case of the Posted Workers Directive (‘PWD’),24 adopted in response to a series of judgments where the CJEU posited that, in the context of a transnational provision of services, requiring undertakings established in another Member State to fully respect a host state’s labour law would run afoul of EU rules on the free movement of services. The only exceptions were those rules meeting overriding requirements in the public interests, but the CJEU failed to clearly identify them.25 The PWD sought to fill this gap, setting a list of seven basic labour standards that host states must, not just can, ensure to apply to posted workers. The PWD was very much responsive to the concerns expressed by a number of Member States that considered the application of the country-of-origin principle as a catalyst for social dumping, allowing undertakings established in lower wage Member States to exploit this advantage when operating in the territory of another Member State.26 In that regard, it is worth recalling that the PWD aimed at setting a minimum floor, explicitly allowing host Member States to impose higher standards to posting undertakings. The CJEU undid the balance enshrined in the PWD, transforming what had been conceived as a floor into a ceiling and adopting a very restrictive approach with regard to the legal instruments that Member States can adopt to impose the minimum standards.27 The EU legislator sought to restore the balance between the ‘economic’ and the ‘social’ within the posting of workers’ regulatory framework by revising the PWD.28 The revision addresses many of the most controversial 22 See generally Michael Dawson and Bruno De Witte, ‘Welfare Policy and Social Inclusion’ in Anthony Arnull and Damian Chalmers (eds), The Oxford Handbook of European Union Law (OUP 2015) 965–66. 23 Tobias Lock, ‘Rights and Principles in the EU Charter of Fundamental Rights’ (2019) 56 Common Market Law Review 1201–26; Jasper Krommendijk, ‘Principled Silence or Mere Silence on Principles? The Role of EU Charter’s Principles in the Case Law of the Court of Justice’ (2015) 11 European Constitutional Law Review 321–56; Dóra Guđmundsdòttir, ‘A Renewed Emphasis on the Charter’s Distinction between Rights and Principles: Is a Doctrine of Judicial Restraint More Appropriate?’ (2015) 52 Common Market Law Review 685–720. 24 European Parliament and Council Directive 96/71/EC of 16 December 1996 concerning the posting of workers in the framework of the provision of services [1996] OJ L18/1. 25 See Case C-113/89 Rush Portuguesa Ld v Office national d’immigration [1990] ECR I-1417, paras 15–18. 26 Paul Davies, ‘Posted Workers: Single Market or Protection of Labour Law Systems?’ (1997) 34 Common Market Law Review 571–602. 27 Case C-319/06 Commission v Luxembourg [2008] ECR I- 4323; Case C- 346/ 06 Dirk Rüffert v Land Niedersachsen [2008] ECR I-1989; Case C-341/05 Laval un Partneri Ltd v Svenska Byggnadsarbetareförbundet and Others [2007] ECR I-11767; Case C-438/05 The International Transport Workers’ Federation and The Finnish Seamen’s Union v Viking Line ABP and Others [2007] ECR I-10779. 28 European Parliament and Council Directive (EU) 2018/957 of 28 June 2018 amending Directive 96/71/EC concerning the posting of workers in the framework of the provision of services [2018] OJ L173/16.

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332 THE EMU AND THE EUROPEAN SOCIAL DIMENSION aspects, but it is still uncertain whether it will be able to offer adequate protection to social objectives in the context of posting.29

III. The Relationship Between the EMU and the European Social Dimension: The Early Days 13.14

The creation of the EMU challenges some of the defining traits of the European social dimension and, in particular, its pluralistic and multi-tiered nature. In this context, diversity in labour and social policies at national level is seen as threat to the stability of the common currency and, thus, largely undesirable. The push towards convergence around specific targets and models enormously intensified after the crisis, but the perception that the EMU would sit uneasily with the retention of a wide margin of autonomy in the social domain at national level was very much present since its early days.30 It was equally clear that social and labour policies might well end up being ‘the very likely victim of EMU’,31 becoming the main adjustment variable in a context where the monetary lever was no longer an option and there was no central fiscal capacity to absorb asymmetric shocks through budgetary transfers across the members of the currency area.

13.15

The creation of a common currency was bound to intensify Member States’ interdependence and, thus, the unsustainable budgetary position of one Member State could affect the stability of the whole edifice. Social policy was a key factor in that regard, due to the importance of this item in Member States’ budgets, as well as to its implications for productivity and competiveness. The solution envisaged in the Delors Report of 1989 was to place national decisions ‘within an agreed macroeconomic framework and subjected to binding procedures and rules’.32 Likewise, there was much awareness as to the fact that the creation of a common currency, founded on the full liberalization of capital movements, could aggravate the imbalances existing within the area, to the detriment of poorer regions. To avoid this, the Delors Report emphasized the necessity to set in place countervailing policies at supranational level, so as to tackle economic and social divergences.33

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As it is well known, this second part of the programme went largely missing once the EMU was brought into life.34 Conversely, the framework envisaged by Delors was created and it rested upon three main pillars. The first element was the ‘no-bailout clause’, now enshrined in Article 125 TFEU,35 which excludes that the Union or any Member State could be held liable for the debts accrued by another Member State. The Maastricht Treaty introduced this provision, which has been labelled the ‘budgetary code of the Union’,36 to force Member 29 See, more generally, Francesco Costamagna, ‘Regulatory Competition in the Social Domain and the Revision of the Posted Workers Directive’ in Silvia Borelli and Andrea Guazzarotti (eds), Labour Mobility and Transnational Solidarity in the European Union (Jovene editore 2019) 79–104. 30 See further Chapter 9 by Dariusz Adamski, paras 9.15–9.18. 31 Denis Bouget, ‘Social Policy in the EMU: Between a Dream and a Nightmare’ (1998) 1 Transfer 75. 32 Committee for the Study of Economic and Monetary Union chaired by Jacques Delors, Report on Economic and Monetary Union in the Community (Office for Official Publications of the European Communities 1989) 14. 33 Ibid, 18. 34 Fabian Amtenbrink, ‘The Metamorphosis of European Economic and Monetary Union’ in Anthony Arnull and Damian Chalmers (eds), The Oxford Handbook of European Union Law (OUP 2015) 722. 35 See specifically Chapter 10 by Charles Proctor, para 10.37. 36 Jean-Victor Louis, ‘Editorial Comment: The No-Bail-out Clause and Rescue Packages’ (2010) 47 Common Market Law Review 977.

THE EMU AND THE EUROPEAN SOCIAL DIMENSION 333 States to ‘consolidate their public spending for the benefit of the stability of the common currency’.37 The second element was the Stability and Growth Pact (‘SGP’), which has been adopted in 1997.38 The main aim of the SGP was to ensure fiscal discipline in the EMU, by making sure that each Member State’s fiscal policies stays within the limits of government deficit (3 per cent of Gross Domestic Product (GDP)) and debt (60 per cent of GDP). These criteria were bound to have a harsh impact on social policy, since cuts to social expenditure were the most important component of economic retrenchment policies adopted by Member States to meet these limits and, thus, to be part of the monetary union.

13.17

The third element consisted of a set of mechanisms aimed at the coordination of national economic and social policies. Although different from one another, these processes were all modelled around the so-called ‘Open Method of Co-ordination’.39 They had a soft law character and were based on the agreement of common objectives, the introduction of common indicators and benchmarks and the measurement of progress toward the objectives. These mechanisms should allow Member States to confront with the experiences of others and, thus, foster convergence through mutual learning. Most of these coordination mechanisms touched upon social domains, such as employment policy, social inclusion, pensions, and healthcare.

13.18

The crisis brutally exposed the inadequacy of the framework to cope with the challenges posed by the structural imbalances that lies at the core of the EMU. Despite being potentially very intrusive, these mechanisms were mostly designed to preserve national sovereignty and political autonomy.40 On the one hand, the choice to leave the final choice as to whether sanctioning Member States failing to respect the above-mentioned criteria in the Council’s hands led to de facto impunity for Member States. The most famous case in that regard is the ECOFIN’s refusal in 2003 to adopt a Commission recommendation requiring France and Germany to reduce their deficits so as to bring them under the 3 per cent threshold.41 On the other hand, coordination mechanisms were considered as not

13.19

37 Matthias Ruffert, ‘The European Debt Crisis and European Union Law’ (2011) 48 Common Market Law Review 1786. 38 European Council Resolution on the Stability and Growth Pact [1997] OJ C236/1; Council Regulation (EC) 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1997] OJ L209/1; Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6. 39 See Kenneth Armstrong, ‘The Open Method of Coordination—Obstinate or Obsolete?’ (2016) University of Cambridge Faculty of Law Legal Studies Research Paper Series Paper No 45/2016. See also Erika Szyszczak, ‘Experimental Governance: The Open Method of Coordination’ (2006) 12 European Law Journal 488–89; Caroline de la Porte, ‘Is the Open Method of Coordination Appropriate for Organizing Activities at European Level in Sensitive Policy Areas?’ (2002) 8 European Law Journal 40–41. 40 Jukka Snell, ‘The Trilemma of European Economic and Monetary Integration, and Its Consequences’ (2016) 22 European Law Journal 160–64. 41 The excessive deficit procedures were initiated by Council Decision 2003/89/EC of 26 May 2003 on the existence of an excessive deficit in Germany—Application of Article 104(6) of the Treaty establishing the European Community [2003] OJ L34/16 and Council Decision 2003/487/EC 3 July 2003 on the existence of an excessive deficit in France—Application of Article 104(6) of the Treaty establishing the European Community [2003] OJ L165/ 29. On 21 October 2003, the Commission recommended the Council to give notice to France to put an end to its excessive deficit situation and to achieve in 2004 an annual reduction in the cyclically-adjusted budget deficit equal to 1 per cent of its gross domestic product. On 18 November 2003, the Commission issued a similar recommendation concerning Germany, asking for an annual reduction in the cyclically-adjusted balance of 0.8 per cent of GDP. On 25 November 2005, the Council voted on the recommendations, failing to reach the required majority. The Commission brought an action of annulment against the non-decision of the Council, but the Court dismissed it, see Case C-27/04 Commission v Council [2004] ECR I-6649, paras 25–36.

334 THE EMU AND THE EUROPEAN SOCIAL DIMENSION being effective enough in forcing Member States to reform their social systems, so as to enhance labour flexibility, adjust wages to productivity, modernize social protection systems or create a more dynamic welfare state. This position, which has been repeatedly endorsed by the Commission,42 reveals a change of perspective as to the nature and functions of the OMC. Rather than just a mechanism for mutual and reflexive learning, coordination arrangements have been increasingly considered as tools capable of reshaping national social systems along more market-friendly and EMU-friendly lines.43

IV. Strengthening Economic Policy Coordination (and Budgetary Discipline) While Weakening the European Social Dimension in Response to the Crisis A. Making EU intervention more intrusive by combining hard and soft processes 13.20

When the crisis struck, the Commission, backed by some Member States, was swift to point to the defects of the framework described above as the main cause for the instability of the common currency. This argument, which overlooked the structural economic imbalances affecting the EMU, quickly became part of the dominant narrative and paved the way for subsequent reforms aimed at strengthening supranational institutions’ disciplinary powers.

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In 2011, the European Parliament and the Council adopted a package of six legal acts—the so-called ‘six-pack’—strengthening budgetary discipline, introducing a new surveillance mechanism on macroeconomic imbalances and enhancing the coordination of economic policies.44 The reform of the SGP went hand-in-hand with the adoption of the Treaty on the Stability, Coordination and Governance in the Economic and Monetary Union (TSCG) by twenty-five Member States.45

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These reforms aimed at, first, strengthening the rules that guarantee budgetary discipline.46 Alongside renewing the validity of the 3 per cent and 60 per cent limits, they committed states to a balanced budget, which, according to Article 3 TSCG, is respected ‘if the annual structural balance of the general government is at its country-specific medium-term 42 Commission, ‘A Renewed Commitment to Social Europe: Reinforcing the Open Method of Coordination for Social Protection and Social Inclusion’ COM (2008) 418 final, 2. 43 Damian Chalmers and Martin Lodge, ‘The Open Method of Co-ordination and the European Welfare State’ (2013) ESRC Centre for Analysis of Risk and Regulation Discussion Paper No 11, 14. 44 European Parliament and Council Regulation (EU) 1175/2011 of 16 November 2011 amending Council Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2011] OJ L306/12; European Parliament and Council Regulation (EU) 1177/ 2011 of 8 November 2011 amending Council Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2011] OJ L306/33; European Parliament and Council Regulation (EU) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1; Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41; European Parliament and Council Regulation (EU) 1176/2011 of 16 November 2011 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/25; European Parliament and Council Regulation (EU) 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8. 45 Signed on 2 March 2012 and entered into force on 1 January 2013. 46 For a more extensive and detailed analysis of these rules and their evolution, see Chapter 28 by Jean-Paul Keppenne, paras 28.1–28.117.

STRENGTHENING ECONOMIC POLICY COORDINATION 335 objective . . . with a lower limit of a structural deficit of 0.5 per cent of the gross domestic product at market prices’. This provision also imposes to make the balanced budget rule part of national legal orders, ‘through provisions of binding force and permanent character, preferably constitutional’. Moreover, the reform put a stronger focus on debt, making it possible for a state to be placed under an excessive deficit procedure if its debt ratio exceeds 60 per cent of GDP and if it fails to reduce it sufficiently.47 Article 4 TSCG introduced a debt-brake rule, requiring signatory states whose debt-to-GDP ratio exceeds the 60 per cent threshold to ‘reduce it at an average rate of one twentieth per year as a benchmark’. Second, the reform changed the way in which decisions are taken at various stages of the surveillance and sanctioning procedure. The ‘six-pack’ established that sanctions in the context of the Excessive Deficit Procedure were to be decided by reverse qualified majority.48 This means that a Commission recommendation proposing to sanction a state is adopted unless a qualified majority of Member States within the Council votes against it. Article 7 TSCG make the use of this rule more general, committing the Contracting Parties whose currency is the euro ‘to support the proposals or recommendations submitted by the European Commission where it considers that a Member State of the European Union whose currency is the euro is in breach of the deficit criterion in the framework of an excessive deficit procedure’.

13.23

The hardening of budgetary rules and procedures was associated with the revamping of economic policy coordination through the creation of the European Semester. The Semester has been fully codified by Regulation 1175/2011 that amended Regulation 1466/1997 on the preventive arm of the Pact. The Semester brings under the same umbrella different strains of EU policy coordination and surveillance that touch upon both economic and social policies. It rests upon three main pillars, namely the Europe 2020 Integrated Guidelines, the Stability and Growth Pact, and the Macroeconomic Imbalances Procedure (MIP). The Semester starts in November, when the Commission adopts the Annual Growth Survey (AGS),49 which should feed into Member States’ strategies in areas such as economic growth, employment, and social inclusion for the following twelve months. In May, the Commission evaluates national reform and fiscal plans and issues Country-Specific Recommendations (CSRs) that set out the actions to be taken by the concerned state. In July, these recommendations are finally approved by the ECOFIN Council. The approval of the ‘two-pack’50 and, in particular, the adoption

13.24

47 This occurs when the excess over 60 per cent is not coming down by at least 5 per cent a year on average over three years, or the Member State is not making sufficient progress towards the required pace of debt reduction during the three-year transition period. 48 Article 6(2) Regulation (EU) 1173/2011. See generally Alberto Miglio, ‘Reverse Qualified Majority Vote in Post-Crisis EU economic governance: a circumvention of institutional balance?’ (2019) Working Paper RescEU No 43-01/2019 accessed 21 January 2020; Rainer Palmstorfer, ‘The Reverse Majority Voting Under the “Six Pack”: A Bad Turn for the Union?’ (2014) 20 European Law Journal 186–203. 49 In 2019, the von der Leyen’s Commission decided to change the name of the document in ‘Annual Sustainable Growth Strategy’, to emphasize the central role played by environmental and climate issues also in this context. See Commission, ‘Annual Sustainable Growth Strategy 2020’, COM (2019) 650 final. 50 European Parliament and Council Regulation (EU) 472/2013 of 27 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1; European Parliament and Council Regulation (EU) 473/2013 of 27 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area [2013] OJ L140/11.

336 THE EMU AND THE EUROPEAN SOCIAL DIMENSION of Regulation 473/2013 added a further step to the Semester, at least with regard to Euro states. Indeed, by 15 October, they have to submit a draft budgetary plan for the following year. This allows the Commission to look into the measures proposed by national governments at a moment in which these measures, and their modes of implementation, are discussed by national parliaments.51 13.25

If compared with previous coordination processes, at least on paper the Semester sensibly enhances the EU institutions’ capacity to formulate, guide, and monitor policy in virtually the entire spectrum of Member State economic and social policies.52 This is mainly due to the combination of soft coordination processes with hard surveillance mechanisms. Failure to comply with the recommendations issued by the Council might lead the Commission to resort to coercive instruments so as to force the recalcitrant states to adopt the recommended measures. As plainly put by the Commission: It is primarily in Member States’ own interests to implement the reforms that will help them recover from the crisis and create the foundations for sustainable growth. The Commission’s recommendations are based on expert analysis of the main challenges in each country. Member States are also responsible to their EU counterparts, as they make a political commitment to reform by endorsing the recommendations at EU leaders’ level and formally approving them at ministerial level. As a last resort, there is the prospect of sanctions if Member States repeatedly fail to take action on public finances or macroeconomic imbalances (under the Excessive Deficit Procedure and the Excessive Imbalance Procedure, respectively).53

Despite formally retaining their non-binding character, these recommendations engender a higher level of compliance than ‘traditional’ ones,54 especially when the concerned Member States are at risk of being placed under one of these highly constraining procedures. 13.26

Furthermore, the Semester allows EU institutions to exercise quasi- normative functions, issuing recommendations that are very detailed and not just ‘broad guidelines’, as envisaged by Article 121 TFEU. For instance, in 2017 France has been recommended: to consolidate the measures reducing the cost of labour to maximise their efficiency in a budget-neutral manner and in order to scale up their effects on employment and investment. Broaden the overall tax base and take further action to implement the planned decrease in the statutory corporate-income rate.55

51 Article 6 Regulation (EU) 473/2013. 52 See Chapter 27 by Jean-Paul Keppenne, paras 27.9–27.13. In this regard, the Author argues that ‘it becomes more and more difficult to maintain that economic governance is based only on mere coordination. Some power has moved from the national to the European level, even if gradually’ (para 27.13). 53 Commission, ‘Q&A: Country-specific recommendations 2014’ (Press Release, 2 June 2014) accessed 27 January  2020. 54 Specifically on this point, see Chapter 11 by Bruno De Witte, para 11.24. 55 Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of France and delivering a Council opinion on the 2017 Stability Programme of France [2017] OJ C261/39.

STRENGTHENING ECONOMIC POLICY COORDINATION 337

B. Subordinating social objectives to EMU-related ones The European Semester has been launched to consolidate the EMU, by filling the original constitutional gap deriving from the choice of adopting a common currency without creating an economic union. Therefore, it is hardly surprising that it has tended to focus on a narrow set of objectives—such as budgetary discipline and competitiveness—that are directly linked to the consolidation of the EMU. In this context, other conflicting objectives, such as social ones, have been mainly relegated to second-tier status, in a way that flies in the face of the equal ranking model enshrined in the Treaties.56

13.27

Budgetary discipline dominated the early rounds of the Semester. The need to solve the sovereign debt crisis and to halt its spread made it ‘the first priority’, as clarified by the Commission in the AGS 2011.57 Despite losing a bit of urgency, this objective remained high on the list also in the following coordination rounds. For instance, the AGS 2018 posited that ‘[r]‌educing high levels of debt and re-building fiscal buffers must continue to be a priority. Governments should improve the sustainability of their public finances, especially where debt ratios are high’.58 At least initially, fiscal probity took the precedence over any conflicting objective, such as social ones. As clarified in the AGS 2012, fiscal consolidation is ‘a basis . . . to securing the future of the European social model’ and, thus, it comes inevitably first.59 In this sense, one can argue that the Semester contributed to the transformation of the European economic constitution into ‘a general mandatory commitment to budgetary discipline’.60

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Cuts to social expenditure has traditionally represented the main route towards fiscal probity. In this context, national welfare and labour systems have been mainly conceived as a cost, paying scant attention to their core functions, such as advancing dignity, cohesion and social justice. Many CSRs are in line with this approach, focusing, in particular on pensions and healthcare, two of the heaviest items on national budgets. Several Member States have been recommended to reform their pension systems, with the primary aim of ensuring their sustainability. The content of these recommendations is strikingly similar, pushing the state concerned:

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to contain future public expenditure growth relating to ageing, in particular from pensions and long-term care, by stepping up efforts to reduce the gap between the effective and statutory retirement age, bringing forward the reduction of early-exit possibilities, promoting active ageing, aligning the retirement age to changes in life expectancy.61 56 See generally Mark Dawson ‘New Governance and the Displacement of Social Europe: the Case of the European Semester’ (2018) 14 European Constitutional Law Review 191–209. 57 Commission, ‘Annual Growth Survey: Advancing the EU’s Comprehensive Response to the Crisis’ COM (2011) 11 final, 9. 58 Commission, ‘Annual Growth Survey 2018’ COM (2017) 690 final, 1. The AGS 2019 considered macro- financial stability and sound public finances as ‘precondition for sustainable growth’ (Commission, ‘Annual Growth Survey 2019’ COM (2018) 770 final, 5). 59 Commission, ‘Annual Growth Survey 2012’ COM (2011) 815 final, 4. 60 Christian Joerges, ‘The European Constitution and its Transformation through the Financial Crisis’ in Dennis Patterson and Anna Södersten (eds), Blackwell Companion to EU Law and International Law (Blackwell 2016) 242–61. 61 Council Recommendation of 8 July 2014 on the National Reform Programme 2014 of Belgium and delivering a Council opinion on the Stability Programme of Belgium 2014 [2014] OJ C247/5. The recommendation was reiterated in the following year, when Belgium launched the reform of its pension system. The CSR 2015 asked Belgian authorities to ‘complement the pension reform by linking the statutory retirement age to life expectancy’

338 THE EMU AND THE EUROPEAN SOCIAL DIMENSION The same happened with regard to healthcare. For instance, in 2017 the Council instructed Portugal to ‘strengthen expenditure control, cost effectiveness and adequate budgeting, in particular in the health sector with a focus on the reduction of arrears in hospitals and ensure the sustainability of the pension system’.62 13.30

As the sovereign debt crisis began to ease its grip, another objective, ie the promotion of economic growth and employment, rose to prominence. This evolution rests on the belated recognition that ‘[f]‌iscal consolidation and financial repair are not sufficient in themselves’.63 In this context, social policy is mostly sees as a ‘productive factor’ that needs to be ‘redesigned’ in order to enhance efficiency, cost containment and private participation.64 Accordingly, many of the defining features of national social and labour systems are regarded as potential obstacles on this road.

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By this mean, the European Semester allows EU institutions to elaborate and enforce its own model on how the welfare state and labour relations should be organized. This model places much emphasis on the principles of equality of opportunities, individual responsibility and reduced welfare dependency.65 All in all, the paradigm is characterized by a low level of de-commodification, leaving individuals to rely first on the market to satisfy their needs, and a residual welfare state with highly targeted and selective safety nets. Furthermore, increased access to employment, to be achieved by making the labour market more flexible and adjusting wages to productivity, is another ever-present ingredient. The removal of these ‘rigidities’ is primarily aimed at increasing competitiveness so to compensate the loss of the monetary lever.

V. Financial Assistance, Strict Conditionality, and the European Social Dimension A. Key features of conditionality policy in the context of financial assistance packages 13.32

Since 2008, eight European states have obtained financial assistance that has been provided through a variety of instruments.66 Early cases, involving non-euro states, such as Hungary,67 Latvia,68 and Romania,69 received assistance on the basis of Article 143 TFEU, (Council Recommendation of 14 July 2015 on the National Reform Programme 2015 of Belgium and delivering a Council opinion on the Stability Programme of Belgium 2015 [2015] OJ C272/27). 62 Council Recommendation 11 July 2017 on the 2017 National Reform Programme of Portugal and delivering a Council opinion on the 2017 Stability Programme of Portugal [2017] OJ C261/97. 63 COM (2011) 815 final, 7. 64 Commission, ‘Annual Growth Survey 2017’ COM (2016) 725 final, 12. 65 Jerôme Vignon and Bea Cantillon, ‘Is There a Time for “Social Europe”? Looking Beyond the Lisbon Strategy Paradigm’ (2012) OSE Opinion Paper No 9, 5. 66 For a comprehensive and detailed analysis of euro area state’s cases see Chapter 33 by Ulrich Forsthoff and Jasper Aerts, paras 33.145–33.252. As for non-euro area states, see Chapter 34 by Alexander Thiele, paras 34.59–34.59. 67 Council Decision 2009/102/EC of 4 November 2008 providing Community medium-term financial assistance for Hungary [2009] OJ L37/5. 68 Council Decision 2009/289/EC of 20 January 2009 granting mutual assistance for Latvia [2009] OJ L79/37. 69 Council Decision 2009/459/EC of 6 May 2009 providing Community medium-term financial assistance for Romania [2009] OJ L150/8.

FINANCIAL ASSISTANCE, AND STRICT CONDITIONALITY 339 which envisages the possibility to grant ‘mutual assistance’ to non-euro area states facing difficulties as regard their balance of payments. Vice versa, in the first Greek bailout package approved in May 2010 there was no EU mechanism available and resources had to be provided through bilateral loans by euro area Member States and by the International Monetary Fund (IMF) under a stand-by arrangement. In this context, the Commission took charge of coordinating and managing the pooled resources. After this experience, the EU rushed to fill the gap, creating two new bailout mechanisms: the European Financial Stabilization Mechanism (EFSM) and the European Financial Stability Facility (EFSF). The former was established by Regulation 407/201070 and it had the capacity to borrow up to a total of 60 million euro. The latter, endowed with more financial resources,71 has been created by an international agreement and operated as a private company established in Luxembourg.72 Most of the resources used to provide financial assistance to Ireland and Portugal came from these sources. The need to reduce the risk of contagion through the establishment of a credible firewall pushed Member States to create a permanent mechanism to provide financial assistance to euro area Member States experiencing or threatened by financing difficulties. The European Stability Mechanism (ESM)73 was established on 27 September 2012 with a maximum lending capacity of 500 million euro. The ESM intervened to provide assistance to Cyprus, together with a loan by Russia, and to Spain for the bailout of the financial sector. Furthermore, the ESM is also involved in the third financial assistance package for Greece, first approved in August 2015.

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Each bailout entailed the respect by the beneficiary state of a set of policy conditions to be agreed with EU institutions, acting on behalf of the donors. Conditionality is a typical tool used by international financial institutions that serves different purposes. First, it aims to reduce moral hazard and to ensure that resources are used to solve the beneficiary state’s problems.74 Moreover, conditionality is meant to protect the whole euro area against possible negative spill overs (the so-called ‘contagion effect’), safeguarding its long-term financial stability by making sure, inter alia, that the beneficiary state will be in the position to payback its loan. Tying financial support to the adoption of austerity measures also purports to send a reassuring message to financial markets, by showing concerned states’ resolve in trying to address the root causes of the problem. Lastly, conditionality serves deterrent purposes, since, as pointedly observed by Schepel, ‘States will have to be deterred from pursuing unsound budgetary policies by the prospect of having to live through the same amount of pain and misery inflicted on States assisted by the ESM’.75

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In 2011, Member States decided to make recourse to conditionality in the context of assistance programmes a requirement sanctioned by the Treaties. In Pringle, the Court made clear that the requirement of strict conditionality is a legal obligation deriving from the

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70 Council Regulation (EU) 407/2010 of 11 May 2010 establishing a European financial stabilization mechanism [2010] OJ L118/1. 71 It had the capacity to borrow up to a total of 440 million euro. 72 The creation of the EFSF was envisaged in the Decision of the Representatives of the Governments of the Euro Area Member States Meeting within the Council of the European Union, ECOFIN, Brussels, 9 May 2010. 73 The Treaty Establishing the European Stability Mechanism (‘ESM Treaty’) was signed in March 2012. 74 Michael Ioannidis, ‘Europe’s New Transformations: How the EU Economic Constitution Changed During the Eurozone Crisis’ (2016) 53 Common Market Law Review 1245–47. 75 Harm Schepel, ‘The Bank, the Bond, and the Bail-Out: On the Legal Construction of Market Discipline in the Eurozone’ (2017) 44 Journal of Law and Society 88 (hereafter Schepel, ‘The Bank, the Bond, and the Bail-Out’).

340 THE EMU AND THE EUROPEAN SOCIAL DIMENSION no-bail out clause, being it ‘intended to ensure that the activities of the ESM are compatible with, inter alia, Article 125 TFEU’.76 The new paragraph 3 of Article 136 TFEU, nominally added to authorize the establishment of the ESM, conferred a constitutional status to the requirement, by making ‘the granting of any required financial assistance under the mechanism . . . subject to strict conditionality’.77 13.36

Conditionality entrusts supranational institutions with an unprecedented capacity to engage in close surveillance and micromanagement of social policy, placing powerful constraints on national authorities’ autonomy in managing their social systems. This capacity hinges upon the uncertain legal location of the instruments governing the definition of the conditions attached to financial assistance packages.78 This allows EU institutions to fully exploit political and economic power asymmetries between them and a state that is facing extreme financial difficulties.

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This situation is all the more apparent in those cases where EU institutions, and the ECB in particular, resorted to implicit conditionality tools, such as secret letters, to push states toward adopting specific structural reforms. In 2011, for instance, the Italian Government received a written request by the then President of the ECB and the then Governor of the Italian Central Bank detailing a series of measures to be adopted, and even specifying the legal instruments to be used, in order to benefit from the Securities Market Programme, even though the letter refrained from making this connection explicit.79

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The departure from EU law and its basic guarantees are features of explicit conditionality, too. In this case, the main legal source is the Memorandum of Understanding (MoU), which details the requirements that the beneficiary state must meet in order to receive financial assistance. The legal nature of this document, and even its capacity to set legally binding obligations, has long been—and, to some extents, still is—highly controversial. It was just in June 2017, nine years after the launch of the first bailout programme, that the CJEU made clear its view in this regard. In the Florescu judgment, it found that that the MoU is mandatory and ‘constitutes an act of an EU institution’ according to Article 267 TFEU.80 Albeit 76 Case C-370/12 Thomas Pringle v Government of Ireland and Others [2012] ECLI:EU:C:2012:756, para 111 (hereafter Pringle). For a rightly critical analysis on this point, see Schepel, ‘The Bank, the Bond, and the Bail-Out’ (n 75) 88. 77 European Council Decision 2011/199/EU of 25 March 2011 amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro [2011] OJ L91/1. 78 Claire Kilpatrick, ‘The EU and its Sovereign Debt Programmes: The Challenges of Liminal Legality’ (2017) EUI Working Paper 2017/14, 3–8. See also Agustin Menéndez, ‘The Crisis and the European Crises: From Social and Democratic Rechtsstaat to the Consolidating State of (Pseudo-)technocratic Governance’ (2017) 44 Journal of Law and Society 74–78 (hereafter Menéndez, ‘The Crisis and the European Crises’); Francesco Munari, ‘Crisi dell’Euro e crisi delle regole: Rule of Law o ragion politica? Il diritto dell’Unione europea dinanzi a nuove sfide’ in Ornella Porchia (ed), Governance economica europea. Strumenti dell’Unione, rapporti con l’ordinamento internazionale e ricadute sull’ordinamento interno (Giappichelli 2015) 33–56. 79 Stefano Sacchi, ‘Conditionality by Other Means: EU Involvement in Italy’s Structural Reforms in the Sovereign Debt Crisis’ (2015) 13 Comparative European Politics 77–92. On the role of the ECB in bailout programmes see Paul Dermine, ‘Out of the comfort zone? The ECB, financial assistance, independence and accountability’ (2019) 26 Maastricht Journal of European and Comparative Law 108–21; Annamaria Viterbo, ‘Legal and Accountability Issues Arising from the ECB’s Conditionality’ (2016) 1 European Papers No 2, 501–31. 80 Case C-258/14 Eugenia Florescu and Others v Casa Judeţeană de Pensii Sibiu [2017] ECLI:EU:C:2017:448, para 35 (hereafter Florescu and Others). See Menelaos Markakis and Paul Dermine, ‘Bailouts, the Legal Status of Memoranda of Understanding, and the Scope of Application of the EU Charter: Florescu’ (2018) 55 Common Market Law Review 643–71; Alberto Miglio, ‘La condizionalità di fronte alla Corte di Giustizia’ (2017) Diritti umani e diritto internazionale 763–70.

FINANCIAL ASSISTANCE, AND STRICT CONDITIONALITY 341 certainly welcome, this finding does not represent the last and final word on this issue.81 The case at stake concerned a specific financial assistance programme that, being directed towards a non-euro state facing difficulties with its balance of payments, has been set up on the basis of Article 143 TFEU and Regulation 332/2002. With regard to non-EU based bailout programmes, the CJEU has traditionally suggested that MoU provisions fall outside the EU legal framework. On this basis, the CJEU rejected annulment actions brought by private applicants against these provisions and requests for preliminary rulings seeking to ascertain the compatibility of national measures adopted to implement the conditions set in the MoU with the EU Charter on Fundamental Rights. This is what happened, for instance, in Sindicato dos Bancarios do Norte, a case certain measures adopted by the Portuguese Government to honour its commitments by cutting public sector wages and suspending the payment of bonuses. Public-sector trade unions challenged these measures before the employment tribunal of Porto, which asked the CJEU to clarify whether the right to fair and just working conditions, as enshrined in Article 31 of the Charter, prevented the reduction of workers’ wages. The CJEU refused to hear this and all the other related questions, pointing to the fact that the contested measures had not been adopted by the Portuguese authorities to implement EU law and, thus, fell outside the scope of application of the Charter according to Article 51.82 The idea according to which MoU provisions and national implementing measures are completely disconnected from the EU legal framework and, thus, not reviewable by the CJEU, can be criticized on three main grounds.83

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First, conditionality aims at stabilizing the EMU, a core EU policy area, by making sure that its weakest components, ie the states in need of financial help, ‘do their homework’ and adopt those reforms that are seen as necessary in order to structurally remedy their difficulties. Second, EU institutions play a major part in the elaboration and enforcement of conditionality, even in those cases where the assistance package is based on an international agreement. For instance, the ESM Treaty establishes that the Commission and the ECB are tasked with assessing the risks posed by the situation and the sustainability of the public debt of the requesting state; negotiating the MoU; monitoring compliance with the conditions. Furthermore, the Commission is the one that signs the MoU on behalf of the ESM once it has been approved by the Board of Governors.84 Lastly, all the bailout packages, even the earlier ones, have strong and explicit linkages with the EU legislation. This connection has been further strengthened by the adoption of Regulation 472/2013, which requires euro area Member States requesting, or already ‘in receipt’85 of, financial assistance to ‘prepare, in agreement with the Commission, acting in liaison with the ECB and, where appropriate, with the IMF, a draft macroeconomic adjustment programme’86 to be approved by the Council on a proposal by the Commission.

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81 See further Chapter 41 by Alicia Hinarejos, paras 41.64–41.66. 82 Case C-128/12 Sindicato dos Bancários do Norte and Others [2012] ECLI:EU:C:2013:149, paras 9–14. 83 Claire Kilpatrick, ‘Are the Bailouts Immune to EU Social Challenge Because They Are Not EU Law?’ (2015) 10 European Constitutional Law Review 498. 84 Pierluigi Simone, ‘Respecting the Democratic Principle in ESM Activities Related to the Context of the Economic and Financial Crisis’ in Luigi Daniele, Roberto Cisotta, and Pierluigi Simone (eds), Democracy in the EMU in the Aftermath of the Crisis (Springer 2017) 198. 85 Article 16 Regulation (EU) 472/2013. 86 Ibid, Article 7.

342 THE EMU AND THE EUROPEAN SOCIAL DIMENSION Macroeconomic adjustment programmes re-propose, albeit in a less detailed fashion, the content of MoUs.

B. The impact of conditionality on the European Social Dimension 13.41

Reduction of social expenditure, modernization of social protection systems and reform of the labour market are key components of EU conditionality policy. From that perspective, the content of the conditions attached to financial assistance packages is in line with the policy documents and the recommendations adopted by EU institutions in the context of the European Semester. The duty for structural adjustment programmes to be compatible with economic policy coordination measures is expressly provided for by both the ESM Treaty and Regulation 472/2013. In Pringle, the CJEU explained that: [T]‌he purpose of the strict conditionality . . . is to ensure that the ESM and the recipient Member States comply with measures adopted by the Union in particular in the area of the co-ordination of Member States’ economic policies, those measures being designed, inter alia, to ensure that the Member States pursue a sound budgetary policy.87

Yet, the impact of conditionality upon the European social dimension is far deeper and more pervasive than that of economic policy coordination mechanisms, obliterating Member States’ autonomy in the exercise of their social prerogatives and systematically subordinating social objectives to the pursuit of EMU-related purposes. 13.42

Socially-relevant conditions can be divided into two main categories: those aiming at reducing sovereign debts and those seeking to restore a beneficiary state’s competitiveness.

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Fiscal consolidation has been a priority of almost all bailout packages and it has been mostly pursued through severe cuts to social expenditure. The emphasis put on this set of measures can be justified in the light of the weight that aggregate social spending has on Member States’ budget, accounting on average for more than 30 per cent of the total. At the same time, targeting social spending also serves moralistic functions, by making states pay for their irresponsible behaviour. This fits perfectly with the dominant narratives of the crisis, which attributes the latter to the profligacy of some Member States and the excessive generosity of their welfare systems.88

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Greece is the Member States where this approach has been applied more forcefully. In the period 2007–13, the Greek Government was called upon to reduce social spending by 17 per cent. Moreover, the First Economic Adjustment Programme for Greece envisaged cuts in health care expenditure amounting to more than 2 billion euro by 2015 and cuts in social benefits amounting to more than five billion euro by the same year. The target was to be achieved through, inter alia, the abolition of budgetary appropriations for the solidarity allowances and a reduction of the monetary transfers to certain categories of vulnerable persons. The Memorandum of Economic and Financial Policies of the second Economic Adjustment Programme of 2012 plainly admitted that most of the cuts imposed by the 87 Pringle (n 76) para 72. 88 Philomila Tsoukala, ‘Eurozone Crisis Management and the New Social Europe’ (2013) 20 Columbia Journal of European Law 37–38.

FINANCIAL ASSISTANCE, AND STRICT CONDITIONALITY 343 ‘bold structural spending reforms’ ‘will need to fall on social transfers’.89 To this end, Greece undertook to reduce the public sector wage bill, so as to generate 1.5 per cent of GDP in savings by 2015, as well as to reform the pension systems, reduce healthcare spending and to amend the social benefit programmes, in order to ‘realize in total around 4 per cent of GDP in additional savings’.90 The same approach prevailed also in the documents detailing the conditions attached to the Third Economic Adjustment Programme, approved in August 2015. In this context, Greek authorities committed to fully implementing pensions reforms in order to target savings of around 0.25 per cent of GDP in 2015 and 1 per cent of GDP in 2016. A second component of the austerity-driven strategy is the promotion of internal devaluation, so to enable the ‘beneficiary’ state to regain external competiveness. In a context where currency devaluation is no longer an option,91 the objective has been mostly pursued by reducing wages and other labour costs, making individual and collective dismissals easier and forcing Member States to revise their wage-setting system, by giving precedence to individual over collective bargaining.92

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These elements are present in all bailout packages and, in particular, in the Greek ones. For instance, the 2010 Greek MoU established that:

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In dialogue with social partners, the government proposes and parliament adopts legislation to reform wage bargaining system in the private sector, which should provide for a reduction in pay rates for overtime work and enhanced flexibility in the management of working time. Allow local territorial pacts to set wage growth below sectoral agreements and introduce variable pay to link wages to productivity performance at the firm level.93

The Second Adjustment Programme voiced its dissatisfaction on this point, claiming that ‘the outcome of the social dialogue to promote employment and competitiveness fell short of expectations’. Therefore, the Greek Government undertook to adopt, prior to the disbursement of the aid, a series of measures, such as a 22 per cent reduction of minimum wage, the introduction of sub-minimum wages for young people—10 per cent less than the normal one—and the reform of wage-setting mechanisms, leading to an ‘overhaul of the national general collective agreement’.94 The Third Adjustment Programme, approved in 2015, envisaged the launch of a consultation process touching upon several key aspects of the labour market. The process should lead to the reform of the rules governing collective dismissal, industrial action and collective bargaining, so as to bring them ‘in line with the best practice in the EU’.95 Aware of the vagueness of this reference, the document added 89 Commission, ‘The Second Adjustment Programme for Greece’ (2012) European Economy Occasional Paper No 94, 97 (hereafter Commission, ‘The Second Adjustment Programme for Greece’). 90 To be achieved by reforming the special wage regimes, a drastic reduction of personnel (firing 150,000 public employees in the period 2011–15) and imposing strict controls on hiring. See ‘Greece: Memorandum of Economic and Financial Policies’ in Commission, ‘The Second Adjustment Programme for Greece’ (n 89) 97–98 (hereafter Commission, ‘2012 Greek MoU’). 91 Internal devaluation policies have been considered as ‘functional equivalents’ to exchange rate flexibility. See generally Klaus Armigeon and Lucio Baccaro, ‘Political Economy of the Sovereign Debt Crisis: The Limits of Internal Devaluation’ (2012) 41 Industrial Law Journal 254–75. 92 Menéndez, ‘The Crisis and the European Crises’ (n 78) 68–70. 93 Ibid, 68. 94 Commission, ‘2012 Greek MoU’ (n 90) 146–47. 95 A reference to these standards can be found also in Article 2(5) Council Implementing Decision (EU) 2015/ 1411 of 19 August 2015 approving the Macroeconomic Adjustment Programme for Greece [2015] OJ L219/12.

344 THE EMU AND THE EUROPEAN SOCIAL DIMENSION that, in any case, ‘[c]‌hanges to labour market policies should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth’.96

VI. EU Structural and Investment Funds as Instruments Contributing to the Strengthening of the EMU 13.47

The capture of the European social dimension by the EMU is very much evident also with regard to the exercise of regulatory and redistributive prerogatives by the EU. The case of European Structural and Investment Funds (‘ESI Funds’) represents an apt example in this regard. The category comprises the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund. Each of these financial instruments pursues a specific set of objectives. For instance, the European Social Fund—established by the Treaty of Rome—aims at ‘render[ing] the employment of workers easier and to increase their geographical and occupational mobility within the Union, and [facilitating] their adaptation to industrial changes and to changes in production systems, in particular through vocational training and retraining’.97 Such a broadly defined aim has been made operational by breaking it down into more specific objectives that changed over time. However, especially after the 1971 revision, a key function of ESF was to mitigate the negative effects that the creation of the internal market could have on employment and, in particular, on the most vulnerable workers and regions.98 The 2013 revision largely deprived the European Social Fund of this rebalancing function. The Common Provision Regulation concerning the 2014–20 programme period99 ended up modifying the role and function of all ESI Funds, by subjecting them, first and foremost, to the strengthening of the EMU and its goals, as articulated in the context of the European Semester and, for those countries under financial assistance, to Structural Adjustment Programmes. This evolution touched upon two main aspects.

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The first aspect concerns the content of the Partnership Agreement, ie of the document drafted to ensure the alignment of ESI Funds’ programming with their objectives, and the role that the Commission can play in this context. Article 12 CPR sets out a long list of elements that should feed into the Partnership Agreement. Inter alia, national authorities must take into account ‘relevant country-specific recommendations adopted in accordance with Article 121(2) TFEU and relevant Council recommendations adopted in 96 Commission, ‘Memorandum of Understanding between the European Commission acting on behalf of the European Stability Mechanism and the Hellenic Republic and the Bank of Greece’ (19 August 2015) 21–22. 97 Article 162 TFEU. 98 Commission, The European Social Fund. An Overview of the Programming Period 1994–1999 (European Communities 1998) 15. 99 European Parliament and Council Regulation (EU) 1303/2013 of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) 1083/2006 [2013] OJ L347/320 (hereafter CPR).

STRENGTHENING OF THE EMU 345 accordance with Article 148(4) TFEU’, so as to make sure that the Funds’ programming aligns with the Union strategy for smart, sustainable and inclusive growth. Quite interestingly, this is the main, if not the only, element upon which the Commission is to assess ‘the consistency of the Partnership Agreement with this Regulation’. To make sure that the ESI Funds are effectively linked to ‘sound economic governance’,100 the Commission can review or propose amendments to the Partnership Agreement ‘to support the implementation of relevant Council Recommendations or to maximise the growth and competitiveness impact of the ESI Funds in Member States receiving financial assistance’. The concerned Member State must reply to the requests and, within two months, propose amendments that have to be approved by the Commission. If the state fails to take action, the Commission can propose to the Council to suspend future payments for the concerned programme. The second element of novelty is the transformation of ESI Funds into compliance tools 13.49 in the context of EMU-related governance mechanisms.101 Article 23 CPR entitles the Commission to propose the suspension of ESI Funds’ commitments and payments when a Member State fails to comply with the requirements set out in the context of budgetary discipline and macroeconomic imbalances procedures or of a macroeconomic adjustment programme. More in detail, the Commission can propose to put ESI disbursements on hold when the Council has decided102 that the concerned state has not done enough to reduce its excessive deficit. In the context of a macroeconomic imbalances procedure, the Commission may propose to put ESI Funds on hold if the Council has adopted either two successive recommendations finding that the corrective action plan proposed by the concerned state is insufficient103 or two successive decisions establishing non-compliance by a Member State that failed to take the recommended corrective action.104 Moreover, the suspension can be proposed when the Commission concludes that a Member State has not taken measures to implement the adjustment programme referred to in Regulation 407/ 2010 or when the Council decides that a Member State failed to honour its commitments under a macroeconomic adjustment programme referred to in Article 7 Regulation 472/ 2013. In all these cases, the suspension is quasi-automatic, being it adopted by the Council by reverse qualified majority voting.105 The CPR ends up prioritizing ESI Funds contribution to the EMU’s stability over the pursuit of their specific objectives, despite nominally putting them on an equal footing. On the one hand, the sanctioning mechanism described above, which can lead to the suspension of payments, operates only when the Partnership Agreement fails to pay due regard to the recommendations issued in the context of the European Semester or a Member State does not comply with the requirements set within the economic governance framework. On the other hand, the mechanism pays little attention to the negative implications that the 100 Article 23 CPR. 101 See generally Fabian Amtenbrink and René Repasi, ‘Compliance and Enforcement in Economic Policy Coordination in EMU’ in András Jakab and Dimitry Kochenov (eds), The Enforcement of EU Law and Values. Ensuring Member States’ Compliance (OUP 2017) 145–81. 102 In accordance with Article 126(8) and (11) TFEU. 103 Article 8(3) Regulation (EU) 1176/2011. 104 Article 10(4) Regulation (EU) 1176/2011. 105 Article 23(10) CPR.

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346 THE EMU AND THE EUROPEAN SOCIAL DIMENSION suspension of ESI Funds’ payments and commitments can have on their specific objectives. The only partial exception is that EU institutions, when determining the scope and level of the suspension, have ‘to take into account’ the economic and social circumstances of the concerned Member State and the impact that this additional penalty can have on ‘programmes of critical importance to address adverse economic or social conditions’.106 The wording of the provision suggests that the limitation of the suspension’s scope and level can occur only in exceptional circumstances and that, quite remarkably, there is no duty for the EU institutions to avoid the suspension even when this measure is bound to have a considerably adverse effect on key social aspects.

VII. Recent Attempts at Strengthening the European Social Dimension: Some Conclusive Remarks 13.51

The reform of the European economic governance in response to the crisis had a profound impact on the architecture, function and content of the European social dimension. Procedurally, the reform entrusted EU institutions with an unprecedented capacity to intrude into the social domain, enabling them to exercise policy formulation, supervision and guidance on virtually all the main components of national welfare and labour systems. Substantively, the measures adopted in this context tended to consider the European social dimension merely as a factor that should contribute to the strengthening of the EMU and that should be reshaped accordingly. This transformation is at odds with Treaty provisions regulating the relationship between the ‘economic’ and the ‘social’ in the EU legal order, unduly constraining Member States’ autonomy in the exercise of their social prerogatives and systematically prioritizing the pursuit of EMU-related objectives over social ones. This result has been achieved through the establishment of a highly technocratic machinery that treat questions entailing key distributive choices as structurally distinct from political processes and that considers with suspect policy autonomy and diversity in the social domain.107

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Progressively, EU institutions have come to acknowledge that this approach was not only contributing to ‘the degradation of basic legal values’108 underpinning the European integration process, but it was eroding its legitimacy and, ultimately, endangering its long- term prospects. In 2013, the Commission adopted a Communication on ‘Strengthening the Social Dimension of the Economic and Monetary Union’.109 The document duly recognized that rebalancing the social and economic dimensions is not just desirable from an economic and political perspective; it is also a legal duty under Article 9 TFEU. However, according to the document: the ‘social dimension’ of the EMU relates to the ability of economic governance mechanisms and policy instruments to identify, take into account and address 106 Article 23(11) CPR. 107 De Witte, ‘The Architecture’ (n 9) 132–34. 108 Claire Kilpatrick, ‘On the Rule of Law and Economic Emergency: The Degradation of Basic Legal Values in Europe’s Bailouts’ (2015) 35 Oxford Journal of Legal Studies 1–29. 109 Commission, ‘Strengthening the Social Dimension of the Economic and Monetary Union’ COM (2013) 690 final (hereafter Commission, ‘Strengthening the Social Dimension Communication’).

SOME CONCLUSIVE REMARKS 347 problematic developments and challenges related to employment and social policies in the EMU.110

The definition makes no reference to the possibility that safeguarding the values and interests that underpin the social dimension may limit, or even trump, the pursuit of EMU objectives. Deprived of its rebalancing function, this dimension was mostly seen just as a constitutive element of EMU, to be safeguarded as long as it can contribute to the achievement of its core objectives by addressing issues—such as unemployment and social problems—that ‘hold back competitiveness and the growth potential of the economies concerned’.111 The emphasis on the need to strengthen the European social dimension led to the adoption of more specific actions aimed at ‘socializing’ economic governance mechanisms. In the case of the Semester, this push materialized in the inclusion of a broader range of inputs and new social indicators in the policy guidance and surveillance processes. For instance, in 2014 the Commission decided to introduce a number of auxiliary employment and welfare indicators in the Macro-economic Imbalances Procedure, so as to complement the existing ones.112 This evolution has been bolstered by the adoption of the European Pillar of Social Rights, a document setting out twenty key principles and rights regarding equal opportunities and access to the labour market, fair working conditions and social protection and inclusion that has been proclaimed in November 2017.113 The Pillar should ‘serve as a point of reference for the further implementation of the European Semester’, being ‘a compass for renewed convergence towards better working and living conditions’. More prosaically, the document has inspired a further set of indicators aiming at ‘monitor[ing] “societal progress” ’ and detecting ‘the most significant employment and social challenges facing the Member States, the EU and the euro area, as well as progress achieved over time’.114

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The push towards greater social sensitivity within the Semester reverberates also in the content of CSRs. There is now a growing number of recommendations that deals with social issues not from a strict EMU angle, but from a more socially-oriented one. For instance, in 2017 the Council recommended that Belgium ought to ‘ensure that the most disadvantaged groups, including people with migrant background, have equal access to quality education, vocational training, and the labour market’;115 that Spain should ‘address regional disparities and fragmentation in income guarantee schemes and improve family support, including access to quality childcare’;116 and that Ireland should ‘enhance social infrastructure, including social housing and quality childcare’.117 Although these recommendations

13.54

110 Ibid, 3. 111 Ibid, 3. 112 Commission, ‘Alert Mechanism Report 2014’ COM (2013) 790 final, 10. 113 For a comprehensive analysis of the Pillar, see Sacha Garben, ‘The European Pillar of Social Rights: An Assessment of Its Meaning and Significance’ (2019) 21 Cambridge Yearbook of European Legal Studies 101–27. 114 Commission, ‘Social Scoreboard’ SWD (2017) 200 final, 2. 115 Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Belgium and delivering a Council opinion on the 2017 Stability Programme of Belgium [2017] OJ C261/6. 116 Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Spain and delivering a Council opinion on the 2017 Stability Programme of Spain [2017] OJ C261/35. 117 Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Ireland and delivering a Council opinion on the 2017 Stability Programme of Ireland [2017] OJ C261/30.

348 THE EMU AND THE EUROPEAN SOCIAL DIMENSION are signs of a welcome evolution, these changes have quite a marginal impact on the way in which economic policy coordination operates. Boosting competitiveness and reducing indebtedness still represents the priorities of structural reforms and take precedence over the attainment of other objectives. Moreover, there is still much emphasis on the need for convergence of social policies, leaving little space for pluralism and differentiation. 13.55

As seen above, the need for greater social sensitivity was much stronger with regard to conditionality in the context of financial assistance programmes. To this end, EU institutions have adopted a twofold set of measures: those seeking to enhance conditionality’s social content and those aiming at reconnecting bailout instruments with EU law.

13.56

As for the first set of measures, in 2014, the political manifesto of Juncker’s Commission promised that ‘in the future, any support and reform programme [should go] not only through a fiscal sustainability assessment; but through a social impact assessment as well’, so as to ensure that ‘the social effects of structural reforms [are] discussed in public’.118 The Commission is now purporting to make this move permanent: Article 13 of the Statute of the proposed European Monetary Fund, which should replace the ESM, establishes that the conclusion of the MoU is to be preceded by a social impact assessment. In the meanwhile, this tool has already been used in the context of the third Greek Adjustment Programme of 2015. Unfortunately, the document appears to be more of an attempt to legitimize the choice to persevere with austerity, praising the good results achieved in the past, rather than a genuine attempt to engage with the Greek social catastrophe.

13.57

The gulf between words and deeds is evident also with regard to the content of more recent MoUs. Alongside scattered references to the need for greater social justice and enhanced protection for the most vulnerable layers of the population, these documents still consider social policy as a cost to be reduced or as a factor that should contribute to boost the concerned state’s competitiveness. Quite tellingly, the Greek Supplemental MoU of 2016 urged Greek authorities to ‘compensate for the cost of the Council of State ruling (equivalent to two per cent of GDP) on some aspects of the previous pension reforms’.119 This condition refers to a 2015 decision by the Greek Supreme CJEU finding that the 2012 pension cuts breached the Greek Constitution and the European Convention of Human Rights (‘ECHR’) for depriving pensioners of their right to a decent life. Quite remarkably, the protection of social rights has gone from being a cornerstone of the so-called European social model to a cost to be compensated.

13.58

A second set of measures that could potentially contribute to overcome the one-sided approach that has traditionally characterized bailout packages are those attempting to fully connect conditionality instruments with EU law and, by these means, to ensure that the measures adopted in that context comply with its limits and guarantees. As seen above, a first step in that direction was taken with the adoption of Regulation 472/2013 requiring euro area Member States to transpose part of the content of MoUs into a macroeconomic 118 Jean-Claude Juncker, ‘A New Start for Europe: My Agenda for Jobs, Growth, Fairness and Democratic Change. Political Guidelines for the next European Commission’ (Strasbourg, 15 July 2014). On the inconsistencies of the monitoring activities carried out to measure conditionality policy’s impact on the vulnerable see Roderic O’Gorman, ‘The Failure of the Troika to Measure the Impact of the Economic Adjustment Programmes on the Vulnerable’ (2017) 44 Legal Issues of Economic Integration 265–92. 119 Commission, ‘Supplemental Memorandum of Understanding: Greece’ (16 June 2016) 4.

SOME CONCLUSIVE REMARKS 349 adjustment programme that has to take ‘into account the practice and institutions for wage formation and the national reform programme of the Member State concerned’, as well as to ‘fully observe Article 152 TFEU and Article 28 of the Charter’.120 In December 2017, the Commission proposed to go further, by transforming the ESM into the European Monetary Fund.121 The new body should be established by a Council Regulation adopted on the basis of Article 352 TFEU and, consequently, it would be rooted in the EU legal framework. In the above-mentioned Florescu judgment, the CJEU has already clarified the implications of such a move. In that case, concerning a financial assistance programme based on EU law, the CJEU found that the MoU was ‘part of EU law’,122 and that the Charter was applicable to national measures adopted to implement the undertakings contained therein. The CJEU had the chance to shed more light on the legal nature of a MoU concluded in the context of a non-EU based bailout package, but it chose to dodge the issue. The case concerned the request made by a Portuguese judge asking whether the reduction of the salaries of the Portuguese Court of Auditors was compatible with the principle of judicial independence, as enshrined in Article 19 TFEU and Article 47 of the Charter. As for this second aspect, AG Saugmandsgaard Øe concluded, albeit in a rather confusing manner, that the measure at stake ‘constitutes an implementation of provisions of EU law, within the meaning of Article 51 of the Charter’,123 due to its strong linkage with the EU legal order. Conversely, the CJEU focused exclusively on Article 19 TFEU, which has a broader scope of application than Article 51 of the Charter and, consequently, it does not impose to determine whether, when honouring the commitments contained in a MoU, Member States are implementing EU law or not.124 However, it is worth highlighting that the CJEU has already come to admit that also the measures adopted in non-EU based assistance programmes are amenable to some form of supranational judicial review, at least with regard to their compatibility with EU law provisions on fundamental rights. In Ledra, a case concerning the ESM-based bailout programme, the CJEU declared the admissibility of action for damages brought against the EU by Cypriot investors, pointing to the key role played by the Commission in the negotiation and the conclusion of the MoU.125

13.59

The opening up of new judicial avenues for the protection of fundamental rights has been counterbalanced by the adoption an extremely deferential approach when reviewing the compatibility of national measures with the Charter. The CJEU limited the intensity of its scrutiny, by granting a wide margin of discretion to national authorities which, as stated in Florescu, are ‘in the best position to determine the measures likely to achieve the objective

13.60

120 Article 7 Regulation (EU) 472/2013. 121 On this proposal and the ensuing debate, see Alicia Hinarejos, ‘A Possible European Monetary Fund and the Future of the Euro Area’ (2019) Yearbook of European Law (advance article available at accessed 27 January 2020). 122 Florescu and Others (n 80) para 47. 123 Case C-64/16 Associação Sindical dos Juízes Portugueses [2017] ECLI:EU:C:2017:395, Opinion of AG Saugmandsgaard Øe, para 53. 124 Case C-64/16 Associação Sindical dos Juízes Portugueses [2018] ECLI:EU:C:2018:117. 125 Joined Cases C-8/15 P to C-10/15 P Ledra Advertising Ltd and Others v Commission and ECB [2016] ECLI:EU:C:2016:701, paras 58–59. On the judgment, see Andrea Spagnolo, ‘The Loans of Organs Between International Organization as “Normative Bridge”: Insights from Recent EU Practice’ (2017) 26 Italian Yearbook of International Law 171–90; René Repasi, ‘Judicial Protection Against Austerity Measures in the Euro Area: Ledra and Mallis’ (2017) 54 Common Market Law Review 1123–56. See more recently Case T-107/17 Frank Steinhoff and Others v European Central Bank [2019] ECLI:EU:T:2019:353 declaring the admissibility of an action for damages against the EU for actions took by the ECB.

350 THE EMU AND THE EUROPEAN SOCIAL DIMENSION pursued’.126 While this is certainly true in abstract terms, the adoption of such a deferential approach in a context where national authorities’ autonomy has been severely curtailed, if not completely annihilated, sounds a bit paradoxical, to say the least. 13.61

The above-described initiatives are welcome signs of a much-needed change. However, they offer more of a symbolic than a substantive response to transformation of the European social dimension into an EMU adjustment variable. The introduction of new social indicators, the adoption of social impact assessments or the incorporation of bailout instruments into the EU legal order can, if duly activated, contribute to a better balancing between competing objectives, but they are obviously unable to emancipate social policy from its role of shock absorber within the EMU and to opening up some policy space for autonomy and diversity in the social domain. What could help in this regard is the creation of a centralized fiscal capacity to finance budgetary transfers across the Member States of the Euro area.127 However, no meaningful steps have been taken in that direction, due to strong opposition by some Member States and lack of initiative on the side of EU institutions.128 For instance, in the 2013 Communication on the strengthening of the social dimension the Commission, while acknowledging the importance of such an instrument for solidarity purposes, ruled out the possibility to establish an insurance system to pool the risks of economic shocks across Member States, citing lack of legal competences as an unsurmountable obstacle.129 As convincingly argued by some scholars,130 this position is too dismissive of the possibilities offered by the Treaties and, in particular, by Article 352 TFEU, at least with regard to the creation of the European unemployment benefit scheme. Indeed, the establishment of a mechanism that allows the transfer of a sum from a European fund to the national general budget when the unemployment rate of a certain country exceeds a pre-determined threshold would certainly help ‘to attain one of the objectives set out in the Treaties’, as required by the flexibility clause. More in detail, such a scheme would serve the aims set out in Article 3 TEU, read in conjunction with Article 9 TFEU, contributing to achieve higher standards of social cohesion with regard to unemployment. Furthermore, the recourse to Article 352 TFEU for the creation of the scheme is necessary due to the lack, or at least the insufficiency, of other EU competences to proceed along this path.

126 Florescu and Others (n 80) para 57. 127 For an in-depth analysis of the desiderability and feasibility of this much-debated reform, see Luca Lionello, ‘Establishing a budgetary capacity in the Eurozone. Recent proposals and legal challenges’ (2018) 24 Maastricht Journal of Comparative and European Law 822–42; Miguel Poiares Maduro, ‘A New Governance for the European Union and the Euro: Democracy and Justice’ (2012) EUI RSCAS Policy Paper 2012/11. See further Chapter 42 by Paul Craig and Menelaos Markakis, paras 42.1–42.136. 128 See Commission, ‘Reflection Paper on the Deepening of the Economic and Monetary Union’ COM (2017) 291; Commission, ‘Roadmap for deepening the Economic and Monetary Union’ accessed 27 January  2020. 129 Commission, ‘Strengthening the Social Dimension Communication’ (n 110) 11. 130 René Repasi, Legal Options and Limits for the Establishment of a European Unemployment Benefit Scheme (Publication Office of the European Union 2017) 37–38.

14

THE EUROPEAN CENTRAL BANK Michael Ioannidis*

I. Introduction 14.1 II. A Concise Chronology of the ECB 14.4 III. Institutional Set-Up and Governance 14.10 A. On systems and mechanisms: the ESCB, the Eurosystem, and the Single Supervisory Mechanism B. The ECB’s institutional structure C. The ECB and the NCBs

14.10 14.17 14.28

D. The ESCB/Eurosystem committees

14.34 14.39 A. Competences, objectives, and tasks 14.40 B. Prohibition of monetary financing 14.46 C. Independence and accountability 14.50 D. Bridging the three constitutional pillars 14.75 V. ECB Instruments 14.78 VI. Concluding Remarks 14.85

IV. ECB’s Three Constitutional Pillars

I. Introduction The European Central Bank (ECB) is the only central bank governed by supranational constitutional law. As such, it is not only the most important institution of the Economic and Monetary Union (EMU), but it also marks a new stage in the history of central banking in general.1 Historically, the tasks and functions of the ECB have reflected the different stages of development of the EMU. The basic principles governing its function were set out in Maastricht, reflecting the interests and ideas about Europe’s economic constitution prevailing at that time.2 The sovereign debt crisis that hit Europe in 2010 was the second defining moment for the ECB after Maastricht. It posited the ECB—like the rest of the EMU—to challenges that some of the drafters of the Maastricht Treaty had not fully anticipated. These new challenges led to the adoption of novel instruments and the further clarification of fundamental rules and principles. Most important of these developments was the entrustment of the ECB with a new task, banking supervision, and the adoption of * The opinions expressed in this chapter are personal and do not necessarily represent the official position of the ECB or of the Legal Services. 1 For a historical account of central banking, see Charles A E Goodhart, The Evolution of Central Banks (MIT Press 1988); Charles A E Goodhart, ‘The Changing role of central banks’ (2011) 18 Financial History Review 135; Curzio Giannini, The Age of Central Banks (Edward Elgar Publishing 2011); Michael D Bordo and Pierre L Siklos, ‘Central Banks: Evolution and Innovation in Historical Perspective’ in Rodney Edvinsson, Tor Jacobson, and Daniel Waldenström (eds), Sveriges Riksbank and the History of Central Banking (CUP 2018); Ulrich Bindseil, Central Banking before 1800: A Rehabilitation (OUP 2019). 2 Carel C A van den Berg, The Making of the Statute of the European System of Central Banks (Dutch UP 2005) (hereafter van den Berg, The Making of the Statute of the European System of Central Banks); Harold James, Making the European Monetary Union: The Role of the Committee of Central Bank Governors and the Origins of the European Central Bank (Harvard UP 2012) 265ff (hereafter James, Making the European Monetary Union); Markus K Brunnermeier, Harold James, and Jean-Pierre Landau, The Euro and the Battle of Ideas (Princeton UP 2016) 317ff. Michael Ioannidis, 14 The European Central Bank In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0018

14.1

354 THE EUROPEAN CENTRAL BANK unconventional measures, which proved necessary to fulfil its monetary-policy mandate.3 Ultimately, not only did the ECB withstand the crisis but it emerged as a protagonist in securing the unity and integrity of the EMU. 14.2

Understanding the ECB and its development over time requires keeping in mind two basic elements that distinguish it from other central banks: The ECB is an institution providing a supranational public good and governed by supranational constitutional law. Originally, central banks largely operated under the principles of private law. Later, when they were understood as providing public goods that merited public control,4 they increasingly became subject to rules and principles of public law, including, sometimes, constitutional law. The establishment of the EMU marks a new stage in this development. It extended the public good of price stability from the national to the supranational level and constituted, for the first time, a central bank on the basis of rules of supranational public law of a constitutional status.

14.3

Because of this unique nature, ECB law presents several characteristics that do not allow for a simple transposition of concepts developed at the national level but require rethinking some basic principles of central banking.5 One of these basic novelties is that monetary and supervisory tasks in the EU are carried out by composite systems: the European System of Central Banks (ESCB), the Eurosystem, and the Single Supervisory Mechanism (SSM). These systems comprise the ECB, a supranational body, and national authorities. This chapter is about the ECB and its role as the most important component of the ESCB, the Eurosystem, and the SSM. Section II starts with a concise chronology, setting out the basic milestones of the EMU and the ECB.6 Section III presents the role of the ECB in the ESCB/Eurosystem and the SSM, and Section IV discusses the three basic constitutional pillars on which the ECB stands. Section V focuses on the basic instruments of the ECB.

II. A Concise Chronology of the ECB 14.4

Behind the achievement of establishing the ECB on 1 June 1998 lays a long and eventful history. The institutional progeny of European monetary policy can be traced back to 1957 and the Treaty of Rome, which established an advisory Monetary Committee in order ‘to promote co-ordination of the policies of Member States in the monetary field’.7 In 1962, the European Commission included in its proposal for furthering European economic integration—the so-called Marjolin Memorandum—a chapter on monetary policy, which called for ‘a council composed of the Governors of the Banks of Issue of the Community countries’, envisioned by the authors of this proposal to eventually become ‘the central organ 3 See Chapters 22 and 41. 4 For the classic account, see Walter Bagehot, Lombard Street: A Description of the Money Market (Henry S King & Co 1873). 5 See Chiara Zilioli, ‘Accountability and Independence: irreconcilable values or complementary instruments for democracy? The specific case of the European Central Bank’ in Georges Vandersanden and Aline de Walsche (eds), Mélanges en hommage à Jean-Victor Louis (vol 2, Ed. De l’Univ de Bruxelles 2013) 396. 6 For the history of European monetary integration in general, see Chapter 2. 7 Article 105(2). The Monetary Committee was comprised of representatives of central banks and finance ministries, with the latter having the upper hand, see James, Making the European Monetary Union (n 2) 41ff.

A Concise Chronology of the ECB 355 of a federal type banking system’.8 In May 1964, the Council established the Committee of Governors of the central banks of the Member States of the European Economic Community (EEC) in order to promote cooperation and coordination between the central banks of the Member States.9 The Committee of Governors was the earliest institutionalized predecessor of central-bank coordination in modern European integration. Task of the Committee was to provide a forum for national central banks to hold consultations concerning the general principles and the broad lines of their policies, to exchange information at regular intervals about their most important measures, and also to ‘examine those measures’.10 In 1970, the Werner Report set out a plan to realize the EMU by stages.11 In April 1972, the so-called ‘snake’ was introduced, a system for progressively narrowing the margins of fluctuation between the currencies of the Member States of the European Economic Community (EEC).12 In March 1979, the European Council established the European Monetary System (EMS)13 and the European Currency Unit (ECU) was introduced.

14.5

In June 1988, the European Council mandated the Delors Committee, named after its Chair, to make proposals for the concrete realization of the EMU. Almost one year later, in April 1989, the ‘Delors Report’ was submitted to the European Council.14 The Report proposed the establishment of an economic and monetary union following three ‘discrete but evolutionary steps’. First, completing the internal market; second, establishing the basic organs and organizational structure of EMU as well as strengthening of economic convergence; and third, locking the exchange rates and assigning EU institutions full monetary and economic responsibilities. The historical events that followed, and mainly the process

14.6

8 Commission, ‘Memorandum of the Commission on the Action Programme of the Community for the Second Stage’ (Brussels, 24 October 1962) 64–65 and 67 accessed 10 February 2020. 9 Council Decision 64/300/EEC of 8 May 1964 on cooperation between the Central Banks of the Member States of the European Economic Community [1964] OJ L77/1206. 10 Article 3 Council Decision 64/300/EEC. See in detail, James, Making the European Monetary Union (n 2). 11 ‘Report to the Council and the Commission on the realisation by stages of Economic and Monetary Union in the Community (Werner Report)’ (1970) accessed 10 February 2020. 12 The design of this arrangement was provided by the report of the group of experts established by the Committee of Governors of the Central Banks of the Member States and presided over by M Théron, Théron, ‘Comité des Gouverneurs des Banques centrales des Etats membres de la Communauté économique européenne, Pre-rapport du Groupe d’experts présidé par M. Théron’ (8 January 1972) accessed 10 February 2020. After considering the Théron Report, the Council resolved to gradually reduce the margins for currency fluctuations; Council of European Community Resolution and of the Representatives of the governments of the Member States of 21 March 1972 on the application of the Resolution of 22 March 1971 on the attainment by stages of economic and monetary union in the Community [1972] OJ C38/3. The resolution of the Council of Ministers was concretized in the Basel Accord, concluded between the EC central banks on 10 April 1972 and entered into force on 24 April 1972. 13 The EMS was agreed, in principle, by the European Council in the Bremen meeting of 6/7 July 1978, European Council, ‘Conclusions of the Presidency of the European Council on the 6 and 7 July 1978’ (Brussels, 18 July 1978) accessed 10 February 2020. The details were determined in the Brussels meeting of 5 December 1978, European Council, ‘Conclusions of the Presidency of the European Council’ (Brussels, 5 December 1978) accessed 10 February  2020. 14 Committee for the Study of Economic and Monetary Union, ‘Report on economic and monetary union in the European Community’ (chaired by Jacques Delors, 17 April 1989) accessed 10 February 2020.

356 THE EUROPEAN CENTRAL BANK of German reunification, put the project of establishing a monetary and economic union under new light. 14.7

The Treaty on European Union (Maastricht Treaty), signed in 1992, established the European Union and laid the foundation for the euro.15 It included a chapter on economic and monetary policy and attached the ESCB/ECB Statute as Protocol No 4 to the Treaties.16 The rules contained therein set out the basic legal framework for the ECB. Having the status of primary EU law, they are hierarchically superior both to national law and to secondary EU law, enjoying thereby constitutional-law status.17 Stage two of the EMU begun in January 1994. The European Monetary Institute (EMI) was established, having the role of a transitory body to undertake the preparatory work for stage three of the EMU.18 The Committee of Governors ceased to exist, and the EMI Council was established as the governing body of the EMI.

14.8

In December 1995, the euro was announced.19 The Council established that the first countries to fulfil the convergence criteria for its adoption were Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland.20 In May 1998, the Heads of State or Government of the Member States made the last critical steps to adopt the single currency and set up a Union monetary authority.21 They appointed the President and the first Members of the Executive Board, selected the first Member States to adopt the euro, and announced the irrevocable fixing of the exchange rates. On 1 June 1998, the ECB and the ESCB were established and in January 1999 stage three of the EMU begun. The euro became the single currency of the euro area and the single monetary policy is from now on conducted by the ECB Governing Council.

14.9

The principles set out in the Maastricht Treaty regarding the ECB and monetary policy in the EU were put to a difficult test during the Eurozone crisis. The crisis challenged the resilience of the EMU and required new approaches and instruments. New bodies were established, most prominently financial-assistance vehicles, such as the European Stability Mechanism (ESM),22 and new sets of rules, such as the ‘six-pack’,23 were adopted, aiming to improve both precautionary economic coordination and crisis management. The ECB also took part in this cosmogony. It was given a role in financial-assistance conditionality,24

15 Treaty of Maastricht on the European Union [1992] OJ C191/1. 16 Denmark, as the United Kingdom until its withdrawal from the EU, is granted a special status, not being obliged to participate in Stage three of the EMU. 17 Some of the rather technical provisions the ESCB/ECB Statute are subject to a simplified amendment procedure under Article 129(3) TFEU and Article 40.1 ESCB/ECB Statute, following the ordinary legislative procedure. 18 Article 117 EC Treaty. 19 Commission, ‘Madrid European Council Meeting (15 and 16 December 1995): Presidency Conclusions’ (Press Release) accessed 10 February  2020. 20 Council Decision 98/317/EC of 3 May 1998 in accordance with Article 109j(4) of the Treaty [1998] OJ L139/ 30. 21 See, in detail, Tommaso Padoa-Schioppa, The Road to Monetary Union in Europe: The Emperor, the Kings, and the Genies (OUP 2000). 22 See Chapter 12. 23 See Chapters 27 and 28. 24 See Article 7(1), (4) and (5) European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1 and Article 13(1), (3) and (7) ESM Treaty see Chapter 30.

Institutional Set-Up and Governance 357 adopted unconventional measures,25 and was assigned the task of banking supervision through the SSM.26 These fundamental changes reshaped the ECB to what it currently is, thereby presenting the next phase in the constitutional development of the ECB.27

III. Institutional Set-Up and Governance A. On systems and mechanisms: the ESCB, the Eurosystem, and the Single Supervisory Mechanism Monetary policy—and later also banking supervision—at supranational level requires significant institutional innovations. One of them is the introduction of ‘system’ as a basic category of EU institutional law. In the field of monetary policy, there are two systems, the ESCB and the Eurosystem, while in the field of banking supervision, one, the SSM.28 Systems, like organizations, fulfil certain tasks. Unlike organizations, however, systems are not unitary entities. Systems have neither decision-making capacity of their own nor legal personality. They are forms of integrating entities that retain their institutional autonomy.29

14.10

The ESCB is a system comprised of the ECB and of the National Central Banks (NCBs) of all EU Member States,30 including those which have not adopted the euro, either because of

14.11

25 Such as the Outright Monetary Transactions (OMT) Programme. For an overview, see Vítor Constâncio, ‘Role and effects of the ECB non-standard policy measures’ (Remarks at the ECB Workshop ‘Monetary Policy in Non-Standard Times’ 11 and 12 September 2017, Frankfurt am Main) accessed 10 February 2020. 26 Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63 (SSM Regulation); and ECB Regulation (EU) 468/2014 of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM Framework Regulation) (ECB/2014/17) [2014] OJ L141/1. See further Chapters 26 and 37. 27 On the development of the Eurozone during the crisis as a process of constitutional transformation, see Kaarlo Tuori and Klaus Tuori, The Eurozone Crisis: A Constitutional Analysis (CUP 2014); Giuseppe Martinico, ‘EU Crisis and Constitutional Mutations: A Review Article’ (2014) 165 Revista de Estudios Políticos 247; Thomas Beukers, ‘Legal writing(s) on the Eurozone crisis’ (2015) EUI Working Paper LAW 2015/11; Michael Ioannidis, ‘Europe’s new transformations: How the EU economic constitution changed during the Eurozone crisis’ (2016) 53 Common Market Law Review 1237. 28 While referred to as a ‘mechanism’ in its title, the SSM is also defined as a ‘system’ in Article 2(9) SSM Regulation. Of course, the SSM construction is different in many aspects for the Eurosystem, importantly, supervisory competences are attributed exclusively to the ECB, as foreseen by the legal basis Article 127(6) TFEU, and the ECB is in charge of overseeing the functioning of the mechanism. Responsibilities are then assigned by the regulation also to national competent authorities, which need to cooperate with the ECB in the achievement of the objectives of the SSM Regulation. 29 System is also the basis of the organization of the US central banking. The framers of the Federal Reserve Act purposely rejected the concept of a single central bank. Instead, they provided for a central banking ‘system’ with three salient features: the Board of Governors, the Federal Reserve Banks (Reserve Banks), and the Federal Open Market Committee (FOMC). The Board of Governors, an agency of the federal government that reports to and is directly accountable to the US Congress, provides general guidance for the System and oversees the twelve Reserve Banks. Within the System, certain responsibilities are shared between the Board of Governors in Washington, DC, whose members are appointed by the President with the advice and consent of the Senate, and the Federal Reserve Banks and Branches, which constitute the System’s operating presence around the country. While the Federal Reserve has frequent communication with executive branch and congressional officials, its decisions are made independently. 30 See Article 282(1) first sentence TFEU and Article 1 ESCB/ECB Statute.

358 THE EUROPEAN CENTRAL BANK derogation31 or of their special status.32 In terms of composition, the Eurosystem is a subsystem of the ESCB, comprised of the ECB and the national central banks of the Member States whose currency is the euro.33 It has thus fewer members than the ESCB but plays the central role in the EMU. This subsystem has been unofficially referred to as ‘Eurosystem’ by the ECB already since 1998,34 a term that was later introduced into primary law with the Treaty of Lisbon. Article 282(1) of the Treaty on the Functioning of the European Union (TFEU) now explicitly refers to the Eurosystem as a Union institutional structure. The Eurosystem is responsible for the monetary policy of the Union and the system’s other core tasks. According to Article 139(2)(c) TFEU, the objectives and tasks that Article 127 TFEU ascribes to the ESCB are only relevant to Member States whose currency is the euro.35 Especially the monetary policy of the Union is a task for the ECB and NCBs of the Member States whose currency is the euro.36 The combined reading of these provisions established the Eurosystem as the basic monetary-policy structure of the EMU already before its official labelling by the Treaty of Lisbon. 14.12

The ESCB and the Eurosystem are comprised by central banks with their own legal personality. The ECB and the NCBs remain thus legally separate both from each other and from the system(s) they belong to. While not unitary organizations, the ESCB and the Eurosystem represent: a novel legal construct in EU law which brings together national institutions, namely the national central banks, and an EU institution, namely the ECB, and causes them to cooperate closely with each other, and within which a different structure and a less marked distinction between the EU legal order and national legal orders prevails.37

This ‘highly integrated system’38 is established on the basis of two cornerstone legal principles, which function as a ‘connecting tissue’ linking central banks to the Eurosystem.39 14.13

The first is the principle of hierarchical subordination of the NCBs to the ECB. According to this principle, which is manifested in various provisions of the TFEU and the ESCB/ECB Statute, NCBs are hierarchically integrated in the Eurosystem, at the apex of which is the 31 According to Article 139(1) TFEU: ‘Member States in respect of which the Council has not decided that they fulfil the necessary conditions for the adoption of the euro shall hereinafter be referred to as “Member States with a derogation” ’. 32 Denmark and, until its withdrawal from the EU, the United Kingdom. 33 See Article 282(1) TFEU and Article 1 ESCB/ECB Statute. 34 See ECB Opinion of 19 September 2003 at the request of the Council of the European Union on the draft Treaty establishing a Constitution for Europe (CON/2003/20) [2003] OJ C229/7, para 14. There, the ECB argued in favour of the official inclusion of the term ‘Eurosystem’ in the Constitutional Treaty for reasons of clarity and accessibility. 35 Pursuant to Article 42.1 ESCB/ECB Statute, which is the corresponding provision in the Statute, however, only Article 3 (tasks), but not Article 2 (objectives) ESCB/ECB Statute is not applicable to Member States with a derogation. Considering also that Article 14.2 ESCB/ECB Statute, aimed to protect the attainment of ESCB objectives, protects all Governors, the ECB takes the view that the objectives apply to all ESCB members. See ECB, ‘Convergence Report 2018’ (ECB 2018) 20. 36 Article 282(1) TFEU. Article 139 TFEU and Article 42 ESCB/ECB Statute list the provisions of primary law that do not apply to Member States with a derogation and their NCBs. 37 Joined Cases C-202/18 and C-238/18 Ilmārs Rimšēvičs/ECB v Republic of Latvia [2019] ECLI:EU:C:2019:139, para 69 (hereafter Rimšēvičs). 38 Rimšēvičs (n 37) para 70. 39 See also Chiara Zilioli and Phoebus Athanassiou, ‘The European Central Bank’ in Robert Schütze and Takis Tridimas (eds), Oxford Principles of European Union Law (OUP 2018) 628ff (hereafter Zilioli and Athanassiou, ‘The European Central Bank’).

Institutional Set-Up and Governance 359 ECB. Article 8 ESCB/ECB Statute provides that the ESCB/Eurosystem is governed by the decision-making bodies of the ECB, and according to Article 14.3 ESCB/ECB Statute, the NCBs are ‘an integral part of the ESCB and shall act in accordance with the guidelines and instructions of the ECB’. Within its field of competence, thus, the ECB has the power to issue legal instruments by which it subjects the NCBs to its instructions and thereby governs the Eurosystem. Such internal legal instruments are part of EU law and therefore enjoy primacy.40 According to Article 42.1 ESCB/ECB Statute and Article 139(2)(e) TFEU, Article 14.3 ESCB/ECB Statute and the acts of the ECB do not apply to Member States with a derogation. The principle of hierarchical subordination is also reflected in the power of the ECB to find that non-Eurosystem related NCB functions unacceptably interfere with the objectives and tasks of the Eurosystem, according to Article 14.1 ESCB/ECB Statute. The overall competence and the responsibility to ensure compliance with ECB guidelines and instructions belong to the ECB Governing Council. If the ECB considers that a national central bank has failed to fulfil its obligations, it may ultimately bring the issue before the Court of Justice of the European Union (CJEU).41 NCB integration to the Eurosystem has thus the form of hierarchical integration.42 The second principle that structures the Eurosystem is that of decentralized implementation. Article 12.1 ESCB/ECB Statute provides that ‘to the extent deemed possible and appropriate . . ., the ECB shall have recourse to the national central banks to carry out operations which form part of the tasks of the ESCB’.43 This provision allows and encourages the ECB to rely on the NCBs for carrying out its (centrally decided) policies. Indeed, the NCBs fulfil the basic implementing operations of the Eurosystem, such as monetary policy operations, payment settlement facilities, and actual euro banknote circulation subject to the authorization of the ECB. The NCBs are thus the operating arm of the Eurosystem. The principle of decentralized implementation does not require that all NCBs are equally involved in the fulfilment of Eurosystem tasks. Certain tasks may be implemented by some national central banks, such as the case with TARGET2,44 banknote production, or the purchase of bonds issued by international organizations in the context of ECB’s quantitative easing programme,45 which is carried out by Banco de España and Banque de France.46

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The Single Supervisory Mechanism, EU’s system of banking supervision, comprises the ECB and the national competent authorities (NCAs) of participating Member

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40 See Zilioli and Athanassiou, ‘The European Central Bank’ (n 39) 624. 41 Article 35.6 ESCB/ECB Statute. According to the procedure provided for in this provision, if the ECB considers that an NCB has failed to fulfil an obligation under the Treaties and this Statute, it shall deliver a reasoned opinion on the matter after giving the NCB concerned the opportunity to submit its observations. If the NCB concerned does not comply with the opinion within the period laid down by the ECB, the latter may bring the matter before the CJEU. 42 This principle is also reflected in other provisions, such as Articles 9.2 and 31.2 of the ESCB/ECB Statute, see Zilioli and Athanassiou, ‘The European Central Bank’ (n 39) 628. 43 Within the Eurosystem, according to Article 9.2 ESCB/ECB Statute, it is the ECB which ensures that the tasks under Articles 127(2), (3), and (5) TFEU are implemented, either through its own activities or through the NCBs pursuant to Articles 12.1 and 14 ESCB/ECB Statute. Article 9.2 ESCB/ECB applies only within the Eurosystem, Article 42.1 ESCB/ECB Statute. See further Chapters 15 and 22. 44 See Chapter 24. 45 See Chapter 22. 46 See Zilioli and Athanassiou, ‘The European Central Bank’ (n 39) 627; Chiara Zilioli and Martin Selmayr, The Law of the European Central Bank (Hart Publishing 2001) 65–66 (hereafter Zilioli and Selmayr, The Law of the European Central Bank).

360 THE EUROPEAN CENTRAL BANK States. Depending on national arrangements NCAs can be the NCBs or other, distinct authorities. Unlike in the field of monetary policy, where, according to Article 127(1) and (2) TFEU, competences are allocated to the Eurosystem, supervisory competences are conferred, following Article 127(6) TFEU, exclusively on the ECB—and not on the mechanism.47 Significant credit institutions are directly supervised by the ECB, while less significant institutions (LSIs) are directly supervised by NCAs.48 The ECB supervises significant institutions through the Joint Supervisory Teams (JSTs).49 JSTs are established for each significant institution and are composed by ECB and NCA staff members, with the JST coordinator always being an ECB staff member. They are responsible for carrying out day-to-day supervision, the implementation of the annual supervisory program, and the implementation of decisions of the Governing Council.50 The ECB competences with regard to LSI supervision are basically discharged through NCAs.51 NCAs are required to deliver regular quantitative and qualitative information about LSIs and to respond to information requests, while the ECB may address them regulations, guidelines or general instructions.52 14.16

Certain aspects of the principles of hierarchical integration and decentralized implementation are also reflected in the SSM. First, the ECB has the oversight of the supervisory mechanism and the overall responsibility for the operation and functioning of the SSM.53 NCAs, when performing the tasks mentioned in Article 4 SSM Regulation shall follow the instructions of the ECB.54 Second, Article 6 SSM Regulation enables the decentralized implementation of certain supervisory competences. On this basis, as the CJEU has also recognized, the NCAs assist the ECB in carrying out the tasks conferred on it in relation to less significant credit institutions.55 Although tightly connected, the constituent parts of the ESCB/Eurosystem and the SSM, namely the ECB (Section III.2) and the NCBs/ NCAs (Section III.3), retain their organizational autonomy. Committees are a structure of the ESCB/Eurosystem that brings expertise developed at an NCB/NCA level to the ECB (Section III.3).

B. The ECB’s institutional structure 14.17

The ECB is one of Union’s seven institutions. It was established in 1998 as an independent body of the European Communities. Its status as a Union institution was clarified with its 47 See also Article 4(1) SSM Regulation; Case C-450/17 P Landeskreditbank Baden-Württemberg—Förderbank v ECB [2019] ECLI:EU:C:2019:372, paras 38–49 (hereafter L-Bank); Agnese Pizzolla, ‘The Role of the European Central Bank in the Single Supervisory Mechanism: A New Paradigm for EU Governance’ (2018) 43 European Law Review 3, 16 (hereafter Pizzolla, ‘The Role of the European Central Bank in the Single Supervisory Mechanism’). 48 Article 6(4) SSM Regulation. See in detail Chapters 26 and 37. 49 Article 3(1) ECB Regulation (EU) 468/2014. 50 Article 3(1) SSM Framework Regulation. 51 Article 6(6) SSM Regulation. 52 Article 6(5) and (6) SSM Regulation. 53 Article 6(1) and (5) (c) SSM Regulation. 54 Article 6(3) SSM Regulation. According to Article 6(5)(a) SSMR, the ECB can adopt (binding) regulations, guidelines, and general instructions addressed to NCAs for the supervision of LSIs. Thus, even though Articles 14.4 and 35.5 ESCB/ECB Statute do not apply in the SSM context, there are elements of a strongly centralized model, Pizzolla, ‘The Role of the European Central Bank in the Single Supervisory Mechanism’ 19 (n 47). 55 L-Bank k (n 47) paras 41 and 49.

Institutional Set-Up and Governance 361 inclusion in the list of Article 13(1) of the Treaty on European Union (TEU) by the Treaty of Lisbon. Unlike the other EU institutions, the ECB has legal personality,56 and may be separately incur non-contractual liability, subject to the regime provided for in Article 340 TFEU.57 The ECB—and thus also the Eurosystem—is governed by three decision-making bodies: the Governing Council, the Executive Board, and the General Council. With regard to the supervisory tasks conferred on the ECB, the Supervisory Board of the SSM prepares draft decisions, which are ultimately adopted by the Governing Council under the quasi- automatic non-objection procedure.

1. The Governing Council The Governing Council is the main decision-making body of the ECB in its monetary function and the only one in its supervisory function. It is responsible for adopting the guidelines and decisions that are necessary to fulfil the tasks of the Eurosystem.58 The Governing Council formulates the monetary policy of the Union and takes the decisions relating to intermediate monetary objectives, key interest rates, and the supply of reserves.59 In addition, the Governing Council adopts the ECB Rules of Procedure,60 exercises the advisory functions of the ECB,61 takes decisions in the field of international cooperation, authorizes the issuance of euro banknotes, and regulates the volume of euro coins.62 After the establishment of the SSM, the Governing Council is also ultimately responsible for decisions in the field of prudential supervision, both with regard to fleshing out the general framework of cooperation within the SSM63 and to fulfilling concrete supervisory tasks. In this case of supervisory tasks, however, specific decision-making rules apply, as it will be discussed in the following. The Governing Council comprises the six members of the Executive Board of the ECB and the currently nineteen Governors of the Eurosystem NCBs.64 When acting in their capacity as member of the Governing Council, Governors must be independent.65 Importantly, when making decisions on monetary policy and other Eurosystem tasks, NCB Governors act in a personal capacity as independent experts and not as national representatives (principle of ‘ad personam participation’).66 The independence of Governors serves to ensure that the ESCB/Eurosystem is shielded ‘from all political pressure’ and is thus in a position to effectively pursue the objectives ascribed to its tasks.67 Despite its majority composition by 56 Article 282(3) TFEU and Article 9.1 ESCB/ECB Statute. For the discussion on the recognition of ECB’s international legal personality, see Zilioli and Athanassiou, ‘The European Central Bank’ (n 39) 614–15. 57 Article 35.3 ESCB/ECB Statute. See Case C-8/15 P to C-10/15 P Ledra Advertising v Commission and ECB [2016] ECLI:EU:C:2016:701; Case T-79/13 Accorinti and others v ECB [2015] ECLI:EU:T:2015:756. 58 Article 12.1 ESCB/ECB Statute. 59 Ibid. 60 Article 12.3 ESCB/ECB Statute. 61 Article 12.4 ESCB/ECB Statute. 62 Article 12.5 ESCB/ECB Statute. 63 See, for example, Articles 6(7) and 26(12) SSM Regulation. 64 Article 283(1) TFEU and Article 10.1 ESCB/ECB Statute. 65 Article 130 TFEU and Article 7 ESCB/ECB Statute. 66 See Article 10.2, second paragraph, first sentence ESCB/ECB Statute and Recital (4) of the Council Decision, meeting in the composition of the Heads of State or Government of 21 March 2003 on an amendment to Article 10.2 of the Statute of the European System of Central Banks and of the European Central Bank (2003/223/EC) [2003] OJ L83/66. This principle does not apply to voting based on shares. There, each Governor acts as representative of his central bank. 67 Rimšēvičs (n 37) para 47.

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362 THE EUROPEAN CENTRAL BANK Governors of NCBs, the Governing Council is thus a supranational decision-making body entrusted with defining and pursuing the Union interest. 14.20

In principle, the Governing Council acts by a simple majority of the members having a voting right, the President having the casting vote in the event of a tie.68 Exceptionally, the Governing Council acts by two-thirds majority69 or even unanimously.70 As a general rule, each member of the Governing Council has one vote (‘one member, one vote’ principle).71 Only on certain defined occasions, provided in Article 10.3 ESCB/ECB Statute, voting rights reflect the share of the respective NCB in the capital of the ECB. In 2003, and in order to maintain the Governing Council’s capacity for efficient and timely decision-making in light of the enlargement of the euro area and the increase in the number of members of the Governing Council, a rotation voting system was introduced that applies as long as the euro area has between 19 and 21 Member States.72 According to Article 10.2 ESCB/ECB Statute, there are currently three categories of Governing Council members when it comes to determining voting rights. First, Executive Board members hold permanent voting rights. Second, the Governors from countries ranked first to fifth according to the size of their economies and their financial sectors—currently, Germany, France, Italy, Spain, and the Netherlands—share four voting rights. All other Governors share eleven voting rights. In the last two groups, the Governors take turns, exercising the rights on a monthly rotation. In practice, however, voting rarely actually takes place in the Governing Council. Most decisions are taken by consensus.73

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When it comes to Eurosystem tasks, and in the field of monetary policy in particular, Governing Council meetings are prepared by the Executive Board. When it exercises the supervisory tasks conferred on the ECB, the Governing Council decides following the non-objection procedure. According to this procedure, the Supervisory Board carries out preparatory works and proposes to the Governing Council of the ECB complete draft decisions. A draft decision is then deemed adopted unless the Governing Council objects within a certain period.74 The non-objection procedure is followed with regard to decisions implementing the general supervisory framework or determining the exercise of supervisory tasks of the ECB. Legal acts forming part of the general framework for

68 Article 10.2 ESCB/ECB Statute. For the Governing Council to vote, there must be a quorum of two-thirds of the members having a voting right. In case this quorum is not met, the President of the ECB may convene an extraordinary meeting at which decisions may be taken without regard to the quorum. 69 Article 14.4 ESCB/ECB Statute. 70 Article 40.3 ESCB/ECB Statute. 71 Article 10.1 ESCB/ECB Statute. 72 Council Decision, meeting in the composition of the Heads of State or Government of 21 March 2003 on an amendment to Article 10.2 of the Statute of the European System of Central Banks and of the European Central Bank (2003/223/EC) [2003] OJ L83/66. This amendment of the voting rules was provided for in the Treaty of Nice, which added to the ESCB/ECB Statute a new Article 10.6 to this effect. According to the amended Article 10.2 ESCB/ECB Statute, when the number of euro area Member States exceeds 21, there will exist four categories of Governing Council members. As before, Executive Board members will continue to hold permanent voting rights and the first group of the five largest countries will continue to share four voting rights, However, a third group of Governors from medium-sized countries will receive eight voting rights and the Governors of a fourth group, comprising the smallest countries, will share three voting rights. In general, the system used by the ECB is similar to the one used by the Federal Open Market Committee (FOMC) of the US Federal Reserve. 73 Mario Draghi, ‘Accounts and accountability’ (Euro50 Group Roundtable on ‘Monetary Policy in Times of Turbulence’, Frankfurt am Main, 31 March 2015) accessed 10 February 2020. 74 Article 26(8) SSM Regulation.

Institutional Set-Up and Governance 363 the cooperation within the SSM as well as legal acts on the effective and consistent functioning of the SSM under the overall responsibility of the ECB are adopted by the ECB, in consultation with national competent authorities, and on the basis of a proposal from the Supervisory Board.75 According to the ESCB/ECB Statute, the Governing Council meets at least ten times a year.76 In practice, meetings take place more often. The schedule of the meetings is determined before the start of each calendar year,77 and the meetings are normally held on the premises of the ECB in Frankfurt.78 In order to safeguard the independence of the members of the Governing Council and especially to shield them from potential national pressure, the minutes of the Governing Council meetings are confidential, unless the Governing Council decides to make the outcome of its deliberations public.79 Starting with its meeting of January 2015, the Governing Council publishes regular public accounts of its monetary policy discussions.80 Although these accounts convey the basic motivations of the decisions of the Governing Council, they do not reveal the individual positions of its members, something that could pose a threat to their independence, potentially exposing them to challenges at the national level.

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2. The Executive Board The Executive Board is the executing organ of the ECB. It comprises the President, the Vice- 14.23 President, and four other members.81 The members of the Executive Board are appointed by the European Council, acting by a qualified majority, from among persons of recognized standing and professional experience in monetary or banking matters. The European Council decides on a recommendation from the Council, after consulting the European Parliament and the Governing Council of the ECB.82 Unlike the rest of the members of the Governing Council, thus, the Executive Board’s members are appointed by a Union institution. The Executive Board is charged with most executing functions of the ECB. It is mandated with implementing the monetary policy of the euro area, in accordance with the guidelines and decisions of the Governing Council,83 preparing the meetings of the Governing Council,84 and managing the ‘current business’ of the ECB.85 The notion of ‘current business’ is not further defined in the Treaties, but is interpreted as entailing the management and administrative task for ‘the day-to-day functioning of the ECB’.86 Flowing directly from 75 Article 6(7) SSM Regulation. 76 Article 10.5 ESCB/ECB Statute. 77 Article 2.1 ESCB/ECB Statute. 78 Article 2.4 ESCB/ECB Statute. 79 Article 10.4 ESCB/ECB Statute. 80 The public accounts are available at accessed 10 February 2020. 81 Article 283(2) TFEU and Article 11 ESCB/ECB Statute. 82 Article 282(2) TFEU and Article 11.2 ESCB/ECB Statute. According to the last sentence of Article 283(2) TFEU, read together with Article 139(2)(h) TFEU, only nationals of euro area Member States may be members of the Executive Board. Their term of office is eight years, non-renewable, Article 11.2 ESCB/ECB Statute. 83 Articles 11.6 and 12.1 ESCB/ECB Statute. 84 Article 12.1 ESCB/ECB Statute. 85 Article 11.6 ESCB/ECB Statute. 86 René Smits, The European Central Bank—Institutional Aspects (Kluwer Law International 1997) 97; van den Berg, The Making of the Statute of the European System of Central Banks (n 2) 441.

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364 THE EUROPEAN CENTRAL BANK the Treaties, these tasks of the Executive Board, including the task to implement monetary policy, cannot be revoked or limited by the Governing Council. In this regard, these two ECB bodies are not in a principal-agent relationship, which typically includes the power of the principal to also exercise himself the powers granted to the agent. Further tasks, beyond those originally allocated by the Treaties, may be delegated to the Executive Board by the Governing Council,87 following the general principles on delegation.88 The Executive Board currently meets at least once a week.89 Each member has the right to cast one vote and decisions are made by simple majority. In the event of a tie, the President has the casting vote.90 Since the establishment of the SSM, the Vice Chair of the Supervisory Board of the SSM is appointed from among the members of the Executive Board of the ECB, serving thus as a link between the two bodies.91

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3. The General Council The General Council is the third decision-making body of the ECB.92 Its existence, composition, and tasks reflect the fact that that not all EU Member States have adopted the euro. It was thus intended as a transitionary body for the intermediate period until all EU Member States adopt the common currency. It comprises the President and Vice- President of the ECB,93 and the NCB Governors of all EU Member States—including thus the non-euro area Member States. The responsibilities of the General Council are mainly advisory, coordinating, and supporting.94 Amongst the most important functions of the General Council is to strengthen the coordination of the monetary policies of the Member States, with the aim of ensuring price stability, and to monitor the function of Exchange Rate Mechanism II (ERM II).95 In practice, one of the most significant decisions taken by the General Council is the adoption of the Convergence Reports, through which the ECB reports to the Council, in accordance with Article 140(1) TFEU, on the progress made by the Member States with a derogation in fulfilling their obligations regarding the achievement of economic and monetary union. The General Council is also responsible for deciding on the percentage of ECB subscribed capital that central banks of Member States with derogation have to pay up as a contribution to the operational costs of the ECB.96 The relationship between the General Council and the other decision- making bodies of the ECB is set out in Article 12 ECB Rules of Procedure, with regard to the Governing Council, and in Article 13 ECB Rules of Procedure, with regard to the Executive Board.97

87 Article 12.1 ESCB/ECB Statute. 88 See Article 17.3 ECB Rules of Procedure; Case C-301/02 P Carmine Salvatore Tralli v ECB [2005] ECR I-4071, paras 40ff. 89 Zilioli and Athanassiou, ‘The European Central Bank’ (n 39) 621. 90 Article 11.5 ESCB/ECB Statute. 91 Article 26 SSM Regulation. 92 Article 44.1 ESCB/ECB Statute. 93 The other members of the Executive Board may also participate in the meetings without, however, having the right to vote, Article 44 ESCB/ECB Statute. 94 Article 46 ESCB/ECB Statute. 95 Articles 46.1 and 43 ESCB/ECB Statute and Article 141(2) TFEU. 96 Article 47 ESCB/ECB Statute. 97 The General Council follows its own Rules of Procedure. ECB Decision of 17 June 2004 adopting the Rules of procedure of the General Council of the European Central Bank (ECB/2004/12) [2004] OJ L230/61.

Institutional Set-Up and Governance 365

4. The Supervisory Board The Supervisory Board is the governing body of the SSM responsible for the planning and execution of supervisory tasks, but it is not a decision-making body. As EU primary law provides that the only ECB organs with competence to make binding decisions are the Governing Council and the Executive Board, the SSM Regulation could not have granted the Supervisory Board independent decision-making powers. Article 127(6) TFEU allows the Council to confer supervisory tasks upon the ECB but not to change its institutional structure. The Supervisory Board, thus, proposes draft decisions, which are ultimately adopted by the Governing Council following the non-objection procedure, as described above.98 The Supervisory Board is composed of its Chair and Vice-Chair, four representatives of the ECB, and one representative of the NCA of each participating Member State. The national representative is usually the top executive of the relevant NCA responsible for banking supervision. The Chair and Vice Chair are appointed by the Council after a proposal of the ECB that has been approved by the European Parliament.99 As noted above, the Vice Chair needs to be selected from among the members of the ECB Executive Board.100 The ECB representatives are appointed by the ECB Governing Council.101 Each member has one vote and decisions are taken by simple majority.102 All Supervisory Board members, including delegates from national authorities, are called to represent the Union interest.103

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C. The ECB and the NCBs The ECB is the only capital-based EU institution.104 NCBs are the sole subscribers to and holders of the ECB’s capital.105 The share of each NCB is calculated using a key (‘capital key’), which reflects the respective country’s share in the total population and gross domestic product of the EU. The ECB adjusts the shares every five years and also when a new country joins (or leaves) the EU. Since 1999 the capital key has changed eight times.106 Eurosystem NCBs have fully paid-up their subscriptions to the capital of the ECB while non-Eurosystem NCBs are required to pay up only ‘a minimal percentage’ of their share as contribution to the operational costs incurred by the ECB in relation to their participation in the ESCB.107 98 Article 26(8) SSM Regulation. 99 Article 26(3) SSM Regulation. 100 Ibid. 101 Article 26(5) SSM Regulation. 102 Article 26(6) SSM Regulation. 103 Article 26(1) SSM Regulation. 104 Its capital currently amounts to 10,825,007,069.61 euro. The fully paid-up subscriptions of euro area national central banks (NCBs) to the capital of the ECB amount to a total of 7,619,884,851.40 euro. Since 29 December 2010 the contributions of the EU’s nine non-euro area NCBs have represented 3.75 per cent of their total share in the subscribed capital. The capital paid to the ECB by the non-euro area NCBs amounts to 120,192,083.17 euro, see accessed 10 February  2020. 105 Article 28.2 ESCB/ECB Statute. 106 A five-yearly update was made on 1 January 2004, on 1 January 2009, on 1 January 2014 and on 1 January 2019; additional changes were made on 1 May 2004 (when the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, and Slovakia joined the EU), on 1 January 2007 (when Bulgaria and Romania joined the EU), on 1 July 2013 (when Croatia joined the EU), and on 1 February 2020 (following the withdrawal of the United Kingdom from the EU). 107 Article 47 ESCB/ECB Statute.

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366 THE EUROPEAN CENTRAL BANK 14.29

The net profits and losses of the ECB are allocated among the euro area NCBs in accordance with Article 33 ESCB/ECB Statute. A part of the profits, determined by the Governing Council, is transferred to the general reserve and the remaining is distributed to the shareholders of the ECB in proportion to their paid-up shares. In the event of a loss, the shortfall may be offset against the general reserve fund of the ECB and, if necessary, following a decision by the Governing Council, against the monetary income of the relevant financial year in proportion and up to the amounts allocated to the national central banks in accordance with Article 32.5 ESCB/ECB Statute. Non-Eurosystem NCBs are not entitled to receive any share of the distributable profits of the ECB nor are they liable to fund any losses of the ECB.

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Although NCBs are the holders of ECB’s capital, receive net profits in proportion to their paid-up shares, and might share potential losses,108 they are not shareholders in the classical sense of the term.109 Unlike typical shareholders, they have no appointment or supervision power over the management of the ECB. The President and the other members of the Executive Board are appointed by a Union institution, the European Council,110 and the Governing Council is comprised by the Governors of the NCBs sitting ex officio in their personal expert capacity. Importantly, the ECB is not operating to maximize the profit of its national shareholders but in order to serve the Union public interest.

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Because NCBs hold ECB capital and the ECB Governing Council is also comprised by NCB Governors, NCB law is also relevant from an ECB perspective. The NCBs are legal persons established by national law,111 but the basic elements of their legal status are ultimately defined by Union public law, both institutionally and substantively.112 Whereas complete harmonization of NCB national laws has not been deemed necessary,113 the most important institutional rules for NCBs are prescribed by Union law.114 This covers the requirement of independence and its concretizations, such as the possible grounds for Governors’ removal from office and the minimum duration of their term of office.115 Substantive central-bank norms are also defined by Union law. First, NCBs are required to operate within the general framework established by the Treaties, such as the general obligation to further the objective of maintaining price stability and to act in accordance with the principle of open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 119.116 Second, in line with the principle of hierarchical subordination discussed above, Eurosystem NCBs must follow specific ECB instructions. When they perform their tasks under the ESCB/ECB Statute, thus, the NCBs act as integral operative parts of the Eurosystem117 and as decentralized central banks of the Union. 108 Article 33.1 ESCB/ECB Statute. 109 See for more details Zilioli and Selmayr, The Law of the European Central Bank (n 46) 72–73; Zilioli and Athanassiou, ‘The European Central Bank’ (n 39) 621, 626. 110 Article 11.2 ESCB/ECB Statute. 111 Their ownership differs, reflecting the different patterns of central-banking development in Europe, but most are publicly owned by the respective EU Member States. Some NCBs also have private shareholders. 112 The extent of the relevance of Union law depends on whether an NCB participates in the Eurosystem or is only a part of the ESCB. 113 van den Berg, The Making of the Statute of the European System of Central Banks (n 2) 137. 114 Article 14.1 ESCB/ECB Statute. 115 Article 14.2 ESCB/ECB Statute. See in detail Section IV.C. 116 Article 127(1) TFEU. 117 Zilioli and Athanassiou, ‘The European Central Bank’ (n 39) 621.

Institutional Set-Up and Governance 367 Non-Eurosystem NCBs are not involved in implementing the single monetary policy and related functions. The rules listed in Article 139 TFEU and Article 42 ESCB/ECB do not apply to Member States with a derogation and their NCBs. However, non-Eurosystem NCBs work closely with the ECB in fields such as the collection of statistical information.118 In addition, the ERM II119 provides a framework for monetary and exchange rate policy cooperation with the Eurosystem. The institutional forum for such cooperation is the General Council of the ECB.

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NCBs are not only parts of the ESCB/Eurosystem but they also discharge national func- 14.33 tions. As indicated by Article 14.4 ESCB/ECB Statute, NCBs can perform non-ESCB/ Eurosystem functions, following their respective national rules. This provision covers a wide range of functions, such as the provision of fiscal agency services to their respective Member States120 or the provision of emergency liquidity assistance (ELA) to their counterparties. Even when performing non-ESCB/Eurosystem functions, however, the Governing Council may prohibit the NCBs from performing them, if they interfere with the objectives and tasks of the ESCB.121 This safeguard has been particularly important regarding the provision of ELA to commercial banks facing liquidity problems.

D. The ESCB/Eurosystem committees The ESCB/Eurosystem committees are an important yet often neglected part of the ECB.122 They are another evidence of the workings of the composite and highly integrated system through which Union central banks fulfil their ESCB/Eurosystem mandate. Committees have no decision-making competences. Their task is to assist the three decision-making bodies of the ECB by providing expertise or information in their fields of competence.123 They are established and dissolved by the Governing Council,124 which also lays down their mandates and appoints their chairpersons,125 and report to it via the Executive Board.126 The Eurosystem/ESCB committees typically exist in three compositions—standard, SSM, and extended composition –defined in the ECB Rules of Procedure.

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According to Article 9.3 ECB Rules of Procedure, Eurosystem/ESCB committees in standard composition are composed of up to two members from each of the Eurosystem NCBs and the ECB.127 Eurosystem/ESCB committees dealing with SSM matters are governed by Article 9.4 ECB Rules of Procedure. According to this provision, the respective

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118 Articles 5.1 and 5.2 ESCB/ECB Statute. 119 See Chapter 25. 120 See Article 21.2 ESCB/ECB Statute. 121 Article 14.4 ESCB/ECB Statute. 122 See, however, Philippe Moutot, Alexander Jung, and Francesco Paolo Mongelli, ‘The Workings of the Eurosystem: Monetary Policy Preparations and Decision-Making—Selected Issues’ (2008) ECB Occasional Paper Series No 79, 38ff; Michelle Everson and F Rodrigues, ‘What can the law do for the European system of central Banks? Good Governance and Comitology “within” the System’ (2010) ZERP Discussion Paper 3/2010. 123 Articles 9.1 and 9.5 ECB Rules of Procedure and Article 8.1 General Council Rules of Procedure. 124 Article 9.1 ECB Rules of Procedure. 125 Article 9.5 ECB Rules of Procedure. 126 See Article 9.1 ECB Rules of Procedure. Pursuant to Article 9.2 ECB Rules of Procedure, the committees assisting in the work of the ECB regarding the tasks conferred on the ECB by Regulation (EU) 1024/2013, report to the Supervisory Board and, where appropriate, to the Governing Council. 127 Article 9.3 ECB Rules of Procedure.

368 THE EUROPEAN CENTRAL BANK committees ‘shall include one member from the central bank and one member from the national competent authorities in each participating Member State, appointed by each Governor following consultation with the respective national competent authority where the national competent authority is not a central bank’. According to Article 9.6 ECB Rules of Procedure, Committees meet in extended composition whenever they deal with matters falling within the field of competence of the General Council and furthermore, whenever the chairperson of the committee and the Executive Board deem this appropriate.128 Committees in extended composition are comprised of delegates from euro area central banks while the national central bank of non-euro area Member State may appoint up to two delegates to take part in the meetings. The Chairperson of each committee is, in principle, a staff member from the ECB.129 Representatives of other Union institutions and bodies and any other third party may also participate in the meetings of a committee, subject to invitation.130 14.36

There are currently seventeen committees, covering a wide variety of policy fields, from communications and accounting to internal auditing. Amongst them, the Market Operations Committee (MOC) assists in the fulfilment of the Eurosystem’s tasks related to the implementation of the single monetary policy, including foreign exchange operations and the management of the ECB’s foreign reserves. The Monetary Policy Committee (MPC) advises on strategic and longer-term issues relating to the formulation of the monetary and exchange rate policy and is responsible for the Eurosystem staff projections. The Market Infrastructure and Payments Committee (MIPC) assists in promotion of the smooth operation of payment systems. The Risk Management Committee (RMC) assists the decision- making bodies of the ECB in ensuring that the Eurosystem acts in the most risk-efficient way to protect itself against financial risk when pursuing its policy objectives. The Legal Committee (LEGCO) provides legal support and advice for the fulfilment of the statutory tasks of the ESCB. According to its mandate, among others, LEGCO prepares draft legal acts, assists the ECB in monitoring the implementation of the regulatory framework, monitors and reports on national and EU legislative developments, and analyses legal topics of relevance for the Eurosystem/ESCB/SSM. Each committee meets several times a year according to their internal yearly calendar. On issues covering more than one policy fields, some of the committees convene jointly with other committees. Committees may delegate work of technical nature to working groups with a specific mandate or to ad hoc task forces.

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At first sight, the ECB system of committees seems to resemble the well-researched comitology procedures of the European Commission.131 Following the Commission comitology procedures, when the Commission intends to adopt an implementing measure of EU law, it must consult a committee where every EU Member State is represented. 128 Article 9.6 ECB Rules of Procedure and Article 8.2 Rules of Procedure of the General Council. 129 Article 9.5 Rules of Procedure of the ECB. 130 Article 9.7 ECB Rules of Procedure. 131 Comitology is governed by European Parliament and Council Regulation (EU) 182/2011 of 16 February 2011 laying down the rules and general principles concerning mechanisms for control by Member States of the Commission’s exercise of implementing powers [2011] OJ L55/13. For analysis and further references, see Carl Fredrik Bergström, Comitology—Delegation of Powers in the European Union and the Committee System (OUP 2005); Herwig C H Hofmann, Gerard C Rowe, and Alexander H Türk, Administrative Law and Policy of the European Union (OUP 2011) 264ff; Jens Blom-Hansen, The EU Comitology System in Theory and Practice Keeping an Eye on the Commission? (Palgrave Macmillan 2011); Alexander H Türk, ‘Comitology’ in Anthony Arnull and Damian Chalmers (eds), The Oxford Handbook of European Union Law (OUP 2015).

ECB’s Three Constitutional Pillars 369 Comitology provides thus an opportunity for national administrations to provide their expertise and to also control how the Commission implements EU law. There are two different procedures to be followed for the adoption of implementing measures by the Commission. The advisory procedure does not bind the Commission, which is free to decide whether to carry out the proposed measure regardless of the committee’s opinion but must ‘take the utmost account’ of it.132 The examination procedure, used especially for measures with general scope and measures with a potentially important impact,133 may lead to a veto of the Commission proposal; if the committee issues a negative opinion, the Commission cannot carry out the measure it proposed. Comitology and Eurosystem/ESCB committees have in common that they bring together national and Union experts to discuss policy issues before adopting action at Union level and to assist Union bodies before deciding. Both evidence the integrated nature of EU decision-making in many fields. The established potential of comitology procedures to enhance the legitimacy of Union decision-making by means of expert deliberation134 may also apply in the field of ESCB/Eurosystem committees. Unlike comitology, however, Eurosystem/ESCB committees do not aim at controlling the exercise of ECB powers but rather to inform and support it.135 According to the applicable rules, they only have an advisory role—resembling thus the advisory procedure of comitology—and they do not have any power over the decision-making bodies of the ESCB. Importantly, whereas the national experts participating in comitology do so explicitly as representatives of their Member States,136 members of the ECB committees participate as independent experts in their personal capacity.

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IV. ECB’s Three Constitutional Pillars The ECB stands on three constitutional pillars. These interrelated pillars are the mandate of the ECB, with its primary focus on price stability, the prohibition of monetary financing, and its independence. First, the mandate of the ECB, sets the outer limits of its competences in line with the general EU principle of conferral.137 Second, the prohibition of monetary financing prescribes an important limitation to the exercise of ECB competences, prohibiting the ECB from financing public bodies either at the Union or the national level. Both are related to the independence and accountability status of the ECB, the third basic constitutional pillar. The ECB enjoys a very high degree of independence and is under special 132 Article 4(2) Regulation (EU) 182/2011. 133 Article 2(2) Regulation (EU) 182/2011. 134 Christian Joerges and Jürgen Neyer, ‘From Intergovernmental Bargaining to Deliberative Political Processes: The Constitutionalisation of Comitology’ (1997) 3 European Law Journal 273; Christian Joerges, ‘ “Good Governance” through Comitology’ in Christian Joerges and Ellen Vos (eds), EU Committees: Social Regulation, Law and Politics (Hart Publishing 1999); Joseph H H Weiler, ‘Epilogue: “Comitology” as Revolution—Infranationalism, Constitutionalism, and Democracy’ in Christian Joerges and Ellen Vos (eds), EU Committees: Social Regulation, Law and Politics (Hart Publishing 1999); Christian Jorges, ‘Deliberative Political Processes Revisited: What Have We Learnt About the Legitimacy of Supranational Decision-Making’ (2006) 44 Journal of Common Market Studies 779. 135 On the rationale of comitology, see Paul Craig and Grainne de Búrca, EU Law: Text, Cases, and Materials (6th edn, OUP 2015) 115, 137. 136 Article 3(2) Regulation (EU) 182/2011. 137 Article 5 TEU.

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370 THE EUROPEAN CENTRAL BANK arrangements regarding its accountability towards other institutions. As the first and second of these pillars are also analysed in other parts of this book, the following will only refer to their basic elements.

A. Competences, objectives, and tasks 14.40

Chapter 2 of the TFEU, specifies the exercise of this competence by setting ‘objectives’ and allocating ‘tasks’.138 The objectives and tasks of the Eurosystem are laid down in Article 127 TFEU.139 The first of these basic tasks, according to Article 127(2) TFEU, is to define and implement the monetary policy of the Union. Considering that primary law does not contain a definition of ‘monetary policy’, the CJEU, in order to determine whether an ECB measure falls within the area of monetary policy, refers principally to the objectives of that measure; the instruments employed are also relevant.140 In its first sentence, Article 127(1) TFEU prescribes that the primary objective of the Eurosystem is to maintain price stability.141 The Treaty does not define what constitutes ‘price stability’, leaving it to the ECB to establish the relevant metrics. In 1998, the Governing Council adopted a quantitative definition of price stability, namely a year-on-year increase in the Harmonized Index of Consumer Prices (HIPC) for the euro area of below 2 per cent. The Governing Council further clarified in 2003 that in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2 per cent over the medium term.142 This specification by the ECB is, in principle, subject to judicial review, but the CJEU has recognized that the ECB enjoys broad discretion in this regard.143 ECB measures that are directly intended to contribute to attaining the inflation rate aim144 or indirectly, by preserving the transmission mechanism and the singleness of monetary policy,145 have been regarded as falling within the primary objective laid down in Article 127(1) TFEU and, thus, within the field of monetary policy.

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According to the second sentence of Article 127(1) TFEU, the Eurosystem shall also support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 TEU ‘without prejudice to the objective of price stability’. According to the wording of Article 127(1) TFEU, thus, this second objective of the ECB has two characteristics: first, is supportive, and, second, is 138 Chapter 2 of the TFEU does not use the concept of competence except for the reference in Article 127(4) first indent TFEU. 139 See also Article 282(2) second sentence TFEU. The provisions of Article 127 TFEU are mirrored in Articles 2–4 and 25.2 ESCB/ECB Statute. 140 Case C-370/12 Thomas Pringle v Government of Ireland and others [2012] ECLI:EU:C:2012:756, paras 53 and 55 (hereafter Pringle); Case C-62/14 Peter Gauweiler and others v Deutscher Bundestag [2015] ECLI:EU:C:2015:400, para 46 (hereafter Gauweiler); Case C-493/17 Heinrich Weiss and others [2018] ECLI:EU:C:2018:1000, para 53 (hereafter Weiss). 141 This primary objective is also outlined in Article 282(2) TFEU and Article 2 ESCB/ECB Statute. 142 See the information published on ECB’s website accessed 10 February 2020; ECB, ‘Introductory statement of the ECB President’ (Press Conference, 13 October 1998) accessed 10 February 2020; and ECB, ‘Press Seminar on the evaluation of the ECB’s monetary policy strategy’ (Frankfurt, 8 March 2003) accessed 10 February 2020. 143 Weiss (n 140) paras 55–56. 144 Weiss (n 140) para 54. 145 Gauweiler (n 140) para 50.

ECB’s Three Constitutional Pillars 371 hierarchically subordinate to the objective of maintaining price stability.146 The ECB is thus allowed only to support the general economic policies of political institutions in the Union if this support does not prejudice the maintenance of price stability. The supporting role of the ECB excludes a self-developed ECB economic policy. This distinction between monetary and economic policy, although not amounting to an absolute separation, reflects a basic Maastricht arrangement. Monetary policy was set out as an exclusive competence of the Union, fulfilled by the Eurosystem, while economic policy was mainly left in the hands of the Member States. During the Eurozone crisis, this distinction between monetary policy and economic policy came to the foreground. Certain actors, including the German Federal Constitutional Court (Bundesverfassungsgericht), alleged that ECB crisis measures went beyond monetary policy and trespassed into the field of economic policy. The CJEU addressed this question, elaborating on the distinction between monetary and economic policy in three fundamental judgements, Pringle,147 Gauweiler,148 and Weiss.149 As the Court has clarified, ‘an economic policy measure cannot be treated as equivalent to a monetary policy measure for the sole reason that it may have indirect effects on the stability of the euro’150 and, vice versa, a monetary policy measure is not an (impermissible for the ECB) economic measure only because it has indirect effects on the real economy, namely effects that might also be sought in the context of economic policy.151 Importantly, the competence to define and implement monetary policy also covers the power to preserve the transmission mechanism through which ECB decisions influence real prices.152

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The next field of activity of the ESCB is financial stability. According to Article 127(5) TFEU, the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system. The ECB approaches financial stability in terms of systemic risk: financial stability is a state whereby the build-up of systemic risk is prevented. In turn, systemic risk is ‘the risk that the provision of necessary financial products and services by the financial system will be impaired to a point where economic growth and welfare may be materially affected’.153 Financial stability means, thus, that the ﬁnancial system is expected to withstand unforeseeable events or shocks without major disruption and to continue providing its services to the economy.154 According to Article 127(5) TFEU, the ESCB has a

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146 Niall J Lenihan, ‘The price stability mandate of the European System of Central Banks: a legal perspective’ (Seminar on Current Developments in Monetary and Financial Law, Washington DC, 23–27 October 2006) 3. 147 Pringle (n 140). 148 Gauweiler (n 140). 149 Weiss (n 140). 150 Pringle (n 140) paras 56–57. 151 Gauweiler (n 140) paras 51–52; Weiss (n 140) paras 61–66. 152 During the Eurozone crisis, the ECB repeatedly lowered its key interest rate and reduced to zero the interest rate it paid private banks for depositing money with the ECB. Under normal conditions, such an interest rate policy would lead to the reduction of all interest rates in the monetary union. That, however, did not happen and the interest rates paid by households and companies in the countries of the periphery remained disproportionally high. The reason for this was that the interest rates for individual private banks and companies reflected on the funding costs of the Member States where they were domiciled. In Gauweiler (n 140), the CJEU agreed with the ECB that the Outright Monetary Transactions (OMT) Programme, the ECBs extraordinary sovereign-bond purchase programme, was necessary to preserve that transmission mechanism and thus pertained to the primary objective laid down in Article 127(1) TFEU; Gauweiler (n 140) para 50. 153 See accessed 10 February  2020. 154 William Allen and Geoffrey Wood, ‘Defining and achieving financial stability’ (2006) 2 Journal of Financial Stability 152, 160.

372 THE EUROPEAN CENTRAL BANK contributory role in this field. The scope of this mandate seems to be equivalent to the category of supplementary or supporting competences.155 Of course, to the extent necessary for the transmission of monetary policy, financial stability falls within the monetary-policy competence of the ECB, subject to the principle of proportionality.156 14.44

Finally, Article 127(6) TFEU provides for the competence of the ESCB in the field of microprudential supervision. This power had not been directly awarded by the Treaty- makers. According to this provision, the Council, acting by means of regulations in accordance with a special legislative procedure, may confer specific tasks upon the ECB ‘concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings’. The SSM Regulation, adopted in 2013, activated this competence, conferred supervisory tasks on the ECB and established the SSM as the Union system of financial supervision composed by the ECB and the NCAs.157 As noted above, the SSM Regulation conferred on the ECB exclusive competence with regard to supervisory tasks in relation to all credit institutions established in the SSM participating Member States, enabling, at the same time, the decentralized implementation of some of these tasks by the national authorities in relation to less significant credit institutions.158

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Beyond these fields of activity, primary law also refers to more specific ‘tasks’ and ‘policies’. Other basic tasks of the ESCB159 are defined in Article 127(2) TFEU. The Eurosystem is also tasked to conduct foreign-exchange operations, to hold and manage the official foreign reserves of the Member States and to promote the smooth operation of payment systems. Article 127(4), together with the ESCB/ECB Statute, also provide for other specific ECB tasks, such as advisory functions, the authorization of issuance of banknotes,160 the collection of statistical information,161 and international cooperation.162

B. Prohibition of monetary financing 14.46

The prohibition of monetary financing has ‘the status of a fundamental rule of the constitutional framework that governs economic and monetary union’.163 The prohibition of 155 See, for example, Article 165(1) TFEU and Article 173(3) TFEU. 156 As noted above, the Court has accepted that measures intended to preserve the monetary transmission mechanism may be regarded as pertaining to the objective of maintaining price stability, thus falling within the primary objective of the ECB. Financial stability, to the extent necessary for the transmission of monetary policy, also falls within the mandate of the ECB, see Georgios Psaroudakis, ‘The Scope for Financial Stability Considerations in the Fulfilment of the Mandate of the ECB/Eurosystem’ (2018) 4 Journal of Financial Regulation 119, 130. In any case, such measures need to respect the principle of proportionality enshrined in Article 5(4) TEU, Gauweiler (n 140) paras 66ff. Applied to financial stability, this means that ECB financial stability measures need to be appropriate for maintaining price stability and should not go beyond what is necessary to achieve this objective. 157 The SSM Regulation is not the only regulation that was adopted on the basis of Article 127(6) TFEU. See Council Regulation (EU) 1096/2010 of 17 November 2010 conferring specific tasks upon the European Central Bank concerning the functioning of the European Systemic Risk Board [2010] OJ L331/162. 158 L-Bank (n 47) para 49. 159 Which, considering Article 139(2)(c) TFEU, are actually tasks of the Eurosystem This provision is replicated in Article 3.1 ESCB/ECB Statute. 160 See Article 128 TFEU and Article 16 ESCB/ECB Statute. 161 See Article 5 ESCB/ECB Statute. 162 Article 6 ESCB/ECB Statute. 163 Case C‑62/14 Peter Gauweiler and Others v Deutscher Bundestag, Opinion of Advocate General Cruz Villalón [2015] ECLI:EU:C:2015:7, para 219.

ECB’s Three Constitutional Pillars 373 monetary financing is set out in Article 123(1) TFEU and in Article 21 ESCB/ECB Statute and is further specified in Regulation 3603/93.164 In essence, the prohibition of monetary financing prescribes that the ESCB/Eurosystem should not finance national or Union public bodies. According to the CJEU, the purpose of this provision is to ‘to encourage the Member States to follow a sound budgetary policy’ and to avoid ‘excessively high levels of debt or excessive Member State deficits’.165 The responsibility of public financing, according to the Treaties, should be borne by political bodies, which expose their choices to the assessment of their electorates, via voting, or of the markets, via interest rates. Central bank financing of the public sector would lessen the pressure for fiscal discipline through these two conduits. Article 123(1) TFEU does not prohibit every purchase of public debt instrument, but explicitly refers to ‘direct purchases’ or, as these operations are also referred to, purchases on the primary market. Purchases of government bonds on the secondary market are an instrument of monetary policy and a typical open-market operation, allowed by Article 18(1) ESCB/ECB Statute. During the Eurozone crisis, however, the line between (prohibited) direct purchases and (permissible) purchases in the secondary market was legally contested. Some of the ECB’s crisis measures involved the purchase of sovereign bonds issued by euro area governments,166 which although bought (or planned to be bought) in the secondary market, raised the question of potential circumvention of the prohibition of monetary financing.

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The issue of the compatibility of ECB policies with the prohibition of monetary financing was also brought before the CJEU by two milestone preliminary references by the Bundesverfassungsgericht in the cases Gauweiler and Weiss. In both cases, the CJEU found that ECB purchases did not violate Article 123(1) TFEU as they were implemented under safeguards guaranteeing that the ultimate purpose of Article 123(1) TFEU had been respected.

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As the Court has ruled, Article 123(1) TFEU prohibits all financial assistance to a Member State, but does not preclude the possibility of purchases at the secondary market.167 The ECB cannot purchase bonds in the secondary market under conditions which would have an equivalent with direct purchases and needs to build safeguards into these purchases so that the ultimate purpose of the prohibition—not to reduce the impetus of the Member States to follow a sound budgetary policy—is not defeated.168 This means, in practice, that

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164 Council Regulation (EC) 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions Article 5 ESCB/ECB Statute referred to in Articles 104 and 104b(1) of the Treaty [1993] OJ L332/1. 165 Gauweiler (n 140) para 100. 166 In 2010, the ECB announced the Securities Market Programme (SMP), with the declared objective ‘to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism’, see Recital (3) ECB Decision (EU) 2010/281 of 14 May 2010 establishing a securities market programme ECB/2010/5 [2010] OJ L124/8. In September 2012, the ECB announced the OMT programme, according to which the ECB stood ready to engage in unlimited purchases of government bonds provided that the issuing euro area Member States have already agreed to an appropriate EFSF/ESM programme containing ‘strict and effective conditionality’, see ECB, ‘Technical features of Outright Monetary Transactions’ (Press Release, 6 September 2012) accessed 10 February 2020. Finally, in 2015, the ECB announced its Public Sector Purchase Programme (PSPP), a quantitative easing policy, aiming at bringing inflation closer to ECB target. The PSPP also involved the purchase of government bonds in the secondary market, see ECB Decision (EU) 2015/774 of 4 March 2015 on a secondary markets public sector asset purchase programme [2015] OJ L121/20, as lastly amended by ECB Decision (EU) 2017/100 of 11 January 2017 [2017] OJ L16/51. 167 Gauweiler (n 140) para 95; Weiss (n 140) para 103. 168 Gauweiler (n 140) paras 104–09; Weiss (n 140) paras 105–08.

374 THE EUROPEAN CENTRAL BANK the ECB needs to ensure that the bond purchases are not such as to allow the Member States to rely, in determining their budgetary policy, on the certainty that the ESCB will purchase their government bonds and that they do not bring about a harmonization of the interest rates applied to the government bonds of the Member States of the euro area regardless of the differences arising from their macroeconomic or budgetary situation.169 The ECB safeguards should also not afford private bond-holders in the secondary market such certainty that they would resell their bond holdings to the ECB as to make them de facto an intermediary of the ESCB.170

C. Independence and accountability 14.50

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Independence and accountability seem to be in reverse relationship: more independence of an institution means that it is less accountable to other actors for its actions. One of the central challenges for the ECB is the need to strike a balance between the two.171 Although this is a challenge common to most central banks,172 it is more pronounced for the ECB because of its supranational character. Independence must not only shield supranational monetary policy from the short termism of ordinary politics but also from their predominantly national character.

1. Independence Central bank independence has been long associated with maintaining price stability. Central-bank objectives, and especially the maintenance of price stability, require operating in a longer time horizon than that of political bodies, which are usually time-conditioned by the next election. Independence allows central banks to develop and implement price-stability policies, the positive effects of which are often visible only at a point beyond the electoral circle. Especially after the 1980s, consensus emerged around this line of reasoning, arguing that independent expertise would avoid many of the pitfalls of short-term

169 Gauweiler (n 140) para 1. According to the Court, ‘the fact that the purchase of government bonds is conditional upon full compliance with the structural adjustment programmes to which the Member States concerned are subject precludes the possibility of [OMT] acting as an incentive to those States to dispense with fiscal consolidation . . .’, Gauweiler (n 140) para 120. In Weiss, the CJEU found that even in the absence of conditionality, sovereign bond purchases are in line with Article 123(1) TFEU as long as they do not allow Member States to rely on them for their financing needs and thus to abandon a sound budgetary policy, see Weiss (n 140) para 143. 170 Weiss (n 140) para 128. 171 ECB accountability has been on the focus of much research, especially after the Eurozone crisis, see in particular Deirdre Curtin, ‘ “Accountable Independence” of the European Central Bank: Seeing the Logics of Transparency’ (2017) 23 European Law Journal 28 (hereafter Curtin, ‘ “Accountable Independence” ’); Nicolò Fraccaroli, Alessandro Giovannini, and Jean-François Jamet, ‘The Evolution of the ECB’s accountability practices during the crisis’ (2018) ECB Economic Bulletin 5/2018; Fabian Amtenbrink, ‘The European Central Bank’s intricate independence versus accountability conundrum in the post-crisis governance framework’ (2019) 26 Maastricht Journal of European and Comparative Law 165; and Diane Fromage, Paul Dermine, Phedon Nicolaides, and Klaus Tuori (eds), ‘Special issue: The ECB’s accountability in a multilevel European order’ (2011) 26 Maastricht Journal of European and Comparative Law; Mark Dawson, Adina Maricut‐Akbik, and Ana Bobić, ‘Reconciling Independence and accountability at the European Central Bank: The false promise of Proceduralism’ (2019) 25 European Law Journal 75 (hereafter Dawson, Marikut-Akbik, and Bobić, ‘Reconciling Independence and accountability at the European Central Bank’). 172 See in detail Fabian Amtenbrink, The Democratic Accountability of Central Banks: A Comparative Study of the European Central Bank (Hart Publishing 1999).

ECB’s Three Constitutional Pillars 375 oriented politics.173 This widely held conviction led to a worldwide increase in central bank independence.174 Reflecting these ideas, central bank independence was introduced as a constitutional rule already by the Maastricht Treaty.175 Independence is protected by various provisions but is primarily evidenced in Article 130 TFEU, which applies to both the ECB and the NCBs.176 At the core of the principle of central bank independence is the rule that neither central banks as institutions nor the persons involved in their governance shall take instructions from EU, national or other bodies. This prohibition is directed both to central banks, which shall not seek or take instructions, and the other EU institutions, bodies, offices or agencies and Member State governments, which shall not seek to influence central banks. Purpose of Article 130 TFEU, as the CJEU has recognized, is to shield the ESCB from all political pressure in order to enable it effectively to pursue the objectives attributed to its tasks.177

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Undue influence may fall under the prohibition of Article 130 TFEU regardless if it has legal form or is simply de facto.178 The different aspects of central bank independence have been significantly elaborated in the EMI179 and, later, in the ECB Convergence Reports.180 Following these Reports, central bank independence has four aspects: (i) functional independence; (ii) institutional independence; (iii) financial independence; and (iv) personal independence of the members of the decision-making bodies.

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Functional (or instrument, as it is sometimes referred to) independence requires that central banks may determine the manner, means, and instruments for achieving their objective

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173 Alberto Alesina and Lawrence H Summers, ‘Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence’ (1993) 25 Journal of Money, Credit and Banking 151. For the basic insights from inconsistency theory, see Finn E Kydland and Edward C Prescott, ‘Rules Rather than Discretion: The Inconsistency of Optimal Plans’ (1977) 85 Journal of Political Economy 473; Robert J Barro and David B Gordon, ‘Rules, discretion and reputation in a model of monetary policy’ (1983) 12 Journal of Monetary Economics 101; Kenneth Rogoff, ‘The Optimal Degree of Commitment to an Intermediate Monetary Target’ (1985) 100 The Quarterly Journal of Economics 1169. For recent evidence on the relationship between central bank independence and inflation, see Christopher Crowe and Ellen E Meade, ‘Central Bank Independence and Transparency: Evolution and Effectiveness’ (2008) 24 European Journal of Political Economy 763; Jakob de Haan and Jeroen Klomp, ‘Inflation and Central Bank Independence: A Meta Regression Analysis’ (2010) 24 Journal of Economic Surveys 593; Jakob de Haan and others, ‘Central Bank Independence before and after the crisis’ (2018) 60 Comparative Economic Studies 183 (hereafter de Haan and others, ‘Central Bank Independence before and after the crisis’). 174 Marco Arnone and others, ‘Central Bank Autonomy: Lessons from Global Trends’ (2007) IMF Working Paper  07/88. 175 Article 107 EEC Treaty. 176 See also Article 7 ESCB/ECB Statute and Article 282(3) TFEU. Specifically, for the Bank of England, see, however, paras 4 and 7 Protocol No 15 on Certain Provisions Relating to the United Kingdom of Great Britain and Northern Ireland. 177 Case C-11/00 Commission of the European Communities v European Central Bank [2003] ECR I-7147, para 134 (hereafter OLAF); Gauweiler (n 140) para 40; Rimšēvičs (n 37) para 47. Based on the fact that ECB independence is not an end in itself but is guaranteed with a view to serve certain purpose (or function), namely to allow it to pursue its objectives, it is sometimes described as ‘functional independence’. The Commission had suggested this characterization in OLAF (para 126) and the CJEU spoke of ‘functional independence of the governors’ in Rimšēvičs (n 37) paras 48 and 70. 178 See ECB, ‘Convergence Report 2018’ (n 35) 16 (‘the ECB is particularly concerned about any signs of pressure being put on the decision-making bodies of any Member State’s NCB which would be inconsistent with the spirit of the Treaty as regards central bank independence’). 179 See EMI, ‘Convergence Report 1998’ (EMI 1998) 291. 180 ECB Convergence Reports, based on Article 140(1) ESCB/ECB Statute, assess the progress made by non- euro area Member States in fulfilling their Treaty obligations regarding the achievement of economic and monetary union. See also Case C-11/00 Commission v ECB (OLAF), Opinion of AG Jacobs [2003] ECR I-7155, paras 151ff, which refers to three of these categories.

376 THE EUROPEAN CENTRAL BANK independently of any other authority.181 For the ECB, functional independence is particularly realized by the disposal of the instruments for achieving its price stability objective as it deems necessary.182 This form of independence became of great significance during the Eurozone crisis, when the ECB had to resort to so-called unconventional measures in order to fulfil its mandate. 14.55

Institutional independence refers to the prohibition of interference with central bank activity. The institutional aspect of independence of the ECB was a critical issue in the milestone OLAF judgment of the CJEU.183 In this case, the CJEU had to answer the question whether conferring powers to conduct investigations within the ECB on OLAF, EU’s anti- fraud body, would infringe ECB’s independence. The Court held that the expression ‘financial interests of the Community’ in Article 280 EC (currently Article 325 TFEU) also covers the resources and expenditure of the ECB.184 ECB’s independence under Article 130 TFEU does not have the consequence of ‘separating it entirely from the European Community and exempting it from every rule of Community law’.185 On the contrary, ‘the ECB, pursuant to the EC Treaty, falls squarely within the Community framework’.186

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For the NCBs, institutional independence manifests itself in a series of concrete prohibitions: of third parties to approve, suspend, annul or defer an NCB decision;187 for bodies other than independent courts to censor on legal grounds decisions relating to the performance of ESCB-related tasks;188 of participation with a right to vote by representatives of third parties in the decision-making bodies of an NCB;189 and of the NCB’s obligation to consult third parties before making decisions.190 Moreover, NCBs’ form of organization may raise institutional independence concerns. This is particularly the case for NCBs that are organized as State-owned bodies, special public law bodies or public limited companies.191 In any case, the legal framework applicable to central banks must be stable in order to allow for their proper functioning.192 Legal personality is also a manifestation of institutional independence.

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Regarding financial independence, Article 282(3) TFEU specifically mentions that the ECB shall be independent ‘in the management of its finances’.193 The financial resources at the disposal of the ECB include its paid-up capital and profit, which results from ESCB operations on the financial markets. On the spending side, the ECB adopts its own conditions 181 For NCBs, see ECB, ‘Convergence Report 2018’ (n 35) 20. Sometimes ‘functional independence’ is used to express the general idea that independence is not an end in itself but is guaranteed with a view to serve certain purpose (or function), see (n 177). This applies to all components of independence. 182 Article 132 TFEU and Article 34 ESCB/ECB Statute. 183 OLAF (n 177). 184 OLAF (n 177) para 89. 185 OLAF (n 177) para 135. 186 OLAF (n 177) para 92. 187 ECB, ‘Convergence Report 2018’ (n 35) 22; ECB Opinion of 15 June 2016 on amendments to the Law on Hrvatska Narodna Banka (CON/2016/33). 188 ECB, ‘Convergence Report 2018’ (n 35) 22. 189 Ibid; ECB Opinion of 11 April 2014 on the independence of Banka Slovenije (CON/2014/25) and ECB Opinion of 18 December 2015 on certain amendments to Banka Slovenije’s institutional framework (CON/2015/ 57). 190 ECB, ‘Convergence Report 2018’ (n 35) 23. 191 ECB, ‘Convergence Report 2018’ (n 35) 21. 192 ECB, ‘Convergence Report 2018’ (n 35) 21. 193 See also Articles 26–33 ESCB/ECB Statute.

ECB’s Three Constitutional Pillars 377 of employment and staff rules194 as well as its own procurement rules.195 The ECB budget is separate from the EU budget. The NCBs should also have sufficient financial resources and adequate net equity to carry out the ESCB/Eurosystem tasks196 and they should always be sufficiently capitalized.197 The features of financial independence, which should, in particular, be protected from outside undue influence, contain the determination of budget, the rules applicable to a central bank’s accounts, the distribution of profits, the capital and financial provisions, ownership, and property rights.198 Personal independence requires that the members of central bank decision-making bodies act free from undue interference. The personal independence of the ECB decision-making bodies is explicitly guaranteed by Article 130 TFEU and is also expressed in the rules governing the term of office and the rules on removal from office.199 Members of the Executive Board have a non-renewable eight-year term of office and may be relieved from office only by the Court of Justice on application by the Governing Council or the Executive Board if they no longer fulfil the conditions required for the performance of their duties or if they have been guilty of serious misconduct.200 NCB Governors shall have a term of office no less than five years and can be relieved from office only under the conditions set out in Article 14.2 ESCB/ECB Statute, namely if they no longer fulfil the conditions required for the performance of their duties or if they have been guilty of serious misconduct.201 The suspension of a Governor may effectively amount to removal for the purposes of Article 14.2 ESCB/ECB Statute.202 A removal decision may be referred to the CJEU by the Governor concerned or by the Governing Council.203 The CJEU has ruled that Article 14.2 ESCB/ECB Statute exceptionally allows for an action for annulment of a national measure that does not respect the independence of national Governors.204 The CJEU has justified this exceptional remedy with reference to the exceptional system of the ESCB as a novel legal construct in EU law and a highly integrated system.205 The federal characteristics of 194 See also Article 36 ESCB/ECB Statute. 195 ECB Decision (EU) 2016/245 of 9 February 2016 laying down the rules on procurement (ECB/2016/2) [2016] OJ L45/15. 196 ECB, ‘Convergence Report 2018’ (n 35) 25. 197 ECB, ‘Convergence Report 2018’ (n 35) 26. 198 ECB, ‘Convergence Report 2018’ (n 35) 26–28. 199 Article 130 TFEU and Article 7 ESCB/ECB Statute. 200 Articles 11.2 and 4 ESCB/ECB Statute. 201 Explicitly, Article 14.2 ESCB/ECB Statute only refers to Governors of NCBs. However, this provision, read together with Article 130 TFEU and Article 7 ESCB/ECB Statute, which refer to ‘members of decision-making bodies’ has been interpreted by the ECB as to apply with regard to its substantive protections also to other members of NCBs’ decision-making bodies involved in the performance of ESCB-related tasks, see Chiara Zilioli, ‘The Independence of the European Central Bank and Its New Banking Supervisory Competences’ in Dominique Ritleng (ed), Independence and Legitimacy in the Institutional System of the European Union (OUP 2016) 146, with reference to relevant ECB practice. 202 Rimšēvičs (n 37) paras 52ff. 203 Article 14.2 ESCB/ECB Statute. 204 Rimšēvičs (n 37) para 76. To that extent, according to the Court, the second subparagraph of Article 14.2 ESCB/ECB Statute derogates from the general distribution of powers between the national courts and the EU courts as provided for by the Treaties and in particular by Article 263 TFEU, according to which an action for annulment is possible against EU acts, ibid para 69. 205 Rimšēvičs (n 37) paras 69–70. For commentary on this seminal judgment, see Daniel Sarmiento, ‘Crossing the Baltic Rubicon’ (VerfassungsBlog, 4 March 2019) accessed 10 February 2020; Jürgen Bast, ‘Autonomy in Decline? A Commentary on Rimšēvičs and ECB v Latvia’ (VerfassungsBlog, 13 May 2019) accessed 10 February 2020; Alicia Hinarejos, ‘The Court of Justice annuls a national measure directly to protect ECB independence: Rimšēvičs’ (2019) 56 Common Market Law Review 1649.

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378 THE EUROPEAN CENTRAL BANK the ESCB/Eurosystem exceptionally require thus a judicial remedy with federal character. The personal independence of the members of the Governing Council is also protected by Article 10.4 ESCB/ECB Statute, which provides that the proceedings of the meetings of the Governing Council shall be confidential.206 14.59

When it comes to independence in the context of the SSM, Article 19 SSM Regulation is applicable. The wording of Article 19 SSM Regulation reflects, but does not replicate, Article 130 TFEU.207 First, there is no explicit prohibition to the NCAs seeking or taking instructions, like in Article 130 TFEU for NCBs. This reflects the fact that, in certain Member States, NCAs are governmental units hierarchically embedded within ministries. In any case, NCA independence is different from that of the NCBs in that is guaranteed by secondary law, and not by the Treaties, and it only extends to the scope of the SSM Regulation. Second, the members of the Supervisory Board are also not generally guaranteed personal independence in the same terms as the members of the Governing Council: there is neither a minimum term of office nor a specification of the grounds for dismissal. Special rules apply only to the Chair, the Vice Chair, and the ECB representatives.208 Third, the SSM Regulation provides for more extensive accountability obligations of the SSM compared to those of the ESCB/Eurosystem.209 Considering that independence and accountability are in an inverse relationship, SSM independence is respectively restricted.

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Despite these differences, however, the SSM Regulation establishes some clear elements of the principle of independence in the supervisory context. Article 19(1) SSM Regulation requires that, when carrying out the tasks conferred on it by this Regulation, the ECB and the national competent authorities acting within the SSM shall ‘act independently’. The members of the Supervisory Board shall also act independently and objectively in the interest of the Union as a whole and shall neither seek nor take instructions from the institutions or bodies of the Union, from any government of a Member State or from any other public or private body.210 Article 19(2) SSM Regulation adds that the institutions, bodies, offices and agencies of the Union and the governments of the Member States and any other bodies shall respect that independence. Article 19 SSM Regulation should also be read in the light of Recital (75) SSM Regulation, which refers to the importance of the prevention of private industry interference in the supervisory field, in addition to ‘undue political influence’. In sum, the general clause of Article 19(1) SSM Regulation guarantees extensive independence 206 Case T-251/15 Espírito Santo Financial (Portugal), SGPS, SA v ECB [2018] ECLI:EU:T:2018:234, para 77. Article 23 ECB Rules of Procedure governs the confidentiality of and access to ECB documents, inter alia, the proceedings of the decision-making bodies of the ECB, or any committee or group established by them are confidential unless the Governing Council authorizes the President to make the outcome of the deliberations public. 207 On the scope of the principle of independence in the SSM context see Ignazio Angeloni, ‘Rethinking banking supervision and the SSM perspective’ (Conference on ‘The new financial architecture in the Eurozone’, European University Institute, Fiesole, 23 April 2015); Alberto de Gregorio Merino, ‘Institutional Report’ in Gyula Bándi and others (eds), European Banking Union—Congress Proceedings Vol 1 (Wolters Kluwer 2016); Zilioli, ‘The Independence of the European Central Bank and Its New Banking Supervisory Competences’ (n 199) 155ff; Yves Mersch, ‘Central bank independence revisited’ (Symposium on Building the Financial System of the 21st Century: An Agenda for Europe and the United States, Frankfurt am Main, 30 March 2017). 208 The Chair has a non-renewable term of office of five years and may be dismissed from office only in two cases (Article 26(3) and (4) of the SSM Regulation); the Vice Chair is chosen from among the members of the Executive Board and thus the independence safeguards for the Executive Board apply to him; the rules on ECB representatives in the Supervisory Board are set out in ECB Decision of 6 February 2014 on the appointment of representatives of the European Central Bank to the Supervisory Board (ECB/2014/4) [2014] OJ L196/38. 209 Articles 20 and 21 SSM Regulation. 210 Article 19(1) SSM Regulation.

ECB’s Three Constitutional Pillars 379 regarding the supervisory tasks of the SSM. It is only narrowed down in the specific points were the drafters of the SSM Regulation clearly deviated from the example of Article 130 TFEU and were they established specific accountability obligations. Based on these extensive protections, that derive—as far as the ESCB/Eurosystem is concerned—from law with constitutional status, the ECB is the most independent central bank in the world.211 However, independence does not mean lack of accountability; a series of arrangements allow for ECB actions to be exposed to external scrutiny. ECB accountability can be distinguished with reference to whom it is owed. Using this criterion, the following distinguishes between accountability to the public and to other institutions, including courts.

2. Transparency and accountability to the public Before the 1990s, central banking was a field of public policy shrouded with mystery.212 Central bank transparency has become such a generalized trend over the last decades, however, that amounts to one of the most dramatic differences between central banking today and central banking in earlier historical periods.213 Transparency serves two purposes in the field of central banking. First, it is used as an instrument to accomplish central banks tasks, such as by shaping inflation expectations. Second, it is a means to promote accountability and legitimacy, by explaining central bank decisions to the public, even when this is not necessary for pursuing its tasks. According to the ECB definition, ‘transparency means that the central bank provides the general public and the markets with all relevant information on its strategy, assessments and policy decisions as well as its procedures in an open, clear and timely manner’.214 According to the Guiding principles for external communication by members of the Executive Board of the ECB, ‘the communication policy of the ECB is an essential part of its accountability and good governance obligations as an independent monetary and supervisory authority’.215 Thus, both the instrumental and the legitimacy-oriented dimensions of transparency are reflected in the ECB understanding of transparency.

211 See Bernard J Laurens, Marco Arnone, and Jean- François Segalotto, Central Bank Independence, Accountability, and Transparency (Palgrave MacMillan 2009), Appendices II, V, and X to Chapter 5; de Haan and others, ‘Central Bank Independence before and after the crisis’ (n 173) 197. 212 Jakob de Haan, Sylvester C W Eijffinger, and Krzysztof Rybinski, ‘Central bank transparency and central bank communication: Editorial introduction’ (2007) 23 European Journal of Political Economy 1. 213 Nazire Nergiz Dincer and Barry Eichengreen, ‘Central Bank Transparency: Where, why and with what effect?’ in Jean-Philippe Touffut (ed), Central Banks as Economic Institutions (Edward Elgar Publishing 2008) 105. In general on central bank transparency see, Jakob de Haan, Sylvester C W Eijffinger, and Krzysztof Rybinski (eds), ‘Special Issue: Central Bank Transparency and Central Bank Communication’ (2007) 23 European Journal of Political Economy; Alan S Blinder and others, ‘Central Bank Communication and Monetary Policy: A Survey of Theory and (2008) 46 Journal of Economic Literature 910; Pierre L Siklos, ‘Central Bank Transparency: Another Look’ (2010) 18 Applied Economics Letters; Jakob de Haan and others, ‘Part III: Central Bank Communication and Expectations Management’ in David G Mayes, Pierre L Siklos, and Jan-Egbert Sturm (eds), The Oxford Handbook of the Economics of Central Banking (OUP 2019). 214 See accessed 10 February 2020. The Guiding principles for external communication by members of the Executive Board of the ECB also state that ‘the members of the Executive Board of the ECB attach great importance to clear, effective and timely communication of the ECB’s strategy and policy decisions as well as issues related to their implementation’. See accessed 10 February  2020. 215 accessed 10 February 2020.

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Transparency is put into practice by the ECB through several ways. First, the ECB discloses information without specific request, either on its own initiative or because legal rules so require. For this purpose, the ECB administers a very comprehensive public website, where it publishes an extensive amount of information related to the exercise of its tasks. This includes, the calendars of the ECB Executive Board Members; the weekly schedule of publications and events (ie meetings of the decision-making bodies, press conferences, speeches of the ECB in the European Parliament, public speaking engagements etc.); the key statistical figures for the euro area; the Single Code of Conduct;216 as well as interviews and speeches of the members of the Executive Board. In December 2014, the Governing Council decided to publish online regular public accounts of its monetary policy discussions, starting with its meeting of January 2015.217 Furthermore, eight times a year, two weeks after each monetary policy meeting, the ECB publishes Economic Bulletins, where it presents the economic and monetary information on which the Governing Council takes policy decisions.218 According to Article 34.2 ESCB/ECB Statute, the ECB may decide to publish its decisions, recommendations and opinions. Although this provision does not establish a legal obligation, the ECB does publish on its website Guidelines, Instructions, and Opinions. Article 15 ESCB/ECB Statute requires the ECB to draft at least quarterly reports on the activities of the ESCB and publish on a weekly basis the consolidated financial statement of the ESCB. The latter provide information on monetary policy and foreign exchange operations and investment activities.

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Second, information that has not been public on the ECB’s own initiative may be disclosed upon request. Such information requests, which have multiplied after the beginning of the financial crisis, are governed by public-access rules.219 Article 15(3) TFEU gives EU citizens, residents, and businesses the individual right to access documents of the EU institutions, bodies, offices and agencies, subject to certain principles and conditions. As the CJEU has ruled, the right to public access is a basic pillar of Union’s democratic accountability.220 For reasons related to the specific tasks of the ECB, the drafters of the Treaty provided in Article 15(3) TFEU that this right only applies to the ECB when exercising its administrative tasks. However, ECB’s public-access rules, mainly the ECB Decision of on public access to ECB documents (ECB/2004/3),221 does not make a distinction between administrative-related and other documents. All documents drawn up or held by the ECB fall under the same transparency regime—to that extent, ECB’s public-access rules go beyond what required by the Treaty. In substance, Decision 2004/3 follows the basic logic of Regulation 1049/2001, which is applicable to the other EU institutions.222 It is based on the premise that there is a general right of the public to access ECB documents, unless one of the exceptions contained in Article 4 applies, and subject, of course, to Union law 216 Article 5a.1. ECB Rules of Procedure. 217 accessed 10 February 2020. 218 accessed 10 February  2020. 219 Curtin, ‘ “Accountable Independence” ’ (n 171) 39. 220 Joined Cases C-39/05 P and C-52/05 P Kingdom of Sweden and Maurizio Turco v Council of the European Union [2008] ECR I-4723, para 45. 221 ECB Decision of 4 March 2004 on public access to European Central Bank documents (ECB/2004/3) (2004/ 258/EC) [2004] OJ L80/42, as amended. 222 European Parliament and Council Regulation (EC) 1049/2001 of 30 May 2001 regarding public access to European Parliament, Council and Commission documents [2001] OJ L145/43.

ECB’s Three Constitutional Pillars 381 protecting the confidentiality of certain information. The CJEU has clarified on several occasions the scope of these rules.223

3. Accountability to other institutions and judicial review The accountability framework of the ECB to other institutions is outlined in the Treaties and in secondary law. Three are the most important institutions for accountability purposes: parliaments, courts, and auditors. a) Parliaments Article 284(3) TFEU imposes on the ECB the obligation to draft an Annual Report on the activities of the ESCB and on the monetary policy of both the previous and current year. The Annual Report is addressed to the European Parliament, the Council and the Commission, and to the European Council. The President of the ECB presents this report to the Council and to the European Parliament, which may also hold a general debate on this basis. According to Article 16.1 ECB Rules of Procedure, the Annual Report is adopted by the Governing Council. According to the same provision,224 the President of the ECB and the other members of the Executive Board, may, at the request of the European Parliament or on their own initiative, be heard by the competent committees of the European Parliament. This parliamentary hearing is independent from the presentation of the Annual Report and may occur on every point in time. To this effect, the President and the other Executive Board members of the ECB participate in quarterly hearings of the Committee on Economic and Monetary Affairs of the European Parliament. Although this procedure, also known as ‘monetary dialogue’, has been criticized as ‘a limited type of accountability’,225 it offers a mechanism that balances the constitutional principles of independence and accountability.226 Additionally, the Members of the European Parliament may address written questions to the ECB to which the ECB provides an answer signed by the President, which it then publishes on its website.227 When it comes to the SSM, the basic rules on accountability are laid down in the SSM Regulation and in the Interinstitutional Agreement (IIA) between the European Parliament and the European Central Bank concluded in 2013.228 According to Article 20(1) SSM Regulation, for its SSM tasks, the ECB shall be accountable to the European Parliament and to the Council.229 Article 20(9) SSM Regulation contains a general 223 See for example, Case T-590/10 Thesing and Bloomberg Finance v ECB [2012] ECLI:EU:T:2012:635; Case T-376/13 Versorgungswerk der Zahnärztekammer Schleswig-Holstein v ECB [2015] ECLI:EU:T:2015:361 (hereafter Versorgungswerk); Case T-116/17 Spiegel-Verlag Rudolf Augstein and Sauga v ECB [2018] ECLI:EU:T:2018:614; Case C-396/19 P ECB v Estate of Espírito Santo Financial Group [2019]. 224 See also Rule 126.3 Rules of Procedure of the European Parliament. 225 Curtin, ‘ “Accountable Independence” ’ (n 171) 32. 226 For a detailed assessment, see Fabian Amtenbrink and Kees van Duin, ‘The European Central Bank before the European Parliament: Theory and Practice after ten years of Monetary Dialogue’ (2009) 34 European Law Review 561; Grégory Claeys, Mark Hallberg, and Olga Tschekassin, ‘European Central Bank accountability: How the monetary dialogue could evolve’ (2014) Bruegel Policy Contribution No 2014/04; Stefan Collignon and Sebastian Diessner, ‘The ECB’s Monetary Dialogue with the European Parliament: Efficiency and Accountability during the Euro Crisis?’ (2016) 54 Journal of Common Market Studies 1296. 227 See Rule 131 Rules of Procedure of the European Parliament. 228 Interinstitutional Agreement between the European Parliament and the European Central Bank on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB within the framework of the Single Supervisory Mechanism (2013/694/EU) [2013] OJ L320/1. 229 Pursuant to Article I.2, eighth indent IIA, the ordinary hearings, ad hoc exchanges of views and the confidential meetings can cover all aspects of the activity and functioning of the SSM covered by the SSM Regulation.

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382 THE EUROPEAN CENTRAL BANK requirement of cooperation between the ECB and the European Parliament to allow for democratic accountability and oversight over the exercise of the tasks conferred on the ECB by the SSM Regulation. This general requirement of accountability does not mean that the European Parliament and the ECB have unfettered discretion to establish whichever mechanism of accountability. According to Article 20(1) and (9) SSM Regulation, accountability shall be discharged ‘in accordance with the provisions of Chapter IV of the SSM Regulation’ and ‘subject to the TFEU’. This means that accountability arrangements are exclusively those enshrined in the SSM Regulation and the IIA and they must be read in light of the relevant provisions of the TFEU, especially those guaranteeing independence. 14.69

The ECB accountability obligations regarding supervisory activities are mainly discharged by the Chair of the Supervisory Board of the SSM. As provided in the SSM Regulation and in the IIA, the Chair of the Supervisory Board shall present the annual ECB report on the execution of its supervisory tasks to the European Parliament in public and to the euro Group in the presence of representatives from any participating Member State whose currency is not the euro.230 The Chair shall also participate in hearings on the execution of its supervisory tasks by the euro Group in the presence of representatives from any participating Member States whose currency is not the euro or by the competent committees of the European Parliament at the request of such committees (ordinary hearings)231 and may be invited to additional ad hoc exchanges of views on supervisory issues with Parliament’s competent committee.232 Finally, he may be invited to confidential oral discussions with the Chair and the Vice-Chairs of the competent committee of the European Parliament (confidential oral discussions).233 The ECB shall reply orally or in writing to questions put to it by the European Parliament, or by the euro Group in accordance with its own procedures and in the presence of representatives from any participating Member States whose currency is not the euro.234

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Article 21 SSM Regulation puts also national parliaments into the picture. According to Article 21(3) SSM Regulation, the ECB shall also forward the annual report provided for in Article 20(2) to the national parliaments of the participating Member States, which may address to the ECB their reasoned observations. National parliaments may also request at any time the ECB to reply in writing to any observations or questions related to ECB supervisory tasks.235 Article 21(3) SSM Regulation provides that national parliaments may invite the Chair or a member of the Supervisory Board to participate in an exchange of views in relation to the supervision of credit institutions in that Member State, together with a representative of the national competent authority. SSM Regulation explicitly states, that these obligations are without prejudice to the normal accountability 230 Article 20(3) SSM Regulation and No I.1. of the IIA. In detail on the supervision dialogue between the ECB and the European Parliament, see Gijsbert Ter Kuile, Laura Wissink, and Willem Bovenschen, ‘Tailor-made accountability within the Single Supervisory Mechanism’ (2015) 52 Common Market Law Review 155; Fabian Amtenbrink and Menelaos Markakis, ‘Towards a Meaningful Prudential Supervision Dialogue in the Euro Area? A Study of the Interaction between the European Parliament and the European Central Bank in the Single Supervisory Mechanism’ (2019) 44 European Law Review 3. 231 Article 20(4) and (5) SSM Regulation and No I.2. of the IIA. 232 No I.2. of the IIA. 233 Article 20(8) SSM Regulation and No I.2. of the IIA. 234 Article 20(6) SSM Regulation. 235 Article 21(2) SSM Regulation.

ECB’s Three Constitutional Pillars 383 of national competent authorities to national parliaments provided by national law for the performance of tasks not conferred on the ECB and for the performance of activities carried out regarding LSIs. Do these requirements amount to genuine accountability? The answers often diverge, depending on the concept of accountability underpinning one’s assessment. According to one of the more widely used definitions, ‘[a]‌ccountability is a relationship between an actor and a forum, in which the actor has an obligation to explain and to justify his or her conduct, the forum can pose questions and pass judgement, and the actor may face consequences’.236 Although it is contested whether the concept of accountability necessarily requires the power of the forum to which accountability is owed to impose consequences, the most convincing approach is that this element is necessary; simply the obligation to explain and to justify acts or omissions does not amount to accountability. At the same time, ‘consequences’ is an element that needs to be read broadly. It does not only cover the power to impose typical or formal sanctions, such as to dismiss one from office, but the ability to inflict any form of costs, including reputational costs, or to award benefits. From this perspective, and considering the public relevance of parliamentary scrutiny, the procedures described above do amount to forms of accountability. b) Auditors and other inspectors The ECB is subject to scrutiny by the European Court of Auditors (ECA), the European Data Protection Supervisor, the European Ombudsman as well as the Union anti-fraud office (OLAF). Access of these authorities to ECB information is also balanced against the principle of independence. According to Article 27.2 ESCB/ECB Statute, the provisions of Article 287 TFEU, providing for the ECA, shall only apply to an examination of the operational efficiency of the management of the ECB. The restricted scope of ECA’s mandate reflects the balance between independence and external auditing stuck by the Treaty-makers. The SSM Regulation makes a direct reference to the restricted mandate of the ECA under Article 27.2 ESCB/ECB Statute, providing that when the ECA examines the operational efficiency of the management of the ECB under Article 27.2 ESCB/ECB Statute, it shall also take into account the supervisory tasks conferred on the ECB by this Regulation.237 The scope of supervisory competences of the ECA under the latter provision has been the subject of disagreement. The ECA has argued that its mandate covers the assessment ‘of whether the supervising institutions are performing their duties in a manner that minimizes the risk of financial instability and potential cost for budgetary resources’.238 To resolve the issue, the ECB and the ECA have concluded a memorandum of understanding on sharing information that facilitates ECA’s audits related to ECB’s banking supervision function.239

236 Mark Bovens, ‘Analysing and Assessing Accountability: A Conceptual Framework’ (2007) 13 European Law Journal 447, 450. 237 Article 20(7) SSM Regulation. 238 Memorandum of Understanding between the ECA and the ECB (signed on 9 October 2019) accessed 10 February  2020. 239 See Letter of Andrea Enria, Chair of the Supervisory Board to MEP Dimitrios Papadimoulis (12 March 2019) accessed 10 February 2020.

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c) Courts The acts and omissions of the ECB can be reviewed before the CJEU, which has jurisdiction in actions brought against the ECB for reviews of the legality of legally binding acts of the ECB,240 failure to act,241 as well as for actions for damages.242 As all Union institutions, Article 266 TFEU requires the ECB to take the necessary measures to comply with the judgment of the CJEU when a certain act has been declared void or a failure to act has been declared contrary to the Treaties. After the Eurozone crisis, the crisis-related activity of the ECB, such as its unconventional monetary policy measures and its participation in the so-called troika, have given rise to cases that clarified significantly the scope of judicial review of ECB decisions. ECB measures taken in the field of supervision have also been under judicial scrutiny. In the two fundamental cases in the field of monetary policy discussed above, the CJEU adopted a deferential standard of review when reviewing ECB measures of monetary policy, allowing the ECB broad discretion in matters of ‘technical nature’ or those requiring ‘complex assessments’.243 An act of the ECB of this nature can be annulled on substance only if a ‘manifest error of assessment’ can be demonstrated.244 This deferential stance has been also followed by the CJEU when it comes to the non-contractual liability of the ECB245 as well as with regard to cases involving requests for public access to ECB documents.246 In certain cases in the field of banking supervision, however, the CJEU has indicated its willingness to adopt a stricter standard of review.247

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The three basic constitutional rules discussed above, namely, the clearly defined mandate of the ECB, the prohibition of monetary financing, and its independence, are closely related to each other. Their balancing in EU law reflects fundamental constitutional choices, mainly on which body should decide questions of economic and monetary policy. Independence of central banks is sometimes understood as an exception to the rule requiring institutions 240 Article 263 TFEU. 241 Article 265 TFEU. 242 Article 340(3) TFEU and Article 41(3) Charter of Fundamental Rights of the European Union. In general on the judicial review of ECB action and its potential as a mechanism of accountability, see Matthias Goldmann, ‘Adjudicating Economics? Central Bank Independence and the Appropriate Standard of Judicial Review’ (2014) 15 German Law Journal 265; Alexander H Türk and Napoleon Xanthoulis, ‘Legal Accountability of European Central Bank in Bank Supervision: A Case Study in Conceptualizing the Legal Effects of Union Acts’ (2019) 26 Maastricht Journal of European and Comparative Law 151; Dawson, Marikut-Akbik, and Bobić, ‘Reconciling Independence and accountability at the European Central Bank’ (n 171) 88ff. 243 Gauweiler (n 140) para 68; Weiss (n 140) paras 73, 91–92. 244 Gauweiler (n 140) paras 68, 74, and 81; Weiss (n 140) paras 24, 78. 245 Case T-79/13 Accorinti and others v ECB [2015] ECLI:EU:T:2015:756, para 68; Case T-749/15 Nausicaa Anadyomène SAS and Banque d’escompte v ECB [2017] ECLI:EU:T:2017:21, para 70; Case T-107/17 Frank Steinhoff and others v ECB [2019] ECLI:EU:T:2019:353, para 72. 246 Versorgungswerk (n 223) para 53; Case T‑730/ 16 Espírito Santo Financial Group SA v ECB [2019] ECLI:EU:T:2019:161, para 73; Case T‑251/15 Espírito Santo Financial (Portugal) v ECB [2018] ECLI:EU:T:2018:234, para 90. 247 See eg Case T-758/16 Crédit agricole v ECB [2018] ECLI:EU:T:2018:472, paras 60–66; Chiara Zilioli, ‘Proportionality as the Organizing Principle of European Banking Regulation’ in Theodor Baums and others (eds), Zentralbanken, Währungsunion und stabiles Finanzsystem: Festschrift für Helmut Siekmann (Duncker & Humblot 2019) 286.

ECB Instruments 385 that exercise public authority to be subject to electoral accountability.248 This exception is justified by the concrete characteristics of price stability as a public good, as discussed above, by the existence of a clearly defined mandate allowing close and easy supervision of central-bank performance, as well as using alternative, non-electoral ways of scrutiny, including judicial review, transparency, and reporting obligations. On the other hand, economic policies, related to taxation, spending, and redistribution, require a high degree of political control that only electorally accountable bodies, such as governments and parliaments, can discharge. The drafters of the Maastricht Treaty could justify the high degree of ECB independence by keeping contestable economic policy decisions outside the scope of the ECB—directly or indirectly, through the prohibition of monetary financing. The specific focus on price stability and its later quantification by the ECB—below, but close to, 2 per cent—served the same purpose. The original arrangement in Maastricht established thus a central bank that, on the one hand, had a carefully circumscribed mandate and was barred from financing the public sector while, on the other hand, was guaranteed a high degree of independence.

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Independence is a functional concept. It is not an end in itself but rather a means to achieve 14.77 ECB objectives.249 This means that its scope is a function of the pursued task. The highest degree of independence is secured for monetary policy and the pursue of price stability— in this field a wide consensus exists that independent central banks are better positioned to pursue the public good than electorally accountable bodies. Following the Eurozone crisis, the ECB started engaging also in other policy fields. As explained above, the ECB was granted competences in the field of banking supervision and even engaged in crisis management activities, liaising with the Commission in the task of monitoring the implementation of financial assistance programmes as part of the so-called troika. Additional accountability requirements have been provided in order to reflect these tasks. The accountability arrangements provided for in the field of banking supervision have been presented above; in the field of conditionality monitoring, Regulation (EU) 472/2013250 contains elements of an accountability regime for the troika in general.251 Whether these arrangements strike the correct balance between independence and accountability remains a contested issue both in politics and academia.

V. ECB Instruments In order to carry outs its tasks and pursue its objectives, the ECB acts in a variety of ways. In economic terms, the instruments used by the ECB are categorized based on their function. 248 See most prominently, the position of the German Constitutional Court, BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 59; BVerfG, Judgment of the Second Senate of 21 June 2016—2 BvR 2728/13, paras 187ff; BVerfG, Order of the Second Senate of 18 July 2017—2 BvR 859/15, para 103. 249 OLAF (n 177) para 134; Gauweiler (n 140) para 40. 250 European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1. 251 In general see Michael Ioannidis, ‘EU Financial Assistance Conditionality after “Two Pack” ’ (2014) 74 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 61, 89ff. For a critical perspective on ECB’s role in this regard, Paul Dermine, ‘Out of the Comfort Zone? The ECB, Financial Assistance, Independence and Accountability’ (2019) 26 Maastricht Journal of European and Comparative Law 108.

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386 THE EUROPEAN CENTRAL BANK From a legal perspective, the categorization of ECB instrument focuses on their form.252 The instruments the ECB uses can be distinguished into two broad categories: formal legal instruments and informal instruments. Although the latter category, which includes announcements and other forms of communication, often escapes legal analysis has gained significant importance in post-crisis central banking. 14.79

Formal legal instruments are identified in Article 132 TFEU and Articles 34 ESCB/ECB Statute, which provide that the ECB may adopt Regulations, Decisions, Recommendations, and Opinions. According to Article 139(2)(e) TFEU, the acts of the ECB do not apply to Member States with a derogation. These acts can either have a general binding effect or produce effects only within the Eurosystem, being directed to NCBs. Regulations are instruments of general application and directly applicable throughout the Eurosystem. Reflecting their status as ECB’s general rules, they are published in the Official Journal (OJ) in all official languages. Decisions are also directly applicable but, unlike Regulations, they are measures of individual application, addressed to specific natural or legal persons, including euro area Member States. Recommendations and opinions are not binding. Recommendations are, for example, used by the ECB to initiate the adoption of certain EU legislation, when it is exceptionally given the right to legislative initiative that typically belongs to the Commission.253 Article 129(3) TFEU allows the ECB the right to initiate amendments of certain provisions of the ESCB/ECB Statute.254 Opinions are the instrument of ECB’s advisory function. They are delivered to Union institutions or national authorities legislating when they act in the ECB’s field of competence—either after a respective request for consultation or on its own initiative.255 The ECB body responsible for the adoption of an instrument depends on the subject-matter can either be the Governing Council or the Executive Board, depending on their respective competences, as described above.

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For the internal governance of the Eurosystem, the ECB may adopt Guidelines,256 Instructions,257 and Decisions that are directed to NCBs. These instruments produce thus their legal effects only internally, within the Eurosystem, and constitute the legal means through which the principle of hierarchical integration of the Eurosystem is operationalized. Guidelines, Instructions, and (internal) Decisions are legally binding instruments,258 which, as all EU law, enjoy primacy over national law and may form basis of legal action before the CJEU.259 The rules for the adoption of internal ECB legal instruments are outlined in Article 17 ECB Rules of Procedure.

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Guidelines are general instruments setting the framework and the general rules that the NCBs must follow when implementing the monetary policy of the Eurosystem. For example, 252 Not all monetary policy instruments are different from a legal perspective—most are applied using the form of Guideline or Decision. 253 For other instances, see ECB Recommendation (ECB/2014/7) of 24 February 2014 on the organization of preparatory measures for the collection of granular credit data by the European System of Central Banks [2014] OJ C103/1. 254 See for example, ECB Recommendation for a Decision of the European Parliament and of the Council amending Article 22 of the Statute of the European System of Central Banks and of the European Central Bank (ECB/2017/18) (presented by the European Central Bank) (2017/C 212/04) [2014] OJ C212/14. 255 Article 127(4) TFEU. 256 Article 12.1 ESCB/ECB Statute. 257 Ibid. 258 Article 14.3 ESCB/ECB Statute. 259 Article 35.6 ESCB/ECB Statute.

ECB Instruments 387 Guideline ECB/2014/60 (the so-called ‘General Documentation’),260 the ‘backbone of the Eurosystem’s legal framework’,261 sets out in detail the basic rules for the Eurosystem’s monetary policy operations. Although Guidelines only bind the parts of the Eurosystem and as such they are not subject to the publication requirement applicable to Regulations, they are often published on the ECB’s own initiative. (Internal) Decisions regulate organizational or administrative issues of the Eurosystem and have no specific addressees. Responsible for their adoption of Guidelines and Decisions is the Governing Council,262 which may delegate this power to the Executive Board, setting also the limits of the delegation. Instructions are individualized acts, implementing Guidelines and Decisions, which contain specific rules. As implementing acts, they fall within the competences of the Executive Board and must be in accordance with Guidelines and Decisions adopted by the Governing Council.263 The ECB does not only use instruments with legal form but also forms of communication as a tool for stabilizing economic expectations and for ensuring the fulfilment of its tasks.264 According to Article 22 ECB Rules of Procedure, general communications and announcements of decisions taken by the decision-making bodies of the ECB may be published on the ECB website, in the Official Journal of the European Union, or by means of wire services common to financial markets or any other media. Especially after the crisis, monetary policy implementation has taken recourse to this instrument, using channels of central bank communication that do not have formal legal form, such as speeches, interviews, press conferences, and regular publications of reports.265 ECB President’s introductory statement at the beginning of the press conferences, following ECB Governing Council monetary policy meetings, have become an iconic instrument of monetary policy, with single words carefully scrutinized by markets and public actors.266 Such communication instruments have assumed a function of their own, different and separate from the (formal) instruments they are meant to communicate, such as the adoption of decisions on future interest rates. By aiming to express commitments and stabilize expectations about the future, these atypical instruments perform a function that comparable to that of formal legal instruments.

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Since July 2013, the Governing Council has been providing forward guidance, namely conditional statements about the future path of the policy interest rates.267 Forward guidance is aimed at clarifying the Governing Council’s assessment of the inflation outlook in the euro area and its monetary policy strategy, which is based on the assessment.268 Providing forward guidance is a material shift in ECB’s communication on monetary policy. It implies communicating not only how the ECB’s Governing Council assesses current economic

14.83

260 ECB Guideline (EU) 2015/510 of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) [2015] OJ L91/3. 261 Zilioli and Athanassiou, ‘The European Central Bank’ (n 39) 624. 262 Article 12.1 ESCB/ECB Statute. 263 Ibid. Except from the field of banking supervision, where competent is the Governing Council. 264 See above the text and references to transparency as a policy instrument, especially (n 213). 265 See Jens Weidmann, ‘Central bank communication as an instrument of monetary policy’ (Lecture at the Centre for European Economic Research, Mannheim, 2 May 2018) accessed 10 February 2020. 266 See on this issue Carlo Rosa and Giovanni Verga, ‘On the consistency and effectiveness of central bank communication: Evidence from the ECB’ (2007) 23 European Journal of Political Economy 146. 267 The ECB’s forward guidance, ECB, ‘Monthly Bulletin April 2014’ (ECB 2014) 65. 268 The ECB’s forward guidance, ECB, ‘Monthly Bulletin April 2014’ (ECB 2014).

388 THE EUROPEAN CENTRAL BANK conditions and the risks to price stability over the medium term, but also what this assessment implies for its future monetary policy orientation. 14.84

Another use of communication tools in order to address distortions in the pricing of sovereign debt in some euro area countries, was the announcement of the Governing Council to undertake Outright Monetary Transactions (OMTs) in euro area secondary sovereign bond markets, subject to countries complying with conditionality. Although so far OMTs have not been activated, the announcement was instrumental in addressing excessive risk premia and improving financial market confidence. The CJEU recognized the legal significance of the announcement, accepting the admissibility of a request of preliminary reference based scrutinizing compatibility of the OMT programme, as announced in the press release, with EU law.269

VI. Concluding Remarks 14.85

The ECB is the central component of the Union’s monetary and banking-supervision frameworks. Its establishment marked an important stage in the development of the law of central banks at a global scale. It is the only central bank tasked with providing a supranational public good and the only one governed by supranational constitutional law. These characteristics are reflected in the institutional arrangement of the ECB. The Governing Council is a unique example of national officials participating in a Union body in their personal capacity, enjoying legal guarantees to serve the Union interest. ESCB/Eurosystem committees bring together experts from all national banks to advise the ECB decision-making bodies under the coordination of ECB staff. The ECB stands on three fundamental constitutional pillars, which were substantially clarified by the CJEU in a series of canonical judgments related to measures adopted during the Eurozone crisis. First, central bank independence is guaranteed by a series of provisions of the TFEU and of the ESCB/ECB Statute and aims at shielding decision-making from short-sighted political pressures, especially those coming from the national level. As a functional principle, independence reflects the different tasks assumed by the ECB. Second, the mandate of the Eurosystem is the outcome of a delicate balancing both between economic and monetary policy and between Union and national competences. The prohibition of monetary financing, the third fundamental constitutional pillar, aims at ensuring the constitutional allocation of tasks between politically responsible fiscal authorities and independent monetary policy-making. The Eurozone crisis presented the ECB with a critical juncture that required a profound rethinking of its role in the Eurozone. This critical juncture, which was not only economic and political but also constitutional, ultimately strengthened the position of the ECB as the most effective supranational institution in the EMU.

269 Even though the OMT decisions had not yet been implemented and their implementation would be possible only after further legal acts have been adopted, Gauweiler (n 140) para 28.

15

ESCB/E UROSYSTEM/NATIONAL CENTRAL BANKS Julian Langner*

I. Legal Nature of the Structures

A. Legal basis in the TFEU and the Statute of the ESCB and of the ECB B. Legal status of the ESCB C. Legal status of the Eurosystem D. Basic understanding for further elaboration, Rotation System E. Principle of decentralization F. Legal status of the NCBs G. Ownership structures of the NCBs H. The NCBs as owners of the ECB I. Foreign reserves

15.1 15.3 15.4 15.6 15.9 15.12 15.22 15.26 15.30 15.36

J. Loss coverage

II. Requirements of the TFEU

A. Refinement by the ECB B. Compatibility of the national legislation C. Independence D. Article 123: prohibition of monetary financing E. Article 124: no privileged access

III. Other National Tasks of NCBs

15.41 15.43 15.44 15.45 15.46 15.73 15.76 15.77

I. Legal Nature of the Structures The European System of Central Banks (ESCB) and the Eurosystem respectively is quite a unique legal structure which is historically unprecedented.1 As part of the European Union (EU), it is necessarily based on the rule of law and needs to be clearly defined in the primary law as such. Thus, the ESCB was included in the European Union’s constituting Treaties by the Treaty of Maastricht in Articles 8 and 106 of the Treaty establishing the European Community (TEC).2 However, it reflects a typical European Union compromise. While it was clear that the Member States would have to give up their sovereignty with regard to their competences in the field of monetary policy, they were ultimately not too eager to give up their freedom with regard to the organizational structures3 of their existing national central banks (NCBs). Many of the latter were institutions with very long histories and traditions; all were held in high esteem in the institutional environment of the Member States.4 As the structures of the future monetary policy institutions were worked out by a committee of

* The author is Head of Division in Deutsche Bundesbank’s legal services. The views expressed in this contribution are those of the author and do not necessarily coincide with those of Deutsche Bundesbank. 1 Florian Becker in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 129 TFEU, para 4 (hereafter Becker in Siekmann (ed), EWU). 2 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 1, Article 282 TFEU, para 2. 3 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 14. 4 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 9. Julian Langner, 15 ESCB/ Eurosystem/ National Central Banks In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0019

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390 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS governors of the NCBs,5 it is thus no wonder that they tried to maintain as much autonomy as possible for their respective institutions.6 Unfortunately, these traditions were not fully coherent so that it was impossible to find a single blueprint for the tasks of the NCBs. The result was a two-layered structure7 with the European Central Bank (ECB) as on the one hand hierarchically superior central body designated to order the NCBs to execute the monetary policy it defines,8 but on the other hand maintaining the legal personality and structure of the NCBs on the second layer. That means that the ESCB does not represent a single authority with lines of instruction running from the top level, the ECB’s board of directors, to hierarchically subordinated units which implement its policies,9 but rather that it is a very complex network among the ECB and the NCBs—a system as the Treaties put it. This implies that on both the national and the supranational EU levels, independent institutions exist which hold or keep a certain measure of organizational independence and competences.10 There are practical consequences to that: (i) it is important to note that a claim against an NCB is not a claim against the ECB or the ESCB, nor is it a claim against the respective Member State, nor against the Union;11 and (ii) there is also a need that the ECB passes legal acts in the sense of Article 14.3 Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB)12 if it wants to bind the NCBs. It cannot simply order them to do specific things. On the contrary, Article 282(1) TFEU13 names the NCBs as equivalent elements to the ECB.14 15.2

Since the body passing these legal acts according to Article 282(4) TFEU and Article 12 Statute of the ESCB is the Governing Council of the ECB, where the governors of the NCBs are members15 according to Article 10.1 Statute of the ESCB and have voting rights according to the rules of Article 10.2 Statute of the ESCB, at least in theory, a balance of power is always assured between the ECB and the NCBs as members of the ESCB.16 5 Carel C A van den Berg, The Making of the Statute of the European System of Central Banks (Dutch UP 2004) 269 (hereafter van den Berg, The Making of the Statute); René Smits, The European Central Bank—Institutional Aspects (Kluwer Law International 1997) 44 (hereafter Smits, The European Central Bank). 6 Chiara Zilioli and Martin Selmayr, The Law of the European Central Bank (Hart Publishing 2001) 57 (hereafter Zilioli and Selmayr, The Law of the European Central Bank). 7 Zilioli and Selmayr, The Law of the European Central Bank (n 6) 56; Rosa M Lastra and Victor Louis, ‘European Economic and Monetary Union: History, Trends, and Prospects’ (2013) 32 Yearbook of European Law 57, 128 (hereafter Lastra and Louis, ‘European Economic and Monetary Union’). 8 Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 135. 9 Cornelia Manger-Nestler, Par(s) inter pares? (Duncker & Humblot 2008) 214 (hereafter Manger-Nestler, Par(s) inter pares?). 10 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 8; Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 128. 11 Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 132. 12 Consolidated version of Protocol No 4 to the TFEU on the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB) [2016] OJ C202/230 (hereafter Statute of the ESCB); Fabian Amtenbrink, The Accountability of Central Banks (Hart Publishing 1999) 122ff (hereafter Amtenbrink, The Accountability of Central Banks); Helmut Siekmann, ‘The legal framework for the European System of Central Banks’ (2015) White Paper Series No 26, 32 accessed 29 January 2020 (hereafter Siekmann, ‘Framework for the European System of Central Banks’). 13 Consolidated version of the Treaty on the Functioning of the European Union [2016] OJ C202/47. 14 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 9. 15 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 32. 16 Manger-Nestler, Par(s) inter pares? (n 9) 200; see also Bernd Krauskopf and Christine Steven, ‘The Institutional Framework of the European System of Central Banks: Legal Issues in the Practice of the First Ten Years of its Existence’ (2009) 46 Common Market Law Review 1143, 1158 (hereafter Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’).

Legal Nature of the Structures 391

A. Legal basis in the TFEU and the Statute of the ESCB and of the ECB Article 282(1) (first sentence) TFEU states that ECB and the NCBs constitute the ESCB.17 This article was included in this form by the Treaty of Lisbon which did not change the content of the former rules of the Treaty establishing the European Community.18 Article 14.3 Statute of the ESCB affirms that the NCBs are an integral part of the ESCB.19 Article 129 TFEU clarifies that the ESCB is governed by the decision-making bodies of the ECB, ie the Governing Council and the Executive Board. Article 129(2) TFEU further defines that there is a Statute of the ESCB and of the ECB which is added to the Treaties as a protocol, namely Protocol No 4, which in its Article 1 repeats the content of Article 282(1) TFEU with an explicit reference to it. Articles 127(1), 282(2) TFEU and Article 2 Statute of the ESCB state the main goal of the ESCB as maintaining price stability.20 Only insofar as it is possible without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 TFEU. The ESCB has to act in accordance with the principle of an open market economy with free competition according to Article 127(1) TFEU.21 Article 127(2) TFEU and Article 3 Statute of the ESCB describe the main tasks of the ESCB as defining and implementing the monetary policy of the European Union, conducting foreign-exchange operations consistent with Article 229 TFEU, holding and managing the official foreign reserves of the Member States and promoting the smooth operation of the payment systems.22 In addition, according to Article 127(5) TFEU and Article 3.3 Statute of the ESCB, the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.23 The latter is a competence held by the ESCB as a whole since the beginning of its existence in 1999, which has to be strictly distinguished from the specific tasks transferred to the ECB alone in the field of banking supervision on the basis of Article 127(6) TFEU by the SSM Regulation24 in 2013. The latter has rendered the ECB the sole prudential supervisory authority for the Member States which have introduced the euro with the opportunity to include further Member States in close cooperation according to Article 7 of the SSM Regulation. 17 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 31. 18 Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 1. 19 Amtenbrink, The Accountability of Central Banks (n 12) 121; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 32. 20 René Smits, ‘The European Central Bank’s Independence and Its Relations with Economic Policy Makers’ (2007) 31 Fordham International Law Journal 1613, 1617 (hereafter Smits, ‘The European Central Bank’s Independence’). See further Chapter 21. 21 Amtenbrink, The Accountability of Central Banks (n 12) 205; Alexander Thiele, ‘The Independence of the ECB: Justification, Limitations and Possible Threats’ (2018) 6 Journal of Self-Governance and Management Economics 98, 105 (hereafter Thiele, ‘The Independence of the ECB’); Alexander Thiele, ‘Die Unabhängigkeit der EZB: Gründe, Grenzen und Gefährdungen’ in Malte Kröger and Arne Pilniok (eds), Unabhängiges Verwalten in der Europäischen Union (Mohr Siebeck 2016) 195, 206 (hereafter Thiele, ‘Die Unabhängigkeit der EZB’). 22 Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 134; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 34. See further Part V. 23 Amtenbrink, The Accountability of Central Banks (n 12) 128; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 35. 24 Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (SSM Regulation) [2013] OJ L287/63; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 35.

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392 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS

B. Legal status of the ESCB 15.4

While on the one hand, the ECB is a European institution according to Article 13(1) TEU, which is endowed with legal personality by Article 282(3) TFEU,25 as the NCBs are by their respective national legal basis,26 the ESCB as such on the other hand does not hold legal personality27 and is not seen as a European institution.28

15.5

The ESCB is also not able to act on itself.29 Since it does not have decision-making bodies of its own, some rules apparently indicating to the contrary, such as Article 2 third sentence Statute of the ESCB (‘The ESCB shall act . . ’), are misleading. Instead, it is led by the decision-making bodies of the ECB, Article 129(1) TFEU.30 In this regard, the decision- making bodies of the ECB are not simultaneously decision-making bodies of the ESCB with identical acting persons. By this token, the ESCB can also not borrow the decision-making bodies of the ECB, as it is not construed as an acting body by the European Treaties.31 The ESCB thus, by lack of an independent legal personality, cannot be holder of competences transferred by the Member States. Nevertheless, the treaties confer tasks and responsibilities to the ESCB as a network32 which is different from transferring tasks to the ECB alone as becomes apparent from the difference in the referral of competences in the field of prudential supervision by Article 127(5) and Article 127(6) TFEU.33 This difference shows the peculiarities of the legal nature of the ESCB. Because of this, the concrete allocation of competences and separation thereof between the ECB and the NCBs in the ESCB as the only legal personalities in the system can only be derived from the rules on the ESCB, in particular the Statute of the ESCB.34 These, however, define that the ESCB is governed by the decision-making bodies of the ECB,35 and thereby assure that in the end the Governing Council of the ECB takes all relevant decisions for the ESCB as a whole.36 25 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 1, 31; Smits, The European Central Bank (n 5) 92. 26 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1145; Amtenbrink, The Accountability of Central Banks (n 12) 125; Smits, The European Central Bank (n 5) 92, Fabian Amtenbrink, Leendert Adrie Geelhoed, and Suzanne Kingston, ‘Economic, Monetary and Social Policy’ in PJG Kapteyn and others (eds), The Law of the European Union and of the European Communities (4th revised edn, Kluwer Law International 2008) 945 (hereafter Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’). 27 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1144; Zilioli and Selmayr, The Law of the European Central Bank (n 6) 65; Amtenbrink, The Accountability of Central Banks (n 12) 120; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 1, 31; Smits, The European Central Bank (n 5) 92. 28 Christian Waldhoff in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Vorbemerkung Articles 127–133 TFEU, para 2; Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 20; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (CH Beck 2015) 35 (hereafter Ohler, Bankenaufsicht); Christoph Herrmann and Corinna Dornacher, International and European Monetary Law (Springer 2017) 76 (hereafter Herrmann and Dornacher, Monetary Law). 29 Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 21. 30 The ESCB shall be governed by the decision-making bodies of the European Central Bank which shall be the Governing Council and the Executive Board; see also Zilioli and Selmayr, The Law of the European Central Bank (n 6) 65; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 947. 31 Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 21. 32 Ohler, Bankenaufsicht (n 28) 35, 37 33 See Section I.A. 34 Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 22. 35 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1152; Herrmann and Dornacher, Monetary Law (n 28) 78; Amtenbrink, The Accountability of Central Banks (n 12) 121. 36 Smits, The European Central Bank (n 5) 94.

Legal Nature of the Structures 393

C. Legal status of the Eurosystem The Eurosystem defined in Article 282(1) second sentence TFEU37 and Article 1 second sentence Statute of the ESCB as the ECB and the NCBs of the Member States whose currency is the euro, is only a subset of the ESCB,38 the latter consisting according to the first sentences of the respective rules of the ECB and the NCBs of all Member States of the European Union. This rule was finally introduced by the Lisbon Treaty,39 to adjust to the fact that a significant number of Member States of the EU has not yet introduced the euro as their currency. Historically, Member States not having introduced the euro as their currency had already been foreseen, when defining the structures of the ESCB.40 The Committee of Governors, which was set up for this task,41 namely had defined in Article 42.4 Statute of the ESCB that, for the decisive functions of the ESCB with regard to the single monetary policy, only the NCBs of the Member States whose currency is the euro had to be read as ‘national central banks’ in the respective rules. The consequence of this is, as it would be expected by any reasonable surveyor, that only the NCBs of the Member States which really participate in the euro project have a say in the monetary policy concerning the euro. Nevertheless, the combination of the ECB and these NCBs holding the full participation rights had neither been described nor been expressly named neither by the European Treaties nor by the Statute of the ESCB, as these rules were originally based on the assumption that all Member States would aim at introducing the euro as their currency as early as possible according to their obligations from the TFEU.42 Consequently, the structures originally foreseen in the Maastricht Treaty for a short adaptation phase were never intended for a prolonged period43 in which Member States, for economical reasons or matters of political opportunity willingly would not introduce the euro, eg Sweden.44 Since Member States decisively holding on to their national currency nevertheless had become a reality, the combination of the ECB and the NCBs of the Member States having introduced the euro finally needed to be defined as an independent subset of the ESCB,45 as this group of central banks was the relevant structure for implementing the monetary policy with regard to the euro. Thus, the term ‘Eurosystem’ which had been in practical use for this combination before signing the Lisbon Treaty,46 was at last—massively supported by the ECB47—included in the official text to achieve a legally binding definition. Apart from this declaratory description,48 it has not changed the legal nature of the structures.49 37 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 32. 38 Ohler, Bankenaufsicht (n 28) 34. 39 Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 3; Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 128. 40 Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 46. 41 van den Berg, The Making of the Statute (n 5) 270. 42 Christoph Herrmann, ‘Die Bewältigung der Euro-Staatsschulden-Krise an den Grenzen des deutschen und europäischen Währungsverfassungsrecht’ (2012) 23 Europäische Zeitschrift für Wirtschaftsrecht 805, 806 (hereafter Herrmann, ‘Die Bewältigung der Euro-Staatsschulden-Krise’); Smits, The European Central Bank (n 5) 133. 43 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 7. 44 Ibid, 6, 36. 45 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 4; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 7. 46 Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 50. 47 Ibid, Article 282 TFEU, para 51. 48 Ibid, Article 282 TFEU, para 53. 49 Ibid, Article 282 TFEU, paras 52ff.

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394 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS 15.7

Thus, the subset ‘Eurosystem’ is of the same legal quality as the more encompassing ESCB. Even though in the current reality all important tasks described above for the ESCB are restricted to the Eurosystem,50 it accordingly also lacks an independent legal personality.51 The restriction of the tasks to the Eurosystem is a logical consequence of the fact that the Member States whose central banks are not part of the Eurosystem have not transferred their monetary competences to the Union as the other Member States having introduced the euro have done, as confirmed by Article 282(4) second sentence TFEU and Article 42.2 Statute of the ESCB.52 Accordingly, their NCBs are not bound by guidelines and decisions of the ECB.53 Nevertheless, this does also not give any institutional quality to the Eurosystem even if there are some contributions to this end in the legal discussion.54

15.8

Since according to Article 50 Statute of the ESCB and Article 141(1) TFEU the General Council is only established as long as there are Member States whose currency is not the euro, with strictly limited competences,55 the Governing Council is the decision-making body for the Eurosystem, whereas all remaining coordinating functions for the ESCB as a whole rest in the General Council as third decision-making body of the ECB. In the latter body, according to Article 44.2 Statute of the ESCB only the President and the Vice- President of the ECB and thus no other members of the Executive Board of the ECB have a voting right, even though the latter may participate. But since the General Council normally does not take decisions,56 its potential to influence the structures of the ESCB is fairly restricted. Instead, it contributes to the work of the ECB57 through the exercise of its competences prescribed by Article 46 Statute of the ESCB58 in a coordinating and advisory capacity.59 However, these decisions are of limited relevance. This is demonstrated by the fact that it can even be assumed that in some cases the Governing Council can take decisions on matters relevant for the whole ESCB which may also affect NCBs of Member States whose currency is not the euro. This is demonstrated by the monitoring of compliance with Articles 123–124 TFEU. In principle, for NCBs of the Member States whose currency is not the euro it will be monitored by the General Council in the transitory period, till they finally introduce the euro. According to Article 271(d) TFEU and Article 35(5) and (6) Statute of the ESCB, however, the Governing Council would have to decide to bring an action to the Court of Justice of the European Union (CJEU) against these non- Eurosystem NCBs, if they failed to fulfil their obligations.60

50 Ohler, Bankenaufsicht (n 28) 34. 51 Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 131. 52 Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 47. 53 Ibid. 54 Becker in Siekmann (ed), EWU (n 1) Article 282 TFEU, para 48. 55 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1155; Herrmann and Dornacher, Monetary Law (n 28) 75; Amtenbrink, The Accountability of Central Banks (n 12) 121, 124ff; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 947, 951; Smits, ‘The European Central Bank’s Independence’ (n 20) 1614; Smits, The European Central Bank (n 5) 97. 56 Jochen Sprung in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 44 Statute of the ESCB, para 52 (hereafter Sprung in Siekmann (ed), EWU). 57 Smits, The European Central Bank (n 5) 97. 58 Sprung in Siekmann (ed), EWU (n 56) Article 46 Statute of the ESCB, para 9. 59 Ohler, Bankenaufsicht (n 28) 34; Herrmann and Dornacher, Monetary Law (n 28) 75; Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 131. 60 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1156ff.

Legal Nature of the Structures 395

D. Basic understanding for further elaboration, Rotation System As an interim result and basis for the further elaborations in this chapter, it can thus be stated that in today’s reality, the competences of the ESCB defined in Article 127(2) TFEU and Article 3 Statute of the ESCB are de facto executed by the Eurosystem with the Governing Council as its decision-making body. Originally all included NCBs had an equal participation right in the decisions of this body by the fact that their governors according to Article 10.1 Statute of the ESCB had one vote each in its decisions.61 The governors could thus by their collective superiority in the Governing Council in comparison to the Executive Board always steer the ECB in a different direction.62 However, with the number of Member States introducing the euro as their currency growing, there was fear that the procedures in the Governing Council would turn out unmanageable.63 So, already in 200364 the ECB’s Governing Council used a competence introduced by the Treaty of Nice in Article 10.6 Statute of the ESCB to unanimously initiate a change to this original ‘one man, one vote’ rule.65 Accordingly, the voting rights of the governors of the NCBs were restricted to fifteen by a decision of the Council (meeting in the composition of the Heads of State or Government) of 21 March 2003.66 However, the Governing Council thereafter postponed the start of the rotation scheme to the point in time when the number of national central bank Governors in the Governing Council would exceed eighteen,67 which otherwise would have applied when this number exceeded fifteen. These decisions aimed at striking the appropriate balance between continuity, efficiency and inclusiveness,68 while preserving the collective nature of the Governing Council.69 Since 1 January 2015, when Lithuania adopted the euro as the nineteenth Member State, the voting rights rotate among the governors of the NCBs. Currently, the governors rotate in two groups defined according to the economic importance of the Member States of the NCBs. The first group shares four voting rights for the five NCBs of the Eurosystem of the economically most important Member States,70 in the second group the remaining fourteen Member States share 61 Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 950. 62 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 47. 63 See accessed 29 January 2020; accessed 29 January  2020. 64 ECB Recommendation of 3 February 2003, under Article 10.6 of the Statute of the European System of Central Banks and of the ECB, for a Council Decision on an amendment to Article 10.2 of the Statute of the European System of Central Banks and of the ECB (ECB/2003/1) [2003] OJ C29/6; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 948. 65 Christine Steven in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 10 Statute of the ESCB, para 13 (hereafter Steven in Siekmann (ed), EWU); for a description of the discussion leading to this proposal see ibid, paras 14–17; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 948. 66 Council Decision 2003/223/EC, meeting in the composition of the Heads of State or Government of 21 March 2003 on an amendment to Article 10.2 of the Statute of the European System of Central Banks and of the ECB [2003] OJ L83/66; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 949. 67 Decision of the ECB of 18 December 2008 to postpone the start of the rotation system in the Governing Council of the European Central Bank (ECB/2008/29) [2009] OJ L3/4. 68 Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 950 point out that the original equality between the NCBs may have been one motive for some smaller economies to favour the pooling of monetary policy at the supranational level in the first place thereby in their perception lessening the de facto influence of the Bundesbank over the direction of monetary policy in (western) Europe until that point. 69 For further information, see ECB, ‘Rotation of voting rights in the governing council of the ECB’ (Monthly Bulletin, July 2009) 91; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 32. 70 Which are determined according to Article 10.2 first indent Statute of the ESCB, currently the governors of Deutsche Bundesbank, Banque de France, Banca d’Italia, Banco de España, and Nederlandse Bank.

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396 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS eleven voting rights.71 As soon as the number of governors exceeds twenty-one, it is envisaged that the second group will be further subdivided into a group consisting of half of the total number of governors (rounded up to the nearest full number) with four voting rights and a group of the remaining governors with three voting rights.72 Yet all members of the Governing Council may participate in the meetings of the Governing Council and retain their right to speak, even if they do not have a right to vote. 15.10

Members of the Governing Council always participate in its meetings in a personal and independent capacity (‘ad personam participation’)73 as experts on monetary policy in Europe, so that the NCBs as legal bodies cannot directly influence the decision-making in the legal sense. On the contrary, Article 130 TFEU, Article 7 Statute of the ESCB74 apply, according to which the NCBs are not even allowed to force their governors to vote towards a specific direction. It is nevertheless quite obvious that the governors will need detailed preparation by the respective staff in their NCB to follow the complex discussions in the Governing Council, thus drawing on all the experience and know-how existing in the respective NCB.

15.11

The remaining position of the governors of the NCBs after introducing the rotation scheme assures that they collectively still dominate the Governing Council. Thus, the indirect influence of the NCBs on the decision-making for the Eurosystem as a whole remains essential and effective, thereby securing their individual powers in it. Nonetheless, the historical developments show tendencies towards centralization of the decision-making in the Governing Council. Thereby, centralization grows in the Eurosystem as a whole.75 This means that the other formal legal guarantees included in the Statute of the ESCB to secure the legal and remaining practical independence of the NCBs become even more important in order to preserve the legal nature of the system.

E. Principle of decentralization 15.12

An important factor securing the internal independence of the NCBs in the Eurosystem is a specific manifestation of the principle of decentralization which is provided for in Articles 9.2 and 12.1 Statute of the ESCB as a fundamental rule for the distribution of the competences within the system.76 Article 9.2 states that the ECB has to ensure that the tasks 71 Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 949. 72 Ohler, Bankenaufsicht (n 28) 45; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 949. 73 Manger-Nestler, Par(s) inter pares? (n 9) 202; Amtenbrink, The Accountability of Central Banks (n 12) 122; Yves Mersch, ‘Aligning Accountability with Sovereignty in the European Union: the ECB’s experience’ in ECB (ed), ECB Legal Conference: Shaping a new legal order for Europe: a tale of crises and opportunities (ECB 2017) 13, 16 (hereafter Mersch, ‘Aligning Accountability with Sovereignty’). 74 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 47; Chiara Zilioli, ‘The Independence of the European Central Bank and Its New Banking Supervisory Competences’ in Dominique Ritleng (ed), Independence and Legitimacy in the Institutional System of the European Union (OUP 2016) 125, 140 (hereafter Zilioli, ‘The Independence of the European Central Bank’). 75 See as reference for this tendency for example Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 950. 76 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 24; Francisco-Javier Priego and Fernando Conlledo, ‘The role of the decentralisation principle in the legal construction of the European System of Central Banks’ in ECB (ed), Legal Aspects of the European System of Central Banks (ECB 2005) 189, 190 (hereafter Priego and Conlledo, ‘The role of the decentralisation principle’).

Legal Nature of the Structures 397 conferred upon the ESCB under Article 127(2), (3), and (5) of the TFEU are implemented either by its own activities or through the NCBs pursuant to Articles 12.1 and 14 Statute of the ESCB. On the one hand, this confirms the competence of the ECB to decide by its Governing Council77 how to allocate tasks within the Eurosystem. On the other hand, this requires the operational integration of the NCBs.78 In doing so, the Statute of the ESCB shows a clear preference for decentralized implementation of tasks by the NCBs of the Eurosystem,79 as long as those tasks have not been specifically attributed to the ECB or the NCBs.80 The principle of decentralization is not a category of the general principle of subsidiarity enshrined in Article 5(3) TEU81 as this only applies in areas which do not fall within the exclusive competence of the Union. The competences of the ESCB on the contrary are fully conferred upon the EU level according to Articles 127, 128 TFEU. Thus, there exists an agreement in the academic discussion that the principle of subsidiarity, even though it may lead to similar functional effects, does not apply with regard to the distribution of executive competences in the ESCB/Eurosystem.82 Unlike the principle of subsidiarity which assures that competences are not unnecessarily transferred to the EU level from the start, the principle of decentralization redistributes the European competences of the ESCB to the NCBs83 and thereby back to the national level, even though this does not result in a national competence. It more accurately reflects a task-oriented activity on a common Union level of the system. Accordingly, it has a horizontal, rather than a vertical effect.84

15.13

The interesting question stemming from this is whether this principle restricts the capacity of the ECB to define the executive competences in the Eurosystem. The answer to that is not unanimous.85 Quite a few authors presume a general competence of the NCBs, except if the ECB views an execution by the NCBs in exceptional cases as impossible or inappropriate.86 This is because, according to Article 12.1 Statute of the ESCB, the ECB shall otherwise have recourse to the NCBs to carry out the operations which form part of the tasks of the ESCB. Thus, in the end it is preferable to follow the interpretation according to which in particular the criterion of appropriateness requires an enhanced inclusion of the NCBs in the execution of the Eurosystem’s tasks, except when the Governing Council judges this to be impossible or inappropriate.87 Unlike the principle of subsidiarity, it does not request an efficiency test. Therefore, for employing the NCBs, it is fully sufficient that they can effectively fulfil the

15.14

77 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1159. 78 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 27. 79 Etienne de Lhoneux, ‘The Eurosystem’ in ECB (ed), Legal Aspects of the European System of Central Banks (ECB 2005) 161–78, 174 (hereafter de Lhoneux, ‘The Eurosystem’). 80 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1159. 81 Consolidated version of the Treaty on the European Union [2012] OJ C326/13. 82 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 27; Ohler, Bankenaufsicht (n 28) 49; Zilioli and Selmayr, The Law of the European Central Bank (n 6) 71; van den Berg, The Making of the Statute (n 5) 317; Smits, The European Central Bank (n 5) 111ff. 83 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 30; Smits, The European Central Bank (n 5) 112. 84 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 31. 85 Ibid, Article 129 TFEU, para 32. 86 Ibid, Article 129 TFEU, para 33; Smits, The European Central Bank (n 5) 112; Amtenbrink, The Accountability of Central Banks (n 12) 125; de Lhoneux, ‘The Eurosystem’ (n 79) 173ff; Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1159ff; Manger-Nestler, Par(s) inter pares? (n 9) 294. 87 Priego and Conlledo, ‘The role of the decentralisation principle’ (n 76) 194; Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1160; Smits, The European Central Bank (n 5) 112.

398 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS task on an average and acceptable quality level.88 In any case it is apparent, but nevertheless questioned,89 that the ECB cannot totally acquire all Eurosystem tasks by itself,90 reducing the NCBs to their remaining national tasks which they can execute according to Article 14.4 Statute of the ESCB. Otherwise, the ECB could undermine the institutional structure prescribed by the Treaties and effectively eradicate the system approach prescribed by them.91 15.15

However, the question remains how individual NCBs could counter inadequate decisions of the ECB in this field and would thereby be protected against a restriction or even removal of competences for the tasks foreseen for them by primary European law.92 The ECB will always have a rather wide range of evaluation which allows it to include aspects of efforts with regard to resources and cost which restricts any control measures to apparently incorrect decisions.93 Yet without any possibility of judicial control, the defence of their participation rights by the NCBs would become totally ineffective.94 Thus, an NCB could bring an action for annulment according to Article 263(4) TFEU before the CJEU against the ECB’s legal act impeding the principle of decentralization.95 In practice, there has not yet been a need for taking the ECB to the CJEU.96 Normally, there will be a vivid discussion in the Governing Council if participation rights of the NCBs are concerned. Such discussion will usually lead to a compromise solution in case the NCBs feel unduly restricted, in particular if all NCBs are equally concerned.

15.16

With the implementation of the monetary policy becoming technically more and more complex and thus requiring high investments in the respective hard-and software and human resources, a specific issue in this regard is whether, for efficiency reasons, it is possible to refer specific tasks only to some or even one NCB alone to promote a specialization in specific fields. Some argue that the ECB is not required to assure absolutely equal treatment of the NCBs, but rather that it may horizontally differentiate between NCBs.97 In principle, the ECB may not be precluded from taking into consideration different capacities and experiences at the NCBs and thus differentiating according to these capacities when attributing the execution of Eurosystem tasks.98 However, this question will hardly become practically relevant, as the NCBs are never restricted from reorganizing the execution of their tasks collectively based on a decision of their own free will to create synergy effects and fixing the basis for such cooperation contractually.99 This has been the case when the Eurosystem decided to share capacities for the improvement of technical platforms, 88 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 34, referring to other critical sources. 89 Zilioli and Selmayr, The Law of the European Central Bank (n 6) 115. 90 Priego and Conlledo, ‘The role of the decentralisation principle’ (n 76) 196. 91 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 35. 92 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1174. 93 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 36. 94 Ibid; Manger-Nestler, Par(s) inter pares? (n 9) 295ff; Priego and Conlledo, ‘The role of the decentralisation principle’ (n 76) 195. 95 Manger-Nestler, Par(s) inter pares? (n 9) 298; Priego and Conlledo, ‘The role of the decentralisation principle’ (n 76) 195, fn 22. 96 Smits, The European Central Bank (n 5) 108. 97 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 37. 98 Becker in Siekmann (ed), EWU (n 1) Article 129 TFEU, para 38; Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1160; Priego and Conlledo, ‘The role of the decentralisation principle’ (n 76) 197 are more critical of that possibility, even if admitting that other possibilities, such as the establishment of different levels of execution to which NCBs could adhere on a voluntary basis, will not be subject to such legal constraints, 198; Ohler, Bankenaufsicht (n 28) 50; van den Berg, The Making of the Statute (n 5) 302. 99 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1160ff.

Legal Nature of the Structures 399 as for instance the TARGET platform for the execution of payments.100 In this case, while the platform is technically run by some specifically designated NCBs, in the legal sense all NCBs participating in TARGET operate a national component of the TARGET system and thus maintain their contractual relationship with their clients.101

1. Issuance of banknotes With regard to the issuance of banknotes, distributing tasks within the Eurosystem becomes of specific importance. According to Article 128(2) second sentence TFEU and Article 16 second sentence Statute of the ESCB, the ECB and the NCBs may issue euro banknotes.102 The Treaties do not, however, explicitly define the concept of issuance.103 According to the majority view in literature, issuance consists in the fact that a liability of the issuer is created by the banknote receiving a value. Since there is no obligation for coverage by gold or other currency in the Eurosystem, this liability is not to be mistaken as an exchange obligation.104 Issuance in this sense has to be differentiated from putting the banknote into circulation. This difference is of special importance for euro banknotes as the institutions taking these separate steps may indeed differ. Since it is hardly imaginable that the NCBs may not be involved in the physical act of putting euro banknotes into circulation,105 it may be questioned whether the ECB should not abstain from the issuance altogether to comply with the decentralization principle of Article 12.1 Statute of the ESCB.106 However, this problem was solved by an ECB decision according to which the ECB as well as the NCBs issue banknotes.107 According to Article 2 of this decision, the ECB and the NCBs shall issue euro banknotes. Article 3 of said decision defines that all physical handling of banknotes, thus including putting them into circulation, shall be performed by the NCBs alone.108 However, this does not mean that only the NCBs are obliged by the issuance of the banknote, as it would appear logical on first sight. Otherwise they would include the obligations stemming from the euro banknotes they had put into circulation in their respective balance sheets. Instead, the Eurosystem follows a virtual allocation scheme109 according to a banknote allocation key as prescribed by Article 4 of said decision which in principle follows the capital key of the ECB.110 According to that key, the ECB always issues 8 per cent of all euro banknotes put into circulation by the Eurosystem.111 This saves the ECB from the otherwise unavoidable consequence that it would be the only central bank in the world whose balance sheet would not figure an obligation position for banknotes in circulation. As a 100 See further Part V. 101 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1161. 102 Amtenbrink, The Accountability of Central Banks (n 12) 127; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 37. 103 Christof Freimuth in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 128 TFEU, para 22 (hereafter Freimuth in Siekmann (ed), EWU). 104 Ibid, Article 128 TFEU, para 23. 105 Priego and Conlledo, ‘The role of the decentralisation principle’ (n 76) 196. 106 Freimuth in Siekmann (ed), EWU (n 103) Article 128 TFEU, para 26. 107 Decision of the ECB of 13 December 2010 on the issue of euro banknotes (recast) (ECB/2010/29) [2011] OJ L35/26. 108 van den Berg, The Making of the Statute (n 5) 327. 109 Julian Langner in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 32 Statute of the ESCB, para 52 (hereafter Langner in Siekmann (ed), EWU). 110 Ibid, Article 32 Statute of the ESCB, para 46. 111 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1171; van den Berg, The Making of the Statute (n 5) 327.

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400 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS consequence of this, an elaborate scheme balancing the seigniorage income from the issuance of euro banknotes needed to be established.112

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2. Implementation of monetary policy The ECB acting by its Governing Council decides on the application of instruments, timing and conditions for open market transactions, and standard credit operations according to Article 18.1 Statute of the ESCB. This includes deciding on the yearly itinerary setting the dates for regular monetary policy transactions on key interest rates and the modalities of their execution, as for instance using an interest rate or volume tender.113 The execution, however, is left to the NCBs for all standard operations.114 Only for some of the extraordinary purchase programmes introduced in the course of the financial crisis starting in 2007/2008, the ECB has become directly involved by purchasing assets by itself for its own balance sheet, eg buying bonds of Eurosystem Member States in the course of the Public Sector Purchase Programme introduced in 2015. This new approach mainly resulted from the intention of balancing loss allocation in the course of the unconventional counter-crisis measures.115 Traditionally, all monetary policy operations are booked on the balance sheets of the NCBs.116 This is a consequence of the decentralization principle, according to which the execution of the monetary policy is normally executed by the NCBs.117 Thus, if the ECB wants to become directly involved, all deviations from this principle need a valid explanation by the ECB which has to be included in the decision introducing the measure.118 In all other cases, the NCBs legally become debtors of the refinancing transactions with the monetary policy counterparties the ECB has defined and acquire all securing rights for them or become debtors in liquidity absorbing transactions. The NCBs are free to design these legal relationships. How they do that normally depends on the approach which they had traditionally used for their monetary policy operations before introducing the euro. Thus, even the legal quality of the relationship between the NCBs and the monetary policy counterparties is not homogeneous throughout the Eurosystem. There are some NCBs using a public-law approach, having the power under national law to pass legal acts setting the standards for monetary policy transactions.119 In these cases, the monetary policy counterparties are subordinated to the NCBs. Other NCBs120 are operating on an equal level using contractual solutions, namely in the form of standard terms and conditions.121

112 Langner in Siekmann (ed), EWU (n 109) Article 32 Statute of the ESCB, paras 54–62; Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1172. 113 Christoph Keller in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 18 Statute of the ESCB, para 130 (hereafter Keller in Siekmann (ed), EWU). 114 Ibid, Article 18 Statute of the ESCB, para 123; Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1161; Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 135; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 946. 115 See ECB, ‘ECB announces expanded asset purchase programme’ (Press release, 22 January 2015) accessed 29 January  2020. 116 Keller in Siekmann (ed), EWU (n 113) Article 18 Statute of the ESCB, para 127. 117 For further details as to the historical development of this set up see van den Berg, The Making of the Statute (n 5) 302. 118 Keller in Siekmann (ed), EWU (n 113) Article 18 Statute of the ESCB, para 138. 119 For instance Banque de France, Banco de España, and Bank of Greece. 120 For instance Deutsche Bundesbank. 121 Keller in Siekmann (ed), EWU (n 113) Article 18 Statute of the ESCB, para 126.

Legal Nature of the Structures 401 The ECB thus only prescribes the material content of those relationships in a guideline on the implementation of the Eurosystem’s monetary policy framework,122 but does not prescribe either a standard formulation of the content or the exact legal format for implementing it. This offers on the one hand maximum flexibility for including the material content into the national legal environment but requires on the other hand complex verification procedures to guarantee the same result in all Member States. If the requests of the ECB are implemented by way of contract, general national-law principles governing standard terms and conditions may restrict the room for manoeuvre of the NCBs implementing the prescribed material content. The ECB thus has to bear in mind these restrictions when undertaking material prescriptions. As the relevant partners of the monetary counterparties, the NCBs are responsible for the technical execution of the monetary policy operations not only in the external but also in the internal relationship within the Eurosystem. The latter includes assuring an effective establishment of the necessary contractual relationships, the valuation, the acceptance, and the check of collateral. It also includes the reversal of securing activities including executing the respective collateral in case of foreclosure.123 In principle, the NCBs thus cover all risks from these transactions by themselves, apart from cases in which the Governing Council has decided otherwise according to Article 32.4 Statute of the ESCB.124

3. Statistics In the field of statistics, the Statute of the ESCB goes further than the standard decentralization principle,125 as it requires that for the tasks described in Article 5.1 Statute of the ESCB, the NCBs shall carry out all of them to the extent possible.126 Namely, this is collecting the necessary statistical information either from the competent national authorities or directly from the economic agents. Thus, the criterion of ‘appropriateness’ does not apply to these data collections, thereby strengthening the decentralization principle in that field.127 In principle, the NCBs have to fulfil those tasks and will normally be able to perform them.128 However, the data requirements of modern statistics become more and more complex, thus demanding elaborate technical equipment for the tasks, so that in particular the smaller NCBs are not always willing to provide that. As a consequence, new cooperation models have been established which allow the NCBs to require their respective reporting agents to directly report data to the ECB.129

122 ECB Guideline (EU) 2015/510 of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) [2015] OJ L91/3, as amended. 123 Keller in Siekmann (ed), EWU (n 113) Article 18 Statute of the ESCB, para 128. 124 See for further information: Langner in Siekmann (ed), EWU (n 109) Article 32 Statute of the ESCB, para 41; Priego and Conlledo, ‘The role of the decentralisation principle’ (n 76) 194. 125 Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 974. 126 van den Berg, The Making of the Statute (n 5) 291. 127 Katharina Muscheler- Lorange in Helmut Siekmann (ed), EWU— Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 5 Statute of the ESCB, para 10. 128 Ibid, Article 5 Statute of the ESCB, para 12. 129 Article 3.3 ECB Regulation (EU) 1333/2014 of 26 November 2014 concerning statistics on the money markets (ECB/2014/48) [2014] OJ L359/97.

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402 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS

F. Legal status of the NCBs 15.22

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15.25

There are different concepts in the academic discussion as to the status of the NCBs in the ESCB covering a wide range from a federal or quasi-federal system to ‘a system that is basically characterised by a hierarchy in which the NCBs are reduced to the role of mere operating arms of the ECB, without making a significant contribution to it’.130

1. Branch of the ECB According to some authors, the NCBs represent branches of the ECB as they see them according to Article 282(1) TFEU and Article 14.3 Statute of the ESCB as European institutions or better part of a European institution. Since the remaining autonomous powers of the NCBs are seen as so irrelevant that the main tasks of the NCBs consist in executing guidelines and decisions of the ECB,131 according to those authors, they are fully extracted from the national organization of government and instead included in a totally integrated ‘Euro-Bank’.132 This line of reasoning is neither convincing133 with regard to the historical intentions nor with the existence of the principle of decentralization, as described above. In addition, the Treaties always call the NCBs decisively ‘national’ which in itself shows134 that it was the intention of the contracting parties to keep them separated from the ECB as European institution according to Article 13(1) TEU.135 2. Special legal entity Other authors believe that the NCBs have themselves become intergovernmental institutions by the creation of the Eurosystem and by this have formed the basis for the ECB as their intergovernmental subsidiary.136 According to this approach, the NCBs would also be elevated from the national to a supranational level. As this approach clearly denies the superior position of the ECB in the ESCB, it is equally unconvincing.137 3. Classical national entity As a consequence, it can only be stated that the NCBs in the end remain national entities as part of the national governing structures, which employ national competences even if executing tasks of the ESCB.138 As a further consequence, all national law remains fully 130 Priego and Conlledo, ‘The role of the decentralisation principle’ (n 76) 193; referring also to Zilioli and Selmayr, The Law of the European Central Bank (n 6) 53–81, describing the discussion in detail. 131 Amtenbrink, The Accountability of Central Banks (n 12) 120ff. 132 Martin Selmayr, ‘Gefahr für die Europäische Zentralbank?’ [1998] Europablätter 39, 40; Martin Selmayr, ‘Wie unabhängig ist die Europäische Zentralbank?’ (1999) 53 Zeitschrift für Wirtschafts-und Bankrecht 2429, 2430ff; Zilioli and Selmayr, The Law of the European Central Bank (n 6) 79; Smits, The European Central Bank (n 5) 94. 133 Ohler, Bankenaufsicht (n 28) 38. 134 Manger-Nestler, Par(s) inter pares? (n 9) 190. 135 For the discussions on the quality of the ECB as a European Institution before clarifying the matter in the Lisbon Treaty see Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1144–48. 136 Zilioli and Selmayr, The Law of the European Central Bank (n 6) 72ff provide arguments why this analogy to company law is misleading. 137 Manger-Nestler, Par(s) inter pares? (n 9) 192. 138 Ibid, 193; Zilioli, ‘The Independence of the European Central Bank’ (n 74) 140; Ohler, Bankenaufsicht (n 28) 35; Ulrich Häde, ‘Die Europäische Währung’ in Hugo J Hahn (ed), Die Europäische Währung: Würzburger Universitätsreden 1996–1998 (Nomos 1999) 103, 108.

Legal Nature of the Structures 403 applicable to them, as long as it does not contradict European law. Exemptions from national law or European law for European institutions do not apply to them. In addition, they are in principle subject to controls by the national courts of auditors or parliamentary inquiry commissions. However, such control institutions have to accept the restrictions of their work stemming from the independence of the NCBs when carrying out tasks and duties conferred on them by the Treaties or the Statute of the ESCB as defined in Article 130 TFEU.139 Any liabilities of the NCBs are according to Article 35.3 second sentence Statute of the ESCB determined by their respective national law and have to be enforced before the national courts following national procedural rules.140

G. Ownership structures of the NCBs As already explained above, the Member States tried to maintain the historical structures of their NCBs as far as possible. Accordingly, the ownership structures follow the historical development of the respective NCBs and differ widely even as concerns their legal nature as private or public law institutions. In particular, the historically younger NCBs are defined under public law, as legal persons under public law, while some of the older NCBs are incorporated as private law companies. The Treaties and the Statute of the ESCB are silent with regard to ownership structures and internal governance of the NCBs, so this question is left to the autonomous determination by each Member State.141

1. Public Ownership For the NCBs subject to public law, as for instance the Deutsche Bundesbank, public ownership is inherent. For the ones established under private company law, only some of them are fully owned by a state, such as the National Bank of Austria and the Dutch central bank. There are no European Union rules, however, obliging the Member States to have full ownership of their NCBs. 2. Private Ownership Some other NCBs have private shareholders, which historically has not been unusual. Some prominent examples are the Bank of Italy, the National Bank of Belgium, and the Bank of Greece. Obviously, such constellations can produce conflicts of interest if the commercial interests of the private investors are not held at bay. Such investment activities in NCBs always have to respect the public task of an NCB. This is assured by the respective national central bank laws normally excluding all control instruments provided for by national company law for the shareholders.142 Accordingly, the participation right of private shareholders is normally restricted to profit shares predefined by the central bank law. This may be problematic enough taking into account that the profits of a central bank may be highly 139 Amtenbrink, The Accountability of Central Banks (n 12) 58. 140 Ohler, Bankenaufsicht (n 28) 36. 141 ECB Opinion of 6 October 2005 on changes to the Banca d’Italia’s structure and internal governance resulting from a law on the protection of savings (CON/2005/34), para 6; Ohler, Bankenaufsicht (n 28) 36. 142 ECB, ‘Convergence Report’ (23 May 2018) 21 (hereafter ECB, ‘Convergence Report’).

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15.27

15.28

404 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS influenced by financial policy considerations which should not lead to preferred contributions to a restricted group of shareholders. 15.29

The situation becomes even more questionable if the NCB is owned by private banks. A conflict of interest appears particularly stringent if the NCB is the national banking supervisor as in the case of the Bank of Italy, where the ownership is even explicitly restricted to Italian banks.143 Even though the European Commission has not opposed the respective Italian legal basis, there may remain some doubts whether such a constellation should not be avoided for the sake of the neutrality of the NCB. Austria, for instance, has used the need to refinance its banking sector as an opportunity to buy back the shares of the Austrian banks in the Austrian National Bank. By that, it got undisputed control of its operations,144 which is by now typical for the NCBs.145

H. The NCBs as owners of the ECB 15.30

15.31

The insulation of the NCBs from undue private interest is of particular importance, as according to Article 28.2 Statute of the ESCB, the NCBs are the sole subscribers of the capital of the ECB.146 Thus, the Statute of the ESCB construes the ECB legally as a subsidiary of the NCBs,147 even though this is misleading,148 since the classical consequences of company law do not follow from that, due to the fact that the Statute follows a specific organizational model.149 To assure that no external institutions can gain interest in the ECB, transfers, pledges, or attachments of the shares in the ECB are prohibited according to Article 28.4 Statute of the ESCB, ie directly by primary European law without a need of anchoring such protection in national law.150

1. Distribution of Monetary Income As a consequence of this ownership structure, all income accruing from the performance of the ESCB’s monetary policy functions is in principle allocated and distributed to the NCBs in accordance with Article 32.1 Statute of the ESCB. Thus, specific political agreements151 concerning profits from Eurosystem transactions by national governments in the course of the Greek support programmes cannot bind the ECB or the rest of the Eurosystem. The ministries of finance may thus only commit to redistribute amounts reflecting income from Greek investments of the Eurosystem out of the part of the profits of their NCBs passed on to them, after the NCBs having determined their profits. 143 See Bank of Italy: accessed 29 January 2020. 144 See Austrian National Bank: accessed 29 January 2020. 145 Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 132. 146 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 33; Smits, The European Central Bank (n 5) 94. 147 Ohler, Bankenaufsicht (n 28) 40; Herrmann and Dornacher, Monetary Law (n 28) 75. 148 Herrmann and Dornacher, Monetary Law (n 28) 75. 149 Ohler, Bankenaufsicht (n 28) 37; Smits, The European Central Bank (n 5) 94. 150 Langner in Siekmann (ed), EWU (n 109) Article 28 Statute of the ESCB, para 28. 151 See Eurogroup, ‘Statement on Greece’ (Brussels, 27 November 2012) accessed 29 January  2020.

Legal Nature of the Structures 405

2. Decisions on Capital Matters All decisions concerning their capital shares or financial resources of the ECB, namely any decisions under Articles 28, 29, 30, 32, 33, and 51 Statute of the ESCB, are taken by the Governing Council, according to Article 10.3 Statute of the ESCB, in a special manner.152 All votes of the NCBs are weighted according to their capital share in the ECB and the votes of the members of the Executive Board are weighted as zero.153 According to Article 10.2 second subparagraph Statute of the ESCB, the rotation system does not apply to these votes. Therefore, all issues concerning capital measures remain restricted to the capital holders according to their relative strength and all NCBs always have a right to participate. 3. Necessity of Provision of ECB Capital The NCBs have to provide the ECB with the necessary capital.154 How much they actually have to provide depends on a complex combination of decisions. In principle, the capital of the ECB is set by Article 28.1 Statute of the ESCB at 5,000 million euro.155 However, this amount automatically increases with one or more countries becoming new Member States of the Union proportionally to the capital key of the Member States joining according to Article 48.3 Statute of the ESCB to avoid a pay-back of already transferred amounts by the former capital owners.156 In addition, the Council of the EU can set a higher level of overall capital by the procedure defined in Article 41 Statute of the ESCB, which the Governing Council may then decide to call in. The Council of the EU had done so by Regulation (EC) 1009/2000157 up to an amount of another 5,000 million euro. This competence was finally used by the Governing Council in its Decision of 13 December 2010 to mobilize the full admitted amount.158 Thereby, the subscribed capital of the ECB rose to a total of approximately 10.761 million euro.159 However, this amount is not necessarily reflected by the actual provision of capital, as other decisions of the Governing Council on the capital that has to be paid in are conclusive for this. In this regard, the Governing Council has decided for the Eurosystem NCBs that they have to pay in their capital share according to the current capital key at 100 per cent.160 If the Eurosystem NCBs pay in those shares, they do it by TARGET transfers leading to an intra-Eurosystem obligation. All these obligations are netted by the ECB and resulting negative balances bear interest at the marginal lending rate. However, the NCBs do not have to bring up real own funds, as the necessary amounts are 152 Ohler, Bankenaufsicht (n 28) 37/38; Herrmann and Dornacher, Monetary Law (n 28) 78. 153 Amtenbrink, The Accountability of Central Banks (n 12) 122ff. 154 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 1; Marco Goldoni, ‘The Limits of Legal Accountability of the European Central Bank’ (2017) 24 George Mason Law Review 595, 597 (hereafter Goldoni, ‘The Limits of Legal Accountability’). 155 Smits, The European Central Bank (n 5) 112. 156 Ohler, Bankenaufsicht (n 28) 39. 157 Council Regulation (EC) 1009/2000 of 8 May 2000 concerning capital increases of the European Central Bank [2000] OJ L115/1; Ohler, Bankenaufsicht (n 28) 39. 158 Decision 2011/20/EU of the ECB of 13 December 2010 on the increase of the European Central Bank’s capital (ECB/2010/26) [2011] OJ L11/53. 159 Karl Croonenborghs, Jari Friebel, and Janka Petöcz, ‘The Principle of Central Bank Independence and its Monitoring by the European Commission’ (2016) 27 Europäische Zeitschrift für Wirtschaftsrecht 849, 854 (hereafter Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’). 160 For the exact development of the relevant decisions see Langner in Siekmann (ed), EWU (n 109) Article 28 Statute of the ESCB, paras 22–27. Currently, ECB Decision of 13 December 2010 on the paying-up of the increase of the ECB’s capital by the national central banks of Member States whose currency is the euro (ECB/2010/27) [2011] OJ L11/54 is relevant; Ohler, Bankenaufsicht (n 28) 40.

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15.33

406 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS part of the ECBs money creation. Thus, the payments are not really of much weight for the NCBs, as even those running a negative TARGET balance will only increase such a negative balance, as it is in principle an indefinite credit line.161 15.34

For the remaining ESCB central banks, ie of those Member States which have not introduced the euro yet, the General Council has decided according to Article 47 Statute of the ESCB that they pay in 3.75 per cent of their respective capital shares as a contribution to the operational costs of the ECB.162

15.35

This means that, without a further decision by the European Council according to the procedure set in Article 41 Statute of the ESCB to increase the limits on the ECB capital according to Article 28.1 Statute of the ESCB, the ECB may not make any further calls for capital from the Eurosystem-NCBs. This situation may, however, change after the Brexit, as the Bank of England leaving the ESCB leads to a redistribution of its substantial capital share among the remaining ESCB central banks. This will result in a larger share of the Eurosystem NCBs which will then have to pay up higher amounts as long as their 100 per cent pay-in obligation is maintained.

I. Foreign reserves 15.36

The Eurosystem, pursuant to Article 127(2) third indent TFEU, is entitled to hold and manage the official foreign reserves of the Member States. Accordingly, apart from these reserves, there are no other official ones in the Eurosystem Member States.163 The reserves of the ECB are replenished by the NCBs of the Member States whose currency is the euro, ie the Eurosystem NCBs, which are obliged to transfer foreign reserves to the ECB according to Article 30.2 Statute of the ESCB. This is because Article 42.4 Statute of the ESCB restricts the application of Article 30 on those NCBs, which is confirmed by Article 42.1 Statute of the ESCB.164 Thus, the obligation is, as for the capital, explicitly one of the NCBs, not of the Member States.165 Still, it is nevertheless not fully comparable as it is restricted solely to the Eurosystem-NCBs. The amount to be originally transferred is set by Article 30.1 Statute of the ESCB at 50,000 million euro to assure sufficient funds for the ECB to defend the external value of the euro.166 It automatically grows with new Member States joining the EU as the capital according to Article 48.3 Statute of the ESCB. This shall avoid that foreign reserves have to be retransferred should Member States whose currency is not the euro167

161 For more details see Langner in Siekmann (ed), EWU (n 109) Vorbemerkung zu Articles 28–33 Statute of the ESCB, para 8. 162 For the exact development of the relevant decisions see Langner in Siekmann (ed), EWU (n 109) Article 47 Statute of the ESCB, paras 11–16. Currently, ECB Decision of 13 December 2010 on the paying-up of the European Central Bank’s capital by the non-euro area national central banks (ECB/2010/28) [2011] OJ L11/56 is relevant; Ohler, Bankenaufsicht (n 28) 40. 163 Christoph Keller and Julian Langner in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 30 Statute of the ESCB, para 5 (hereafter Keller and Langner in Siekmann (ed), EWU). 164 Ohler, Bankenaufsicht (n 28) 15. 165 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 17. 166 For further information see Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 2. 167 See Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 18.

Legal Nature of the Structures 407 join. According to this automatism, the upper limit for the foreign reserves has in the meantime grown to roughly 57,605.52 million euro. The original members of the Eurosystem were obliged to transfer their share of these reserves at once in full, as defined in the annex of the Guideline of 3 November 1998.168 However, as they only paid in the share of the foreign reserves attributable to the Eurosystem NCBs, the rest of the statutory amount was left open, so that in reality about 80 per cent of it or the equivalent of 39.460 million euro was transferred.169 These transfers needed to consist in US dollars, Japanese yen and gold. Euro and currencies of EU Member States are unsuitable.170 When NCBs became members of the Eurosystem later, they also had to transfer their respective share of the foreign reserves according to Article 48.1 Statute of the ESCB.171 The determination of this share requires complex calculations, as it is the gist of Article 48.1 Statute of the ESCB to assure that all members of the Eurosystem make contributions of identical value.172 After these transfers, the ECB needs to have the sole right to dispose of those foreign reserves, even if it has never been fully determined to enjoy full ownership rights.173 According to Article 30.3 Statute of the ESCB, the NCBs receive an equivalent claim against the ECB for their contribution in euro, leaving the exchange rate risk with the ECB.174 85 per cent of this claim is interest-bearing on the basis of the marginal lending rate; the remaining 15 per cent is non-interest bearing. The latter reflects the transfers of gold which the Governing Council had set at 15 per cent.175 Gold assets do by nature not generate interest.176 These claims, nevertheless, are not redeemable,177 except for the theoretical case of a liquidation of the ECB.178

15.37

Requiring further reserves from the existing Eurosystem NCBs up to the full amount of 50.000 million euro would not fit into the structure of Statute.179 The ECB may rather request those NCBs to fill up its reserves180 from their remaining own reserves, which they are allowed to hold according to Article 31.2 Statute of the ESCB,181 up to the amount of the claim credited to the NCBs as equivalent to their contributions to the foreign reserves according to Article 30.3 Statute of the ESCB.182 This was allowed by the European Council by its Regulation EC/1010/2000,183 where it admitted further calls of up to another

15.38

168 Current version: ECB Guideline of 3 November 1998 as amended by the Guideline of 16 November 2000 on the composition, valuation and modalities for the initial transfer of foreign-reserve assets, and the denomination and remuneration of equivalent claims (ECB/2000/15) [2000] OJ L336/114; see Keller and Langner in Siekmann (ed), EWU (n 1) Article 30 Statute of the ESCB, para 20. 169 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 37. 170 See ibid, Article 30 Statute of the ESCB, paras 24ff. 171 Ibid, Article 30 Statute of the ESCB, para 22. 172 For further information, see Langner in Siekmann (ed), EWU (n 109) Article 48 Statute of the ESCB, paras  4–11. 173 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 32; Ohler, Bankenaufsicht (n 28) 41. 174 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 44. 175 Ibid, Article 30 Statute of the ESCB, para 41. 176 Ibid, Article 30 Statute of the ESCB, para 45. 177 Article 3.5 Guideline ECB/2000/15. 178 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 47. 179 Ibid, Article 30 Statute of the ESCB, para 39. 180 Which was confirmed by the ECB: see ibid, Article 30 Statute of the ESCB, para 69. 181 Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 136. 182 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 13. 183 Council Regulation (EC) 1010/2000 of 8 May 2000 concerning further calls of foreign reserve assets by the European Central Bank [2000] OJ L115/2.

408 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS 50,000 million euro.184 This approach covers flexible demands of foreign reserves, should the ECB have exhausted its existing means,185 but it contains an upper limit to avoid confronting the NCBs with demands they would not be able to fulfil.186 Those requests can only be made once. As soon as the NCBs have transferred the requested amounts of reserves, the respective competences are exhausted and further requests would require a new procedure according to Article 30.4 Statute of the ESCB.187 However, the Council Decision left open whether the upper limit would once again only be applicable up to the respective share of the Eurosystem NCBs. Nevertheless, for practical reasons the limit has to be interpreted in this way.188 Thus, the Governing Council is currently free to call in further foreign reserves respecting this framework without further action by other institutions.189 So far, the ECB has never felt the need to use these competences. 15.39

The administration of the ECB’s foreign reserves was, following historical precedence from the ECU,190 always entrusted to the NCBs. Only for smaller NCBs models have been developed which allow them to reduce their participation to their technical abilities up to a total opt-out.191 This administration, however, is not a special variety of the decentralization principle of Articles 9.2 and 12.1 Statute of the ESCB, but the NCBs act as disclosed agents of the ECB in the civil law sense.192 Accordingly, for this capacity of the NCBs the Governing Council precisely prescribes in a guideline193 how to document those activities and what standard agreements to use.194 It also defines investment principles for the ECB’s foreign reserves, which the NCBs have to follow.195 Some of the competences for fine- tuning those orders for the NCBs are delegated to the Executive Board.196 The liability of the NCBs for their activities is restricted as they operate without charge.197

15.40

The administrative tasks with regard to the ECB’s foreign reserves have to be differentiated from the holding and administration of the remaining national foreign reserves which the Eurosystem198 NCBs do in their own name199 as Eurosystem tasks according to Article 127(2) third indent TFEU. This means that they are subject to the general framework of the European Treaties in this regard.200 These activities are explicitly authorized by Article 31 Statute of the ESCB. When the Statute of the ESCB was drafted, there was full awareness that, after the transfer of foreign reserves, this remaining part of the reserves would be 184 ECB, ‘Convergence Report’ (n 142) 25. 185 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 60, an idea already held by the Committee of Governors, which had drafted the first proposal for a statute. 186 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 62. 187 Ibid, Article 30 Statute of the ESCB, para 68. 188 Ibid, Article 30 Statute of the ESCB, para 73. 189 Ibid, Article 30 Statute of the ESCB, para 74. 190 Ibid, Article 30 Statute of the ESCB, para 93. 191 Ibid, Article 30 Statute of the ESCB, para 88. 192 Ibid, Article 30 Statute of the ESCB, para 104. 193 ECB Guideline of 20 June 2008 on the management of the foreign reserve assets of the European Central Bank by the national central banks and the legal documentation for operations involving such assets (recast) (ECB/2008/5) [2008] OJ L192/63. 194 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, paras 108–14. 195 Ibid, Article 30 Statute of the ESCB, paras 121–26. 196 Ibid, Article 30 Statute of the ESCB, para 127. 197 Ibid, Article 30 Statute of the ESCB, para 128. 198 For the other ESCB central banks Article 31 does not apply according to Article 42.1 Statute of the ESCB; see Keller in Siekmann (ed), EWU (n 113) Article 31 Statute of the ESCB, para 9. 199 Herrmann and Dornacher, Monetary Law (n 28) 77. 200 Keller in Siekmann (ed), EWU (n 113) Article 31 Statute of the ESCB, para 17.

Legal Nature of the Structures 409 significant. It should thus be subject to full control of the NCBs to bring it under an effective influence of the ECB.201 The ECB has accordingly clarified in its convergence reports that there shall not be any rights of third parties, for instance parliaments or governments, to influence the administration decisions of the NCBs with regard to those reserves.202 Thereby, the question whether the NCBs should own the foreign reserves needs not to be answered in the end.203 The ECB is not directly involved in the administration of those national reserves. Its rights out of Article 31 Statute of the ESCB are of a defensive, political nature only, which means that the necessary decisions of the Governing Council are standard decisions and not taken according to the voting-rules of Article 10.3 Statute of the ESCB.204 According to Article 31.2 Statute of the ESCB, administrative decisions of the NCBs are subject to an approval by the ECB if they surpass certain limits. The nature of this approval is one of public law and cannot influence the civil law effectiveness of the underlying contracts with third parties if such approval is not given.205 The ECB can take the case to the CJEU in line with Article 35.6 Statute of the ESCB though.206 The Governing Council has issued guidelines to coordinate these procedures according to Article 31.3 Statute of the ESCB.207 The ECB can only prohibit transactions above certain thresholds in case that there is sufficient reason provided that the transaction is not consistent with the exchange rate and monetary policies of the Union. This decision is fully subject to review by the CJEU according to Article 263(4) TFEU.208 The NCBs are, however, according to Article 23 first and fourth indent Statute of the ESCB, free to establish obligations towards international organizations. For these transactions Article 31.1 Statute of the ESCB clarifies that for them the approvals foreseen in Article 31.2 Statute of the ESCB are not needed at all.209

J. Loss coverage The NCBs as owners of the ECB are not legally bound to provide either capital210 or foreign reserves should massive losses be generated by the ECB’s operations, in particular the monetary policy ones.211 Even if there is room according to Article 28.1 Statute of the ESCB, which is currently not the case as explained above, or Article 30.1 Statute of the ESCB for further calls, such a call would always require a decision by a majority provided for in Article 10.3 Statute of the ESCB. This means that it would always require a decision of the governors of the NCBs alone without application of the rotation scheme. In case of Article 28.3, this 201 Ibid, Article 31 Statute of the ESCB, para 3. 202 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 30; ECB, ‘Convergence Report’ (n 142) 32. 203 Keller and Langner in Siekmann (ed), EWU (n 163) Article 30 Statute of the ESCB, para 32. 204 Keller in Siekmann (ed), EWU (n 113) Article 31 Statute of the ESCB, para 18. 205 Ibid, Article 31 Statute of the ESCB, para 10. 206 Ibid, Article 31 Statute of the ESCB, para 15. 207 ECB Guideline of 23 October 2003 for participating Member States’ transactions with their foreign exchange working balances pursuant to Article 31.3 of the Statute of the European System of Central Banks and of the European Central Bank (ECB/2003/12) [2003] OJ L283/81. 208 Keller in Siekmann (ed), EWU (n 113) Article 31 Statute of the ESCB, para 19. 209 Ibid, Article 31 Statute of the ESCB, paras 60, 68. 210 Langner in Siekmann (ed), EWU (n 109) Article 33 Statute of the ESCB, para 9. 211 The German Constitutional Court (Bundesverfassungsgericht— BVerfG) has questioned that though. BVerfG, Judgment of the Second Senate of 21 June 2016—2 BvR 2728/13 (OMT), para 216; BVerfG, Order of the Second Senate of 18 July 2017—2 BvR 859/15, para 125.

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410 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS majority even has to be qualified in the sense that, according to Article 10.3 Statute of the ESCB, it must represent two thirds of the subscribed capital and half of the shareholders. Thus, even if in such a situation political pressure to provide coverage might develop,212 which was also considered by the German Federal Constitutional Court in its OMT judgment based on the ECB’s Convergence Reports,213 a legal obligation of the NCBs would not exist.214 In addition, the NCBs are fully independent to take decisions on these questions according to Article 130 TFEU. 15.42

Another way to offset such losses would be against monetary income that would otherwise have to be distributed to the NCBs if the ECB’s reserves are exhausted according to Article 33.2 Statute of the ESCB.215 However, such decision would once again first have to be taken according to Article 10.3 Statute of the ESCB by the governors of the NCBs alone.216

II. Requirements of the TFEU 15.43

When fulfilling their Eurosystem/ESCB tasks according to Article 127(2) TFEU, the NCBs are fully integrated in the framework of the European Union Treaties and are thereby protected against undue influence in their affairs in particular by their independence according to Article 130 TFEU.

A. Refinement by the ECB 15.44

However, the rules of the Treaties are not spelled out in detail.217 The ECB has thus used its possibilities to further develop the basic principles contained in the treaties. It had two helpful instruments to do so. On the one hand, the Member States with derogation from their obligation to introduce the euro218 have to be evaluated according to Article 140(1) TFEU in the European Commission’s219 and the ECB’s convergence reports whether their national legislation, including their central bank statutes, is compatible with Articles 130 and 131 TFEU.220 These reports gave the ECB the opportunity to define the basic concepts it saw as essential in the national central bank statutes and other national law to fully 212 Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 855; Jakob de Haan and Sylvester C W Eijffinger, ‘The politics of central bank independence’ (2016) DNB Working Paper No 539, 13, 17 (hereafter de Haan and Eijffinger, ‘The politics of central bank independence’). 213 BVerfG, Judgment of the Second Senate of 21 June 2016—2 BvR 2728/13, para 217; BVerfG, Order of the Second Senate of 18 July 2017—2 BvR 859/15, para 126; Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 854 also referring to the risks that could ultimately stem therefrom if such obligations by the Member States were presumed, and (ibid, 855) stressing that this cannot compromise central bank independence as such. 214 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 33. 215 Ibid. 216 Langner in Siekmann (ed), EWU (n 109) Article 33 Statute of the ESCB, para 8; Ohler, Bankenaufsicht (n 28) 43. 217 And there is no clear definition of ‘independence’ as such, see Thiele, ‘The Independence of the ECB’ (n 21) 103; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 204. 218 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 36ff. 219 For more detailed information on the European Commission’s Convergence Report see Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 851. 220 Ibid.

Requirements of the TFEU 411 implement the necessary independence of the NCBs. On the other hand, changes to the central bank statutes have to be consulted with the ECB or the ECB can submit opinions on these matters according to Article 127(4) TFEU, Article 4 Statute of the ESCB.221 In these opinions, the ECB could individually examine specific proposals by the Member States for the development of the respective lay-out of the legal structure of their NCBs and whether they are in line with its general concepts. Over the years, this has led to a rather detailed concept of how the situation of the NCB of a Member State should appear.222 Thus, even for the Eurosystem Member States which are not dealt with in the convergence reports, the ECB has drawn the attention of such Member States to those of their legal acts which have found to be not in line with the doctrinal developments in its convergence reports and recommended modifications.223 In serious cases, in which there is a clear breach of the developed concepts of independence in the national statutes, it always remains a task of the European Commission to initiate an infringement procedure against such a Member State.224 By this, the ECB has developed the aspects of central bank independence225 which originally stem from political economic research226 and have been the result of empirical studies227 into legal categories being part of the legal framework for the Eurosystem as interpretation of high authority. By this it has also overcome the problem of a lack of a universally valid definition of central bank independence before.228 As all legal instruments, these categories are kind of a ‘snap-shot’, reflecting as a basis an understanding at the time when the definitions are established. They thus freeze a specific state of scientific perception. Thus the legal discussion is by now insulated from the economic one and lawyers can concentrate on these legal concepts instead of having to ‘surrender in the face of seemingly complex macroeconomic models’.229 Therefore, even if there were newer economic discoveries, for which there

221 Herrmann and Dornacher, Monetary Law (n 28) 78. 222 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 126; Fabian Amtenbrink, ‘The Three Pillars of Central Bank Governance: Toward a Model Central Bank Law or a Code of Good Governance?’ in IMF (ed), Current Developments in Monetary and Financial Law (vol 4, IMF 2008) 101, 120 (hereafter Amtenbrink, ‘The Three Pillars of Central Bank Governance’). 223 Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 851. 224 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 145; Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 852. 225 Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 851. 226 Ibid, 850; for further reference see Amtenbrink, The Accountability of Central Banks (n 12) 15; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 103; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 952; Wouter Bossu, Sean Hagan, and Hans Weenink, ‘Safeguarding central bank autonomy: the role of transparency and accountability’ in ECB (ed), ECB Legal Conference: Shaping a new legal order for Europe: a tale of crises and opportunities (ECB 2017) 31, 33 (hereafter Bossu, Hagan, and Weenink, ‘Safeguarding central bank autonomy’); de Haan and Eijffinger, ‘The politics of central bank independence’ (n 212) 2; Smits, The European Central Bank (n 5) 152. 227 Alex Cukierman, Central Bank Strategy, Credibility, and Independence: Theory and Evidence (MIT Press 1992) ch 19; Alex Cukierman, ‘Central Bank Independence and monetary policymaking institutions—past, present and future’ (2008) 24 European Journal of Political Economy 722; Alex Cukierman, ‘Monetary policy and institutions before, during, and after the global financial crisis’ (2013) 9 Journal of Financial Stability 373, in which he comes to the conclusion that during financial crises inflation targeting might be de-emphasized in favour of the maintenance of liquidity and confidence; for references see also Amtenbrink, The Accountability of Central Banks (n 12) 18; Jakob de Haan, Fabian Amtenbrink, and Sylvester C W Eijffinger, ‘Accountability of central banks: aspects and quantification’ (1999) BNL Quarterly Review No 209, 169, 170 (hereafter de Haan, Amtenbrink, and Eijffinger, ‘Accountability of central banks’); Thiele, ‘The Independence of the ECB’ (n 21) 100; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 198; Maddalena Cavicchioli and others, ‘Determinants of Central Bank Independence: a Random Forest Approach’ (2016) RECentWorking Paper No 122, 2; de Haan and Eijffinger, ‘The politics of central bank independence’ (n 212) 2–5. 228 Amtenbrink, The Accountability of Central Banks (n 12) 17. 229 Ibid, 379.

412 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS might be even indications,230 and political pressure towards a different direction,231 this would not have an immediate effect on the legal guidance provided by the definitions which are of relevance here.232 However, since the ECB has established these definitions, which are part of soft-law, it can change them, if it wants to. It albeit needs to sensitively change its preceding concretizations by using new convergence reports and opinions to integrate new concepts. This would include these changes into its legal doctrine, but it would do so only step by step. The fundamental rules could also be changed. Since they are anchored at the European Union constitutional level,233 this would be difficult, but not impossible.234 Yet, only changes of this nature could have immediate effect. Thus, even in the Eurosystem with its fundamental framework defined at EU constitutional level,235 changing this framework implies that ultimate ex-post accountability is provided by the democratically legitimized institutions,236 but no longer directly by national parliaments.237 This makes it recommendable for all members of the Eurosystem to exercise self-restraint with regard to overstretching their acknowledged independence238 to avoid a back-lash that would result in direct controls of the democratically legitimized institutions and thereby endanger the independent pursuit of a monetary policy concentrated on price stability.

B. Compatibility of the national legislation 15.45

Article 131 TFEU and Article 14.1 Statute of the ESCB require all Member States to ensure that their national legislation including the statutes of their NCBs is compatible with the EU Treaties and the Statute of the ESCB. The idea of these rules is that the ESCB can only fulfil its decentralized tasks, if all NCBs fulfil the necessary legal preconditions to be integrated into the system, in particular with regard to independence239 and legal personality.240 Thus, in this unusual case, EU primary law does impose obligations and grants protection to the 230 Charles Goodhart and Rosa M Lastra, ‘Populism and Central Bank Independence’ (2018) 29 Open Economies Review 49, 51ff (hereafter Goodhart and Lastra, ‘Populism and Central Bank Independence’); Thiele, ‘The Independence of the ECB’ (n 21) 102 pointing out that these questions can hardly be solved from the legal side; de Haan and Eijffinger, ‘The politics of central bank independence’ (n 212) showing different approaches which reflect on a broader variety of factors influencing central bank independence. 231 Goodhart and Lastra, ‘Populism and Central Bank Independence’ (n 230) 52ff; Bossu, Hagan, and Weenink, ‘Safeguarding central bank autonomy’ (n 226) 36, 42; Thiele, ‘The Independence of the ECB’ (n 21) 100; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 199. 232 See also Thiele, ‘The Independence of the ECB’ (n 21) 102; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 202. 233 Amtenbrink, The Accountability of Central Banks (n 12)180, 188; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 113 questions the wisdom of securing it on a constitutional level; Goldoni, ‘The Limits of Legal Accountability’ (n 154) 599. 234 Goodhart and Lastra, ‘Populism and Central Bank Independence’ (n 230) 54, 56; Amtenbrink, The Accountability of Central Banks (n 12) 35, 42; de Haan, Amtenbrink, and Eijffinger, ‘Accountability of central banks’ (n 227) 181; Sylvester C W Eijffinger and Marco M Hoeberichts, ‘Central Bank Accountability and Transparency: Theory and Some Evidence’ (2000) Economic Research Centre of the Deutsche Bundesbank Discussion Paper 6/00, 5 (hereafter Eijffinger and Hoeberichts, ‘Central Bank Accountability and Transparency’). 235 Amtenbrink, The Accountability of Central Banks (n 12) 43 which makes it hard to change. 236 Amtenbrink, The Accountability of Central Banks (n 12) 42; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 113ff seeing it as a ‘nuclear option’ in any case; de Haan, Amtenbrink, and Eijffinger, ‘Accountability of central banks’ (n 227) 174. 237 Amtenbrink, The Accountability of Central Banks (n 12) 180. 238 Thiele, ‘The Independence of the ECB’ (n 21) 102 referring to BVerfG, Order of the Second Senate of 18 July 2017—2 BvR 859/15, paras 102ff. 239 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 127. 240 Steven in Siekmann (ed), EWU (n 65) Article 131 TFEU, para 2.

Requirements of the TFEU 413 NCBs, even though they are national institutions belonging to the internal administrative structures of the Member States.241 The principle of central bank independence enshrined in Article 130 TFEU is applicable in all Member States, not just the ones having introduced the euro as their currency, apart from the UK, which was explicitly exempted,242 and Denmark, which is subject to an even more complex agreement, according to the respective protocols of the Treaties.243 The explicit mentioning of this need for adaptation in EU primary law clarifies that there ought not to be any conflicts between national and European Union law with regard to these basic provisions of the EU Treaties and the Statute of the ESCB, which would otherwise have had to be solved by the priority of the Union law.244 The obligation is unlimited temporally. That means that, if convergence is confirmed once by ECB and Commission, the Member State cannot thereafter pass laws differing from the underlying understanding and that all Member States have to proceed in achieving compliance until it is finally confirmed.245 Insofar, frequent changes may destroy the necessary legal certainty.246

C. Independence Article 130 TFEU clarifies for the NCBs explicitly that neither the NCB as such nor the members of its decision-making bodies shall seek or take instructions from Union institutions, bodies or agencies and for the NCBs even more relevant from any government of a Member State or any other body and that all of those bodies shall respect this principle and not seek to influence the members of the decision-making bodies of the NCBs in the performance of their tasks. The same material content is repeated in Article 7 Statute of the ESCB. This obligation is restricted to the exercise of the tasks and duties conferred on the NCBs by the European Treaties and the Statute, which means that it does not apply to the remaining national tasks of the NCBs according to Article 14.4 Statute of the ESCB referred to below. However, some Member States have expanded the independence to all activities of the NCB by the national statutes of the NCBs,247 which is neither required by primary European Union law, nor is it the case for all Member States.248

241 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 139. 242 Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 850; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 6. 243 Articles 4 and 7 of Protocol No 15 on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland explicitly exclude the application of Article 131 TFEU, Article 14 Statute for the UK, whereas for Denmark these rules would, according to Article 2 of Protocol No 16 on certain provisions relating to Denmark, in principle apply, however, Commission and ECB are of the opinion that Denmark’s central bank statutes do not have to reach convergence with these rules as long as Denmark has not notified the Council that it renounces its exemption from the third stage of economic and monetary Union, because there is no other way to end the derogation of Denmark; see Steven in Siekmann (ed), EWU (n 65) Article 131 TFEU, paras 8–9; Zilioli, ‘The Independence of the European Central Bank’ (n 74) 139, who is of the opinion that Article 130 applies to Denmark; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 6, 41. 244 Steven in Siekmann (ed), EWU (n 65) Article 131 TFEU, para 7. 245 Ibid, Article 131 TFEU, para 11; even though Sweden for instance has lacked to fulfil those obligations without consequences so far, see ibid, Article 131 TFEU, para 4; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 6; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 102. 246 ECB Opinion of the European Central Bank of 14 December 2011 on the Magyar Nemzeti Bank (CON/ 2011/104) para 2.2 (hereafter ECB, ‘Opinion CON/2011/104’). 247 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 142. 248 Deutsche Bundesbank for instance is not fully independent as concerns some of its national tasks.

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414 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS 15.47

The argument for this kind of ‘monetary independence’ is derived from the experience that political institutions do not necessarily have an incentive to maintain price stability.249 On the contrary, they may be interested in short term boost effects by expanding the money supply beyond the rate of real growth in the economy. In non-democratic societies, the government may directly use its control of the money supply to address various interests, in particular the financing of its projects, whereas in democratic societies, the incumbent party may be interested in increasing money supply before an election to raise employment and a feeling of well-being of the electorate in the hope that this will turn into votes for the prolongation of its policies.250 Thus, leaving the monetary policy to independent experts of a central bank is justified by the idea that these effects will be excluded and the goal of price stability achieved.251 The wording clarifies that independence is not an end in itself but meant as instrument for achieving exactly this goal of price stability.252 In this respect, it includes all NCBs of the ESCB with the exception that applied to the Bank of England even though Article 139(2)(c) TFEU might indicate the contrary. Article 42 Statute of the ESCB clearly includes the objectives of Article 2 Statute of the ESCB for the Out-NCBs as well.253 Since both rules are of the same rank, the correct interpretation applies the objective of price stability to all NCBs, as this was the intention of the original drafters of the Statute of the ESCB, which was not properly reflected when repeating some of the content of the Statute of the ESCB in the TFEU to strengthen its importance.254 The ECB rightly assumes that the obligation to strive for price stability, as their main objective, applies for the NCBs of the Member States as soon as they join the European Union.255

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Article 130 TFEU does not apply within the Eurosystem itself as a way of insulating the NCBs from influence by the ECB. The NCBs are on the contrary an integral part of the system which is governed by the decision-making bodies of the ECB, which is clarified by Articles 8, 9.2, 14.3, and 35.6 Statute of the ESCB.256

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The ECB has taken the issue of the NCBs’ independence very seriously and has therefore closely analysed and dissected it over the years. For this reason, the EMI (the predecessor 249 Amtenbrink, The Accountability of Central Banks (n 12) 24; Bossu, Hagan, and Weenink, ‘Safeguarding central bank autonomy’ (n 226) 33; Goldoni, ‘The Limits of Legal Accountability’ (n 154) 597; Smits, The European Central Bank (n 5) 153; Thiele, ‘The Independence of the ECB’ (n 21) 100; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 198 lays out the development which has led to the current understanding and the set-up of the ECB in the form of the Treaties; see also de Haan and Eijffinger, ‘The politics of central bank independence’ (n 212) 7. 250 Amtenbrink, The Accountability of Central Banks (n 12) 14; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 103; Thiele, ‘The Independence of the ECB’ (n 21) 99f; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 197; de Haan and Eijffinger, ‘The politics of central bank independence’ (n 212) 2ff with further references. 251 BVerfG, Order of the Second Senate of 18 July 2017—2 BvR 859/15, para 103; Rosa M Lastra, ‘Central bank independence and financial stability’ (May 2010) Banco de España, Estabilidad Financeria No 18, 51, 53 (hereafter Lastra, ‘Central bank independence and financial stability’); Zilioli, ‘The Independence of the European Central Bank’ (n 74) 129; Herrmann and Dornacher, Monetary Law (n 28) 79; Amtenbrink, The Accountability of Central Banks (n 12) 14, 185 questions the historic evidence for this correlation; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 102 admits though that there exists a large consensus basically accepting the need for central bank independence; also critical de Haan, Amtenbrink, and Eijffinger, ‘Accountability of central banks’ (n 227) 170, 184ff; de Haan and Eijffinger, ‘The politics of central bank independence’ (n 212) 16 suggest ‘that governments may choose to delegate monetary policy in order to detach it from political debates and power struggles’. 252 Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 850; Zilioli, ‘The Independence of the European Central Bank’ (n 74) 135. 253 ECB, ‘Convergence Report’ (n 142) 20. 254 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 141. 255 ECB, ‘Convergence Report’ (n 142) 20. 256 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 143.

Requirements of the TFEU 415 of the ECB) had already split up the concept of independence into four different features in detail,257 which it then used in its first convergence report in 1998 for assessing the NCBs’ statutes when preparing for the introduction of the euro.258 Accordingly, the ECB has identified four features of central bank independence.259

1. Functional independence The fact that central bank independence is not an end in itself, but rather a measure to achieve a clearly defined objective of an NCB prevailing over any other objective260 is particularly addressed by the concept of functional independence.261 Thus, each NCB’s primary objective needs to be defined in a clear and legally certain way. At the same time, it needs to be coherent with the primary objective of price stability established by the TFEU.262 To this end, the NCBs have to be provided with the necessary means and instruments for achieving this objective independently of any other authority.263 Nevertheless, the concept is fully compatible with holding the NCBs accountable for their decisions,264 because this supports the confidence that the public needs to have in their independent position.265 Otherwise in a democratic society the public would hardly entrust such a field of policy which may have 257 European Monetary Institute, Progress towards Convergence (1996) (European Monetary Institute 1996) 100–03. 258 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 143. 259 Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 850. 260 Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 109. 261 Amtenbrink, The Accountability of Central Banks (n 12) 45; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 109 points out that a clear hierarchy of objectives is advisable (see also de Haan, Amtenbrink, and Eijffinger, ‘Accountability of central banks’ (n 227) 173; Eijffinger and Hoeberichts, ‘Central Bank Accountability and Transparency’ (n 234) 2; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 8; Thiele, ‘The Independence of the ECB’ (n 21) 104; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 206), but that even the clear restriction on price stability leaves large discretion on how to define it (see also Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 110; Thiele, ‘The Independence of the ECB’ (n 21) 106; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 205, which is by now accepted by the German Constitutional Court BVerfG, Order of the Second Senate of 18 July 2017—2 BvR 859/15, para 117, making it difficult to hold it accountable. Amtenbrink, The Accountability of Central Banks (n 12) 47 doubts whether the objective of price stability can be a precondition for an accountable central bank as it lacks a yardstick for evaluating the performance of the central bank (also in de Haan, Amtenbrink, and Eijffinger, ‘Accountability of central banks’ (n 227) 172, 178; Eijffinger and Hoeberichts, ‘Central Bank Accountability and Transparency’ (n 234) 2). He recommends subjecting both government and parliament to this objective (Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 108). Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 9ff also points out that the ECB itself has set its exact understanding of price stability. 262 Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 853; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 8; Matthias Goldmann, ‘Adjudicating Economics? Central Bank Independence and the Appropriate Standard of Judicial Review’ (2014) 15 German Law Journal 265, 266 (hereafter Goldmann, ‘Adjudicating Economics?’) challenges such a narrow restriction though. 263 Amtenbrink, The Accountability of Central Banks (n 12) 19, 188. 264 Amtenbrink, The Accountability of Central Banks (n 12) 36 demands that if the monetary tasks are removed from the government, which needs to be accountable, to an independent central bank, then this independent institution needs to be accountable, too. He sees a need for an evaluation of performance as a result of which sanctions may be imposed (ibid, 38). However, he concedes that a general definition of democratic accountability is difficult to formulate, as proposals for strengthening the democratic accountability of central banks can only be forwarded on a case-by-case basis (ibid, 377). He describes the relationship between central bank independence and the legal need for mechanisms of democratic accountability as mutually dependent and not as one dominated by the other (ibid, 378). Mersch, ‘Aligning Accountability with Sovereignty’ (n 73) 14 points out that the extended scope of the ECB’s (but also the Eurosystem’s as a whole) role as result of the crisis which started in 2007/08 has ‘expectedly translated into increased attention and scrutiny’. 265 ECB, ‘Convergence Report’ (n 142) 20; Goodhart and Lastra, ‘Populism and Central Bank Independence’ (n 230) 56 stress that this becomes even more important if their mandate is stretched; Amtenbrink, The Accountability of Central Banks (n 12) 56, however, questions whether transparency alone can provide for a sufficient degree of accountability of the central bank; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 123 sees the necessity to build trust though.

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416 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS enormous influence in the day to day life of all citizens266 to an independent agent which is not controlled by elected bodies. It will only accept that if it can always monitor its restriction to a clearly defined mandate.267 15.51

Accordingly, the national legal framework shall provide for clear accountability of the NCBs towards the respective national societies:268 The function of accountability is neither to confirm democratic legitimacy of independent institutions, which comes from their legal basis, nor to impose a form of direct control on them, which would be incompatible with the concept of independence. Accountability is a mechanism for ensuring the democratic dimension of independent institutions.269

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So ultimately, it shall assure that the independent NCBs do not become foreign elements in the democratic legitimacy structures which are part of the values the Union is according to Article 2 TEU founded on. This approach followed by the ECB for itself and also applied for the accountability of an NCB means: justifying and explaining its decisions by demonstrating that it is acting in accordance with its mandate. In this respect, various forms of accountability [eg democratic accountability, judicial accountability]270 and supporting channels (eg communication tools) can reinforce each other.271

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However, this ‘transparency-oriented’272 approach273 is under heavy scrutiny in academic discussion.274 As a consequence a homogeneous definition of accountability is still 266 Goodhart and Lastra, ‘Populism and Central Bank Independence’ (n 230) 54. 267 Ibid, 55; Goldmann, ‘Adjudicating Economics?’ (n 262) 266ff questions that, pointing out, how this question influences also judicial accountability. He even considers that it is possible to compromise price stability on the short run, as long as it is pursued on the long run (ibid, 275). For Amtenbrink, The Accountability of Central Banks (n 12) 36 the democratic accountability of the ESCB in the end depends on the existing mechanisms on the European level. 268 Thiele, ‘The Independence of the ECB’ (n 21) 107ff; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 211. 269 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 132. 270 Thiele, ‘The Independence of the ECB’ (n 21) 112; Thiele, ‘Die Unabhängigkeit der EZB’ (n 21) 217 points out that this part has become relevant for the Eurosystem as well, this is why this reference is included by the authors into this verbatim quote. 271 Mersch, ‘Aligning Accountability with Sovereignty’ (n 73) 15. 272 de Haan, Amtenbrink, and Eijffinger, ‘Accountability of central banks’ (n 227) 173, 176 see such an approach as insufficient; Eijffinger and Hoeberichts, ‘Central Bank Accountability and Transparency’ (n 234) 2; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 106 rightly points out that the definition of ‘transparency’ in this regard is not unanimous either. 273 Deirdre Curtin, ‘Accountable Independence of the European Central Bank: Seeing the Logics of Transparency’ (2017) 23 European Law Journal 28, 32ff (hereafter Curtin, ‘Accountable Independence of the ECB’). 274 Amtenbrink, The Accountability of Central Banks (n 12) 33; Amtenbrink, ‘The Three Pillars of Central Bank Governance’ (n 222) 107 gives further references for the approach that the associated delegation of powers to independent unelected officials in a democratic society is only acceptable if independent central banks are one way or the other accountable to democratically elected institutions; Goldoni, ‘The Limits of Legal Accountability’ (n 154) 606 shows that it was even hard to draw definite lines here in the CJEU; Deirdre Curtin, ‘Linking ECB transparency and European accountability’ in ECB (ed), ECB Legal Conference: Shaping a new legal order for Europe: a tale of crises and opportunities (ECB 2017) 83–88; Curtin, ‘Accountable Independence of the ECB’ (n 273) 30, 32, who doubts that ‘ECB transparency, as it is interpreted by the ECB . . . suggest[s]‌“a new paradigm of accountability” ’ referring to Zilioli, ‘The Independence of the European Central Bank’ (n 74) 132 (where in fn 24 Zilioli rather states that ‘transparency itself becomes a paradigm of accountability, ie a new dimension of accountability’), and (ibid, 133) whether transparency can lead to accountability with the secret keeper able to retain absolute control over what is released; Goldoni, ‘The Limits of Legal Accountability’ (n 154) 616 with regard to judicial accountability and the IMF sees a need for higher levels of ex ante transparency and ex post accountability; see also Bossu, Hagan, and Weenink, ‘Safeguarding central bank autonomy’ (n 226) 42; even though in the beginning of the discussion it was quite apparent that in an institutional set up of this type the central bank is only ‘partially

Requirements of the TFEU 417 missing.275 The approach of the ECB will nevertheless be decisive for the assessment of the NCBs’ accountability in convergence reports or opinions. In the end though, a stable monetary regime as a valuable asset will always need to be carefully weighed against the basic principle of democracy.276 In this regard, publishing regular reports and giving financial statements or holding regular press conferences is part of the transparency by which the NCBs produce the necessary accountability in a democratic environment.277

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Such enhanced transparency is the basis for an admissible dialogue of the NCBs with third parties representing the democratic institutions of the Member States. Even though it is impermissible for the NCBs to seek instructions from government or parliament, a dialogue with those institutions in a democratic society is nevertheless important. In this regard, opinions and requests may be expressed, but the ability to force the NCBs to follow such opinions or requests is not permissible.278 A Dialogue with members of national institutions, even when based on statutory obligations to provide information and exchange views, is tolerable as long as:

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this does not result in interference with the independence of the members of the NCB’s decision-making bodies, the special status of governors in their capacity of ECB’s decision-making bodies is fully respected; and confidentiality requirements resulting from the Statute are observed.279

It is thus decisive that such dialogue cannot influence the outcome of the deliberations of the NCBs’ decision-making bodies. National rules on access of third parties have to comply with the confidentiality regime of the ESCB according to Article 37 Statute of the ESCB. Access of state audit or similar institutions must also be limited to their task and be without prejudice to the ESCB’s independence and confidentiality regime.280

2. Institutional independence The institutional independence of the NCBs directly refers to the prohibition of seeking or taking instructions in Article 130 TFEU, Article 7 Statute of the ESCB. In this regard, any reflection of this primary law prohibition in national law should not narrow the scope of

independent’: Eijffinger and Hoeberichts, ‘Central Bank Accountability and Transparency’ (n 234) 7 (which is not in line with Article 130 TFEU). 275 See already Amtenbrink, The Accountability of Central Banks (n 12) 35; Curtin, ‘Accountable Independence of the ECB’ (n 273) 32, 43. 276 Amtenbrink, The Accountability of Central Banks (n 12) 379; see also Eijffinger and Hoeberichts, ‘Central Bank Accountability and Transparency’ (n 234) 6. 277 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 133; Curtin, ‘Accountable Independence of the ECB’ (n 273) 33. 278 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 144; Helmut Siekmann in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 130 TFEU, para 114; Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 853. 279 ECB, ‘Convergence Report’ (n 142) 22; Goldmann, ‘Adjudicating Economics?’ (n 262) 271 refers to an ‘interdependence theorem’ derived from economic research though according to which a ‘joint optimization’ of policies pursued by the different agencies concerned with financial stability is required; see also Amtenbrink, The Accountability of Central Banks (n 12) 25ff; de Haan and Eijffinger, ‘The politics of central bank independence’ (n 212) 6. 280 ECB, ‘Convergence Report’ (n 142) 29.

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418 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS its application.281 Any possibility to influence the decision-making of the NCB in relation to the ESCB-related tasks by ownership rights of the Member States should also be limited by law.282 15.58

Any rights of third parties to give instructions to NCBs, their decision-making bodies or their members are clearly incompatible with the Treaties if they refer to ESCB-related tasks. If national laws provide for a discharge of the performance of the members of NCBs’ decision-making bodies by third parties, such powers shall not impinge on their capacities to independently take decisions in respect of ESCB-related tasks. It is recommendable to state that expressly in the respective provisions.283 This also includes involving the NCBs in measures to strengthen the financial stability in the Member State, as long as these measures do not fully respect the functional, institutional, and financial independence of the NCBs with regard to the performance of their tasks under the European Treaties and the Statute of the ESCB.284 Thus, if the NCB is attributed tasks beyond advisory tasks, these tasks shall not affect the execution of its ESCB-related tasks from an operational and financial point of view.285 Also, if members of the decision-making bodies of the NCB had to take over other tasks in collegiate decision-making supervisory bodies or other authorities, due consideration would have to be given to protect their personal independence.286 Rights of third parties in national law which result in approving, suspending or annulling of NCBs’ decisions concerning ESCB-related tasks are incompatible with the Treaties and the Statute of the ESCB.287 Thus, a revision of such decisions of the NCBs is only permissible by independent courts. Any right for other bodies to censor, on legal grounds, the performance of ESCB-related tasks would lead to an inadmissible reassessment of the NCBs’ decision at a political level. The governor of an NCB is also not entitled to suspend the implementation of a decision of the ESCB or the decision-making bodies of an NCB until it is finally cleared by a political body, as this would be equivalent to seeking instructions.288

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It is inacceptable for representatives of other national bodies to participate in decisions of the decision-making body of an NCB concerning the performance of ESCB-related tasks with a right to vote, even if their vote is not decisive.289 But even without such a right to vote, such participation is impermissible if it ‘interferes with the performance of ESCB-related tasks by that decision-making bodies or endangers compliance with the ESCB’s confidentiality regime’.290 This may be the case if the absence of such party can prevent the meeting being held.291 281 ECB, ‘Opinion CON/2011/104’ (n 246) para 9.1. 282 ECB, ‘Convergence Report’ (n 142) 28. 283 ECB, ‘Convergence Report’ (n 142) 23; Zilioli, ‘The Independence of the European Central Bank’ (n 74) 153. 284 ECB Opinion of 13 April 2010 on the amendment to the Law on credit institutions and financial undertakings introducing further financial market stabilization measures (CON/2010/31) para 3.1. 285 ECB Opinion of 12 November 2009 on conditions and procedures for the application of the measures to strengthen financial stability (CON/2009/93) para 3.1.5. 286 ECB Opinion of 21 December 2010 on the Hungarian Financial Supervisory Authority and on its President’s legislative powers (CON/2010/94) para 3.5. 287 ECB, ‘Convergence Report’ (n 142) 22; Zilioli, ‘The Independence of the European Central Bank’ (n 74) 153; Amtenbrink, The Accountability of Central Banks (n 12) 54 questions these restrictions for lessening the democratic accountability. 288 ECB, ‘Convergence Report’ (n 142) 22. 289 ECB Opinion of 11 April 2014 on the independence of Banka Slovenije (CON/2014/25) para 3 (hereafter ECB Opinion CON/2014/25). 290 ECB, ‘Convergence Report’ (n 142), 22; ECB Opinion CON/2014/25 (n 289) para 3; ECB Opinion of 18 December 2015 on certain amendments to Banka Slovenije’s institutional framework (CON/2015/57) para 5. 291 ECB Opinion of 21 July 2008 on amendments to the Statute of Banca Naţională a României (CON/2008/31) para 3.3.

Requirements of the TFEU 419 An NCB shall also not be expressly obliged in its statutes to consult third parties ex ante with regard to ESCB-related tasks; as such competence would provide such third parties with a formal mechanism to influence the NCB’s final decision.292

3. Personal independence Personal independence is directly granted by Article 14.2 Statute of the ESCB only to the governors of the NCBs to ensure that they can perform their Union tasks stemming from primary law in the European interest rather than in the national interest of the respective Member State. For the governors of the Member States which have not yet introduced the euro, this applies not only to their restricted Union functions, but also to their national tasks. This is particularly important, as they also have to pursue the main objective of price stability independently and prepare their NCBs for joining the euro.293

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According to Article 14.2 first subparagraph, the governor needs to have a minimum term of office of five years.294 Thus, Member States are not precluded from prolonging the term of office,295 which may be even recommendable to further align their term of office with the ones of the members of the ECB’s Executive Board, which is eight years by Article 11.2 Statute of the ESCB.296 Even an indefinite term of office may be permissible, provided that the grounds for dismissal are in line with those of Article 14.2 Statute of the ESCB.297 The national statutes may provide for a reappointment of the NCB governors differing from the members of the ECB’s Executive Board, who according to Article 11.2 Statute of the ESCB are ineligible for reappointment. This, however, may produce a certain potential for influencing the governor by appointing authorities if he or she is approaching reappointment.298 If the governor’s term of office ends prior to its expiry by death or stepping down, the successor needs to be appointed for a full term and cannot be restricted to the remaining term. The term of office also cannot be shortened by a compulsory retirement age in national law, as Article 14.2 Statute of the ESCB has precedence over such conflicting national laws.299 Also, amendments to the NCBs’ statutes have to secure the tenure of the running terms.300 Amending national legislation affecting the remuneration of governors should apply only for future appointments.301

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Article 14.2 second subparagraph Statute of the ESCB lays down the reasons for relief of a governor from office, which are exactly two, namely ‘if he no longer fulfils the conditions

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292 ECB, ‘Convergence Report’ (n 142) 22. 293 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 146. 294 Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 948. 295 Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 34. 296 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 146 and fn 95; Amtenbrink, The Accountability of Central Banks (n 12) 121; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 32. 297 ECB, ‘Convergence Report’ (n 142) 23. 298 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 147; Amtenbrink, The Accountability of Central Banks (n 12) 50, on 49 he suggests reappointments as a mechanism of ex post accountability though. 299 See ECB Opinion of 15 November 2012 on euro banknotes and coins and amendments to the Banco de España’s Statute (CON/2012/89) para 7 (hereafter ECB Opinion CON/2012/89); ECB, ‘Convergence Report’ (n 142) 23; Zilioli, ‘The Independence of the European Central Bank’ (n 74) 147. 300 ECB, ‘Convergence Report’ (n 142) 23ff. 301 ECB, ‘Convergence Report’ (n 142) 23; Zilioli, ‘The Independence of the European Central Bank’ (n 74) 148.

420 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS required for the performance of his duties or if has been guilty of serious misconduct’. Article 14.2 second subparagraph Statute of the ESCB applies from the point in time of a governor’s election or appointment,302 even if he or she has not taken up office yet.303 The first reason is self-explanatory. It covers cases of persistent health problems or other lack of capacity over a sustained period.304 The second reason is more controversial as it concerns a governor committing a criminal offence under national law. However, as this requires a grave misconduct, determining where the boundary between ‘minor’ and ‘serious’ runs in such a case may become a difficult question, in particular since there may be political reasons305 to make up such a case to gain influence on the NCB.306 Since these boundaries are not harmonized on Union level, it would first have to be decided by an independent national court or tribunal on national level whether the NCB governor has committed a crime.307 15.64

To avoid the unduly broad application of these reasons, the governors or the Governing Council can refer decisions to the effect of a relief on grounds of infringement of the EU Treaties or of any rule of law relating to its application to the CJEU within two months of the publication or notification or otherwise knowledge of the decision by the plaintiff.308 In theory, this gives the Governing Council the power to hold on to a governor and defend his case before the CJEU even if he himself would be willing to give in.309 In practice, in the most relevant case of an alleged criminal offence by the governor, the necessary final decision by a national court on his guilt and the suspension resulting therefrom may create an enormous credibility problem for the ECB,310 since, with the national decision pending, the ECB might find itself unable to avoid getting involved in the national controversies resulting from an NCB governor being indicted for a criminal offence, before it could finally ask for a clarification by the CJEU. However, there was a first case by which the CJEU annulled the decision of the Anti-Corruption Office of Latvia of 19 February 2018 in so far as it prohibited the governor of the Latvian central bank from performing his duties as governor.311

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The ECB Governing Council also has no possibility to assess the national eligibility criteria for the appointment of NCB governors and has acknowledged the competence of the Member States to determine the employment conditions.312 This reflects political realities, even though the selection criteria might have an enormous influence on the execution of the governors’ Eurosystem tasks in the end.313 If the national selection procedures are not completed in a timely manner, the position of the governor of the NCB in the Governing Council may be left pending due to the personal nature of his role there. 302 ECB Opinion CON/2014/25 (n 289) para 2.1. 303 ECB, ‘Convergence Report’ (n 142), 24; Zilioli, ‘The Independence of the European Central Bank’ (n 74) 147. 304 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 148. 305 Goodhart and Lastra, ‘Populism and Central Bank Independence’ (n 230) 58. 306 Amtenbrink, The Accountability of Central Banks (n 12) 51 admits this, even though he sees positive effects of a broad right of dismissal as strengthening the democratic accountability of central banks. 307 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 149. 308 Ibid, 146; Zilioli and Selmayr, The Law of the European Central Bank (n 6) 78. 309 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 150. 310 Ibid, 149. 311 Joined Cases C-202/18 and C-238/18 Rimšēvičs and ECB v Latvia [2019] ECLI:EU:C:2019:139. 312 Ohler, Bankenaufsicht (n 28) 44. 313 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 152.

Requirements of the TFEU 421 Even though other members of the decision-making bodies of the NCBs are not expressly referred to in Article 14.2 Statute of the ESCB, the ECB has extended its application by its convergence reports to all members of their decision-making bodies who are involved in the performance of ESCB-related tasks (with an emphasis on NCB governors’ deputies), because different degrees of independence would undermine the personal independence in the NCBs as a whole314 and Article 130 TFEU and Article 7 Statute of the ESCB explicitly refer to the members of the decision-making bodies.315 However, there is no procedure to the CJEU available to such other members in case of infringements. Thus, the national legislators have to make sure that there is an independent judicial review of their removal from office.316 National law should also foresee strict rules preventing conflicts of interest:317

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In particular, members of such decision-making bodies may not hold office or have an interest that may influence their activities, whether through office in the executive or legislative branches of the state or in regional or local administrations, or through involvement in a business organization.318

4. Financial independence Each NCB must always have sufficient resources to carry out its tasks.319 Since this is not explicitly stated in EU primary law, the ECB has scrutinized in its convergence reports from the beginning that the NCBs must be capitalized appropriately at all times.320 The ECB has laid particular importance on the fact that the NCBs may need to provide the ECB with capital and foreign reserves or forsake some of their profit claims from the ECB to stabilize it, as mentioned above.321 The NCBs should nevertheless always be in a position to fulfil their tasks unimpaired. Thus, the NCBs must have sufficient means to fulfil not only their ESCB-related, but also their national tasks.322 From these necessities, the ECB has derived 314 See ECB Opinion of 4 November 2004 on monetary policy decision-making (CON/2004/35) para 7; ECB Opinion of 12 December 2005 on changes to the state treasury system (CON/2005/55) para 8; ECB Opinion of 25 August 2006 on a general revision of the statutes of Banca d’Italia (CON/2006/44) para 3.3; ECB Opinion of 22 June 2006 on amendments to the statutes of the Banque de France (CON/2006/32) para 2.6; ECB Opinion of 7 March 2007 on an amendment to the Deutsche Bundesbank’s statutes relating to the number and nomination of the members of its Executive Board (CON/2007/6) paras 2.3 and 2.4. 315 ECB, ‘Convergence Report’ (n 142) 24. 316 Ibid, 24ff. 317 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 146. 318 ECB, ‘Convergence Report’ (n 142) 25; for the importance of that ‘professional independence’ see also Goodhart and Lastra, ‘Populism and Central Bank Independence’ (n 230) 57. 319 de Haan and Eijffinger, ‘The politics of central bank independence’ (n 212) 12ff refer to new research showing the importance of financial independence. 320 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 153. 321 See Section I.J. 322 ECB, ‘Convergence Report’ (n 142) 25ff; ECB Opinion of 20 January 2004 on measures affecting Suomen Pankki’s financial position and provisions relating to its power to issue norms (CON/2004/1) para 5; ECB Opinion of 11 August 2005 on the rules for payment of the Banco de España’s profits to the Treasury (CON/2005/30) para 9; ECB Opinion of 2 December 2008 on the payment of Banco de España’s profits to the Treasury (CON/2008/82) para 3.2; ECB Opinion of 16 January 2009 on amendments to the rules governing the distribution of the income of the Nationale Bank van België/Banque Nationale de Belgique and the allocation of its profits to the Belgian State (CON/2009/4) para 2.1; ECB Opinion of 24 June 2009 on the distribution of Latvijas Banka’s profits (CON/ 2009/53) para 2.2 (hereafter ECB Opinion CON/2009/53); ECB Opinion of 23 October 2009 on the distribution of Lietuvos bankas’s profits (CON/2009/83) para 2.4.2 (hereafter ECB Opinion CON/2009/83); ECB Opinion of 11 January 2010 on recovery measures that apply to undertakings in the banking and financial sector, on the supervision of the financial sector and financial services and on the statutes of the Nationale Bank van België/ Banque Nationale de Belgique (CON/2010/7) para 2.2.5; ECB Opinion of 10 November 2011 on the amendments to Lietuvos bankas’ profit distribution rules (CON/2011/91) para 3.2; ECB Opinion of 7 September 2012 on a capital increase of the Banque centrale du Luxembourg (CON/2012/69) para 2.1; ECB Opinion of 27 December 2013

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422 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS an obligation of the Member States to keep the NCBs sufficiently capitalized. According to the ECB, this requires the Member State to provide the NCB with an appropriate amount of capital at least up to the level of its statutory capital within a reasonable period of time, if the NCB’s capital becomes less than its statutory capital or even negative for a prolonged period of time.323 This approach may be duly questioned though,324 as the financial independence of an NCB rather depends on its credibility in the markets. Such credibility of an NCB diverging from a private company does not depend on its statutory capital,325 as an NCB is not subject to insolvency. 15.68

To assure these sufficient means, third parties may according to the ECB only have an influence on the NCB’s budget if a safeguard clause provides that this does not affect the financial needs for carrying out its ESCB-related tasks.326 If the NCBs are entrusted with supervisory tasks, it needs to be assured that the respective NCB has ultimate control over all cost-related aspects of its execution.327

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The NCBs’ accounts need to be drawn up either in accordance with general accounting rules or in accordance with rules which the decision-making bodies of the NCBs have set. If third parties are admitted to specify such rules, they must at least take into account proposals by the NCBs’ decision-making bodies.328 The annual accounts should be adopted by the decision-making bodies of the NCBs assisted by independent accountants. An ex-post approval by third parties such as parliament or government is admissible, but the decision- making bodies should calculate the profits independently and professionally.329 The scope of controls by state auditors of the NCBs needs to be clearly defined and should be without prejudice to the activities of the independent external auditors provided by Article 7.1 Statute of the ESCB. Such controls shall not interfere with the NCBs’ ESCB-related tasks,330 because as far as they are protected by central bank independence the parliaments as receivers of State auditors’ reports cannot interfere anyhow. The reports shall be done on a non-political, independent and purely professional basis.331

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NCBs shall not be hindered from building up their reserve capital to a level which is necessary for them as members of the ESCB to fulfil their tasks.332 Thus, decisions on the allocations should be taken by the NCB’s decision-making bodies on professional grounds, if the on a capital increase of the Banca d’Italia (CON/2013/96) para 3.1; ECB Opinion of 26 June 2014 on a systemic risk committee (CON/2014/46) para 5.4. 323 ECB, ‘Convergence Report’ (n 142) 26; Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 853ff. 324 Ohler, Bankenaufsicht (n 28) 43 rightly states that there are no obligations set in European law and that obligations therefore have to stem from national law. 325 See Langner in Siekmann (ed), EWU (n 109) Vorbemerkung zu Articles 28–33 Statute of the ESCB, para 13; Article 33 Statute of the ESCB, para 13. 326 ECB, ‘Convergence Report’ (n 142) 26. 327 Ibid, 28; Zilioli, ‘The Independence of the European Central Bank’ (n 74) 173. 328 ECB Opinion of 24 July 2013 on the financial independence of Sveriges Riksbank (CON/2013/53) para 4.3.1 (hereafter ECB Opinion CON/2013/53); ECB, ‘Convergence Report’ (n 142) 27. 329 Ibid. 330 ECB Opinion of 14 February 2011 on amendments to the Polish Constitution concerning adoption of the euro (CON/2011/9) para 3.3; ECB Opinion of 22 June 2011 on the Hungarian State Audit Office in relation to its audit of the Magyar Nemzeti Bank (CON/2011/53) para 2.1. 331 ECB, ‘Convergence Report’ (n 142) 27. 332 ECB Opinion of 24 March 2009 on amendment to the rules on the distribution of the profits of Lietuvos bankas in the context of financial turmoil (CON/2009/26) para 3.3.

Requirements of the TFEU 423 NCBs’ statutes do not prescribe how profits have to be allocated. Such decisions may only be subject to the discretion of third parties if the third parties cannot influence the necessary means for carrying out ESCB-related as well as national tasks of the NCBs.333 Profits can only be distributed to the state budget if any accumulated losses from previous years have been covered334 and financial provisions deemed necessary have been created. Thus, NCBs cannot be forced to distribute profits by temporary or ad-hoc legislative measures.335 Special taxes on their unrealized profits also interfere with their financial independence.336 Capital reductions or amendments to their profit distribution rules should only be initiated and decided in full cooperation with the NCBs.337 NCBs must be able to employ and retain the qualified personnel necessary to independently perform their tasks stemming from the Treaties and the Statute of the ESCB.338 Thus, an NCB shall not lose control over its staff and the national government shall not influence its policy on staff matters. There needs to be close and effective cooperation with the NCB on amending national legislative provisions affecting the remuneration of the NCB’s staff339 including questions of staff pensions.340 Funds freed by reductions of salaries stay under full control of the NCB.341

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How independence is assured if NCBs execute tasks as dependent national authorities poses an interesting question. One example is found in the tasks which the NCBs perform as national statistic authorities contributing to statistics of Eurostat, which has to be distinguished from producing the own statistics of the ESCB according to Article 5 Statute of the ESCB. However, the control mechanisms generally applying to national authorities and thus also including the respective NCBs in such a case must be employed in a way

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333 ECB, ‘Convergence Report’ (n 142) 27ff. 334 ECB Opinion of 27 October 2009 on Národná banka Slovenska’s independence (CON/2009/85) para 4.3. 335 ECB Opinion (CON/2009/26) para 3.4; ECB Opinion (CON/2011/91) para 3.4; ECB Opinion of 20 February 2013 on the profit distribution of the Bank of Greece (CON/2013/15) para 3.2; ECB Opinion CON/2013/53 (n 328) para 4.2.3. 336 ECB Opinion of 24 July 2009 on an amended draft legislative provision on the taxation of the Banca d’Italia’s gold reserves (CON/2009/63) para 3.1; ECB Opinion of 14 July 2009 on the taxation of the Banca d’Italia’s gold reserves (CON/2009/59) para 2.2. 337 ECB Opinion CON/2009/83 (n 322) para 3.6; ECB Opinion CON/2009/53 (n 322) para 3.3. 338 ECB, ‘Convergence Report’ (n 142) 28. 339 The main Opinions are ECB Opinion of 18 May 2010 on the legal status of Lietuvos bankas’s assets, terms of office and remuneration of Board members, immunity of foreign reserves of foreign central banks and annual financial statements of Lietuvos bankas (CON/2010/42), para 4.3; ECB Opinion of 1 July 2010 on the remuneration of the staff of Banca Naţională a României (CON/2010/51) para 3.1.2; ECB Opinion of 12 July 2010 on amendments to the Law on the Magyar Nemzeti Bank introducing salary reductions (CON/2010/56) para 3.4; ECB Opinion of 26 August 2010 on further measures for the restoration of budgetary balance (CON/2010/69) para 3.1 (hereafter ECB Opinion CON/2010/69); ECB Opinion of 12 November 2010 on the Banco de Portugal’s staff remuneration and the budget (CON/2010/80) para 3.2.2 (hereafter ECB Opinion CON/2010/80); ECB Opinion CON/2011/104 (n 246) para 8; ECB Opinion of 22 December 2011 on the Magyar Nemzeti Bank’s independence (CON/2011/106) para 4.3; ECB Opinion of 26 January 2012 on pension reforms in the public sector (CON/2012/ 6) para 3 (hereafter ECB Opinion CON/2012/6); ECB Opinion of 9 November 2012 on the Banco de Portugal’s staff remuneration and the budget (CON/2012/86) para 3.2; ECB Opinion of 28 January 2014 on remuneration for public servants during periods of sick leave (CON/2014/7) para 4.1. 340 ECB Opinion CON/2010/80 (n 339) para 3.2.1; ECB Opinion of 14 April 2011 on amendments to the Statute of the Bank of Greece (CON/2011/36), para 3.3.4; ECB Opinion of 4 January 2012 on the salaries of civil servants (CON/2012/1) para 3.1; ECB Opinion CON/2012/6 (n 339) para 2; ECB Opinion CON/2012/89 (n 299) para 6; ECB Opinion of 28 June 2013 on pay and pension reforms (CON/2013/46) para 4.3; ECB Opinion of 19 May 2014 on pension restrictions (CON/2014/35) para 2.3. 341 ECB Opinion CON/2010/69 (n 339) paras 3.4 and 3.6; ECB Opinion CON/2010/80 (n 339) para 3.3.4; ECB Opinion of 26 May 2014 on the remuneration of staff and members of decision-making bodies of the Banca d’Italia and taxation of its revalued shares (CON/2014/38) para 4.2.2.

424 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS that avoids compromising the central bank independence which the NCBs enjoy for their ESCB-related tasks. This may be a complex compromise in practice.

D. Article 123: prohibition of monetary financing342 The prohibition of monetary financing in Article 123.1 TFEU and Article 21.1 of the Statute can be considered a corollary to the principle of financial independence. While its main objective is to ensure that the primary objective of monetary policy (to maintain price stability) is not impeded and that pressure for fiscal discipline is maintained, it is because the financial obligations of the state can often jeopardize the financial independence of the central bank that this prohibition contributes to the protection of [central bank] independence.343 15.73

Due to this extraordinary importance, it has to be interpreted extensively. According to the ECB it includes the NCBs and extends well above the cases explicitly named in Article 123(1) TFEU (overdraft and credit facilities, direct purchases of debt certificates by public institutions). By this, it includes all forms of funding of the public sector as confirmed by the CJEU,344 ie without obligation to repay,345 even though there are discussions in literature346 as to the exact scope of this prohibition.

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However, it does not apply to business activities with publicly-owned credit institutions according to Article 123(2) TFEU and for the traditional activities of the NCBs as fiscal agents according to Article 21.2 Statute of the ESCB.347 The precise scope of the monetary financing prohibition is further clarified by a Council regulation.348 According to its Article 7, contributions to the IMF by the NCBs in fulfilment of obligations of their Member States are admissible.349 These rules of the European law are directly applicable to the NCBs and, thus, do not need any national transposition. Should national laws mirror them nevertheless, they may clearly not narrow their scope of application.350

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Particularly as a consequence of the public-debt crisis stemming from the financial crisis of 2007/2008, Member States had become interested in transferring tasks to the NCBs’ budgets to relieve their own budgets from the resulting cost. Member States may nevertheless not confer financing activities of third parties on NCBs where such financing does not relate to any of the tasks and functions of the central banks but is a responsibility of 342 See further Chapter 9 at paragraphs 9.28–9.30. 343 Zilioli, ‘The Independence of the European Central Bank’ (n 74) 136. 344 Case C-62/14 Peter Gauweiler and Others v Deutscher Bundestag [2015] ECLI:EU:C:2015:400, para 95. 345 ECB, ‘Convergence Report’ (n 142) 30. 346 See for instance Goldmann, ‘Adjudicating Economics?’ (n 262) 271, 278 with reference to Herrmann, ‘Die Bewältigung der Euro-Staatsschulden-Krise’ (n 42) 810, 812; Amtenbrink, The Accountability of Central Banks (n 12) 25. 347 ECB, ‘Convergence Report’ (n 142) 29; see for its exact scope: Amtenbrink, The Accountability of Central Banks (n 12) 34ff. 348 Council Regulation (EC) 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions referred to in Articles 104 and 104b (1) of the Treaty [1993] OJ L332/1. 349 Jörn Axel Kämmerer in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013)Article 123 TFEU, para 19 (hereafter Kämmerer in Siekmann (ed) EWU). 350 ECB, ‘Convergence Report’ (n 142) 30.

Requirements of the TFEU 425 the government.351 If government tasks are newly entrusted to the NCBs, they must be adequately remunerated ex-ante.352 The separation of the tasks is not easy though, as some tasks in the field of banking supervision, including consumer–protection issues, may indeed belong to the central banks.353 The ECB has therefore used various consultations354 to define criteria to determine government tasks. Important criteria for qualifying a task as a government task are: (a) its atypical nature; (b) the fact that it is discharged on behalf and in the exclusive interest of the government; and (c) its impact on the institutional, financial and personal independence of the NCB. This is particularly the case when the task either creates inadequately addressed conflicts of interest with existing central bank tasks or is disproportionate to the NCB’s financial or organizational capacity, or does not fit into the NCB’s institutional set-up, or harbours substantial financial risk355 and exposes the members of the NCB’s decision-making bodies to political risks which are disproportionate and may negatively impact their personal independence.356 Even with these underlying criteria, the ECB had to reach several individual decisions sorting out the exact borderlines.357 These also show the close relationship between the prohibition of monetary financing and the financial independence of the NCBs. In this regard, it is of particular importance that the ECB allowed short term financing of deposit insurance and investor protection by discretion of the NCB if addressed to urgent situations, and systematic stability aspects were at stake.358 As regards resolution tasks, only technical administrative tasks that do not undermine the NCB’s independence were seen as permissible,359 but not taking over financing needs stemming from resolution of credit institutions either directly or indirectly by taking over obligations of a resolution fund.360

E. Article 124: no privileged access361 As public authorities, the NCBs are also bound by the prohibition of privileged access according to Article 124 TFEU, which aims at preventing privileged access conditions for the public sector to the financial markets.362 They may thus not take measures granting privileged access to financial institutions by the public sector except for prudential

351 ECB Opinion of 9 March 2006 on the integration of banking, capital markets, insurance and pension funds supervision (CON/2006/15) para 5.1.2. 352 ECB, ‘Convergence Report’ (n 142) 30; ECB Opinion of 16 October 2015 on the central register of bank accounts (CON/2015/36) para 3.1.6 (hereafter ECB Opinion CON/2015/36); ECB Opinion of 13 November 2015 on a register of bank accounts (CON/2015/46) paras 3.1.6 and 3.2 (hereafter ECB Opinion CON/2015/46). 353 For further specifications see ECB, ‘Convergence Report’ (n 142) 31ff. 354 Ibid, 30. 355 See also Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 854. 356 ECB Opinion of 1 July 2015 on recovery and resolution in the financial market (CON/2015/22) para 2.3.2 (hereafter ECB Opinion CON/2015/22); ECB Opinion CON/2015/36 (n 352) para 2.1; ECB Opinion CON/2015/ 46 (n 352) para 2.1. 357 See ECB, ‘Convergence Report’ (n 142) 31–34. 358 ECB Opinion of 29 October 2015 on the deposit guarantee scheme (CON/2015/40) para 3.2. 359 ECB Opinion CON/2015/22 (n 356) para 3.2.3. 360 ECB Opinion CON/2015/22 (n 356) para 3.2.2; ECB Opinion of 22 September 2015 on the designation of Lietuvos bankas as a resolution authority (CON/2015/33) para 3.1.2; ECB Opinion of 16 October 2015 on recovery and resolution of credit institutions and investment firms (CON/2015/35) para 3.1.1; ECB, ‘Convergence Report’ (n 142) 33ff. 361 See further Chapter 9 at paragraphs 9.28–9.30. 362 Kämmerer in Siekmann (ed), EWU (n 349) Article 123 TFEU, para 2.

15.76

426 ESCB/EUROSYSTEM/NATIONAL CENTRAL BANKS considerations.363 Furthermore, their rules on the mobilization and pledging of debt instruments must not be used to circumvent that prohibition.364

III. Other National Tasks of NCBs 15.77

The NCBs may according to Article 14.4 Statute of the ESCB still perform national tasks entrusted to them by their respective national legislator.365 However, according to Article 14.4 first sentence Statute of the ESCB, the Governing Council is able to object to those tasks by a two-thirds majority if these national activities of the NCBs interfere with the general objectives and tasks of the Eurosystem, in particular the ECB’s monetary policy.366 Originally meant as a very drastic measure which should have been understood as an ultima ratio competence,367 it has turned out to be a necessary instrument to guarantee the operability and integrity of the Eurosystem, in particular, in times of financial crisis when national desires for support by the relevant NCBs may rise. It is not so much the actual use of the competence by the Governing Council, but the fact that it exists which executes a disciplinary effect and leads to informal contacts between the NCBs and the ECB in the preparation of national activities, which have assured that the ECB could steer the Eurosystem in general in line with its defined policies.

15.78

One of the most important national tasks remaining with the NCBs is Emergency Liquidity Assistance or ELA.368 This being a traditional task of a central bank, it was always seen as a national task based on NCBs’ competences in Article 14.4 Statute of the ESCB.369 As reason for this, it was always stated that ELA is a central bank capacity which is closer to supervision and would therefore rather correspond to obligations of the national governments to financially support credit institutions for financial stability reasons.370 Consequently, the NCBs perform ELA as non-ESCB task on their own responsibility and liability.371 However, as it is financed in the end by creating central bank money,372 the opportunity for objection by the Governing Council according to Article 14.4 first sentence is of even bigger importance here,373 as the NCBs may otherwise inadequately bloat the money supply if they do 363 ECB, ‘Convergence Report’ (n 142) 36. 364 See Article 3.2 and Recital (10) Regulation (EC) 3604/93 of 13 December 1993 specifying definitions for the application of the prohibition of privileged access referred to in Article 104a of the Treaty [1993] OJ L332/4. 365 Ohler, Bankenaufsicht (n 28) 38; van den Berg, The Making of the Statute (n 5) 319; Croonenborghs, Friebel, and Petöcz, ‘The Principle of Central Bank Independence’ (n 159) 850, fn 12; Siekmann, ‘Framework for the European System of Central Banks’ (n 12) 33; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 947. 366 Ohler, Bankenaufsicht (n 28) 38; van den Berg, The Making of the Statute (n 5) 320; Amtenbrink, Geelhoed, and Kingston, ‘Economic, Monetary and Social Policy’ (n 26) 947. 367 Krauskopf and Steven, ‘The Institutional Framework of the European System of Central Banks’ (n 16) 1153. 368 Ohler, Bankenaufsicht (n 28) 38. 369 Article 2.1 ELA Agreement of 17 May 2017, accessed 29 January 2020 (hereafter ELA Agreement); Keller in Siekmann (ed), EWU (n 113) Article 18 Statute of the ESCB, para 110; Lastra, ‘Central bank independence and financial stability’ (n 251) 65; Lastra and Louis, ‘European Economic and Monetary Union’ (n 7) 145. 370 Ohler, Bankenaufsicht (n 28) 115, questions whether this is still sensible after the supervisory functions have been transferred to the ECB according to Article 127(6) TFEU. 371 Article 2.2 ELA Agreement; Lastra, ‘Central bank independence and financial stability’ (n 251) 65; Ohler, Bankenaufsicht (n 28) 115. 372 Article 1.2(a) ELA Agreement. 373 Ohler, Bankenaufsicht (n 28) 115.

Other National Tasks of NCBs 427 not strictly comply with the requirements of ELA. The basis of these requirements are originally not legal principles374 and not specifically defined for the Eurosystem, but are traditionally applied when providing lender of last resort assistance by central banks.375 These requirements are that ELA is provided as short term as possible, that there is no market access possible for the credit institution, and that it is only provided to a temporarily illiquid but solvent credit institution, ie it is excluded for insolvent credit institutions. Also, ELA may only be provided against good collateral which is valued at lower than pre-panic prices but higher than it would have been valued had the central bank not entered the market. It should only be provided against a penalty rate and by full discretion (‘constructive ambiguity’) of the central bank to avoid moral hazard.376 Nevertheless, with the publication of the ELA-Agreement, the ECB has now provided for a legal foundation of ELA provision in the Eurosystem, confirming these basic aspects and defining information obligations for the NCBs to the ECB.377 However, in times of financial crisis the availability of collateral may be a problem. Thus, the ECB has accepted that ELA may be provided against a valid state guarantee as collateral. In such a case the relevance for competition law matters requires clearance by the Commission according to Article 108(3) TFEU to avoid illegitimate state aid according to Article 107 TFEU378 first indent. The ECB then admits it only if systematic stability aspects are at stake, there are no doubts as to its legal validity and enforceability under the applicable national law, and the economic adequacy of the state guarantee, which should cover both principal and interest on the loans.379

15.79

If these conditions are not met, and accordingly the provision of ELA is not possible, the provision of funding for such a credit institution becomes a government task. If an NCB provides it nevertheless, this will result in monetary financing and is thus prohibited by Article 123(1) TFEU.380 All European institutions are bound by the law. One would thus expect that when the respective NCB informs the ECB about its intended provision according to the prescribed ELA procedure,381 the ECB would always refuse it ex-ante on the basis of Article 14.4 first sentence Statute of the ESCB, since an unlawful approach always interferes with the objectives and tasks of the ESCB. However, the Governing Council has reserved itself some room for manoeuvre in such cases, as according to the ELA-Agreement such a breach of Article 123 TFEU may only constitute an interference with the objectives and tasks of the Eurosystem according to Article 127(2) TFEU.382 The Governing Council may thus decide differently.383

15.80

374 The concept was developed in the nineteenth century for the British central bank policy by Henry Thornton and Walter Bagheot, see Ohler, Bankenaufsicht (n 28) 114. 375 Lastra, ‘Central bank independence and financial stability’ (n 251) 62. 376 Ibid; Ohler, Bankenaufsicht (n 28) 114. 377 Article 3 ELA Agreement. 378 Ohler, Bankenaufsicht (n 28) 116ff; Commission, ‘Communication on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication)’ [2013] OJ C216/1, paras 56ff. 379 ECB, ‘Opinion of 24 January 2012 on a guarantee scheme for the liabilities of Italian banks and on the exchange of lira banknotes’ (CON/2012/4) fn 42 referring to other relevant opinions; Ohler, Bankenaufsicht (n 28) 116. 380 Articles 5.3, 5.4 ELA-Agreement; Ohler, Bankenaufsicht (n 28) 115ff. 381 Article 3.1 ELA-Agreement; Ohler, Bankenaufsicht (n 28) 39 confirms a general information obligation. 382 Article 5.2 ELA-Agreement. 383 Article 5.1 ELA-Agreement.

16

EU INSTITUTIONS REPRESENTING MEMBER STATES’ GOVERNMENTS Eugenia Dumitriu Segnana and Alberto de Gregorio Merino*

I. Introduction II. Council of the EU

A. Organization of the Council B. Functioning of the Council C. Specific powers relating to the EMU (legislator, coordination fora, executive powers)

III. Euro Group

A. Organization (composition, role of the EWG)

16.1 16.2 16.4 16.38 16.86 16.92

B. Role in the different crisis

IV. The European Council V. The Euro Summits VI. The Role of the European Council and of the Euro Summits During the Financial and Sovereign Debt Crisis of the Euro: A Critical Assessment

16.107 16.114 16.121

16.128

16.92

I. Introduction 16.1

The Council of the European Union (EU) occupies a central place in the Economic and Monetary Union (EMU), even more so than in any other Union policies.1 It exercises in this area a variety of roles going from a forum for coordination of national policies to legislative functions and executive powers. The different crises that affected the Union and in particular the euro area in the last ten years have strengthened its prominent position, in no small part due to the Council’s ownership by the Member States. Alongside the Council, the Euro Group, which is presided by a fixed-term president, has developed itself as the informal forum where Ministers from the Member States whose currency is the euro discuss matters of common interest. Its role has been decisive, in particular in the Cypriot and Greek crisis, which could have put into question the very existence of the euro area as a whole.

II. Council of the EU 16.2

The Council of the European Union, which is presided by the six months rotating Presidency, is composed of representatives of Member States at ministerial level. * The views expressed by the authors are strictly personal and do not engage the institution for which they work. 1 For an analysis of the post-crisis decision-making in the Union, see also Marc Dawson, ‘The Legal and Political Accountability Structure of “Post‐Crisis” EU Economic Governance’ (2015) 53 Journal of Common Market Studies 976–93. See Part IV concerning other EU institutions. Eugenia Dumitriu Segnana and Alberto de Gregorio Merino, 16 EU Institutions Representing Member States’ Governments In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0020

Council of the EU 429 This chapter focuses on the internal organization and functioning of the Council, with a special emphasis on the powers of the Council in the EMU, as well as on the role and organization of the Euro Group.

16.3

A. Organization of the Council The Council is a single institution which meets in specialized configurations. Its work is organized in a pyramidal manner, involving three main different layers: the ministerial level, the Coreper, and the working group.

1. The singlehood of the Council According to the Treaties, the Council is a single institution, but meets in different configurations.2 Those configurations are listed in Annex I to the Council’s Rules of Procedure.3 Currently, there are ten Council configurations: General Affairs; Foreign Affairs; Economic and Financial Affairs (hereafter ECOFIN); Justice and Home Affairs; Employment, Social Policy, Health and Consumer Affairs (hereafter EPSCO); Competitiveness (Internal Market, Industry and Research); Transport, Telecommunications and Energy; Agriculture and Fisheries; Environment; and Education, Youth and Culture.

16.4

16.5

According to Article 16(6) of the Treaty on European Union (TEU) read in conjunction with Article 236 of the Treaty on the Functioning of the European Union (TFEU), the list of the configurations of the Council will in the future be adopted by the European Council by qualified majority.

16.6

Amongst the ten configurations mentioned above, two Council configurations have a specific role assigned by the Treaties themselves: the General Affairs and the Foreign Affairs configurations.4 The General Affairs Council (hereafter GAC) is entrusted with the task of ensuring the consistency of the work of the different configurations; it prepares and ensures the follow-up of the European Council in liaison with the President of the European Council and the Commission. In practice, this means that the GAC is in charge of any horizontal matters, such as institutional affairs, or until recently, the negotiations pertaining to the withdrawal of the United Kingdom of Great Britain and Northern Ireland (UK) from the Union.

16.7

The Foreign Affairs Council has the task of elaborating the Union’s external action under the strategic guidance of the European Council and of ensuring its consistency.

16.8

The singlehood of the Council means that, notwithstanding the specific role assigned by the Treaties to the GAC in relation with the European Council, there is no hierarchy as such between the different configurations of the Council. Moreover, the name of the configuration

16.9

2 See Article 16(6) TEU. 3 The Rules of Procedure of the Council are based on Article 240 TFEU. They have been elaborated in the 1970 and have been amended regularly in particular in order to reflect the modifications to the Treaties. The current Rules of Procedure date from 2009, after the entry into force of the Lisbon Treaty, see Council Decision of 1 December 2009 adopting the Council’s Rules of Procedure 2009/937/EU [2009] OJ L325/35 (hereafter Council’s Rules of Procedure). 4 See Article 16(6) TEU.

430 EU INSTITUTIONS REPRESENTING MEMBER STATES of the Council does not appear in the title of decisions adopted by the Council. The name of the configuration appears however in brackets in the agenda of the meetings and in the related documents. 16.10

The singlehood of the Council is also reflected by the structure of the Council’s agenda. According to Article 3(6) second subparagraph of the Council’s Rules of Procedure, each part5 of the agenda of the Council is divided into ‘A’ (no discussion) and ‘B’ (for debate) items. In order to ensure a smooth and efficient decision-making process, the A points are inscribed on the agenda of the Council irrespective of the existence of a connection with the configuration concerned. Indeed, where an act is ready for adoption by the Council without further discussions, its adoption is put on the agenda of the closest Council meeting. For instance, in its session of 5 December 2017, the ECOFIN configuration has adopted the conclusions on the implementation of EU-NATO Joint Declaration 2017, which is a Foreign Affairs related act.6

16.11

The decision to entrust a specific Council configuration with the adoption of a particular act belongs to the Presidency, which is responsible for organizing Council work. The Presidency enjoys in that respect a wide margin of discretion and is guided by criteria such as specialization or timing.

16.12

There are also instances where different configurations of the Council are called to work together because the file in question touches upon different spheres of specialization. For illustration, it is recalled that in the framework of the European Semester,7 the adoption of the Country Specific Recommendations (hereafter CSR) provided for in Article 2a(2) of Regulation 1466/978 brings together three different configurations of the Council. Even if the procedure relating to the coordination of economic policies referred to in Article 121(2) TFEU is different than the procedure foreseen in Article 148 TFEU as regards employment policies, the European Council had agreed politically in March 2005 a simplified arrangement for improving the governance based on a three-year cycle.9 At the beginning of that cycle, the Commission presents a ‘strategic report’ which is examined by the relevant Council configurations and discussed subsequently at the spring European Council, ‘which will establish political guidelines for the economic, social and environmental strands of the strategy’. In fine, the Council adopts a set of ‘integrated guidelines’ consisting of broad economic policy guidelines and employment guidelines in accordance with Articles 121 and 148 TFEU. This procedure means that the EPSCO, ECOFIN, and GAC have to examine together and agree on the different draft reports that are to be submitted to the European Council on the basis of Articles 121(2) and 148(5) TFEU. In practice, EPSCO and ECOFIN prepare their own contributions relating to the CSR and the full text is agreed by the GAC. The European Council then adopts conclusions on the draft reports. On the basis of the political guidelines elaborated by 5 According to Article 3(6)(1) Council’s Rules of Procedure, the agenda is divided in two parts: ‘legislative deliberations’ and ‘non legislative activities’. 6 See Council of the European Union, ‘List of ‘A’ Items—Non-legislative activities’ (14907/17 PTS A 88, Brussels, 4 December 2017). 7 See Chapter 28. 8 Council Regulation (EC) 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1997] OJ L209/1. 9 See Presidency Conclusions (7619/1/05 REV 1 CONCL 1, 23 March 2005) 39.

Council of the EU 431 the European Council, the Council (in practice the ECOFIN), acting by qualified majority, adopts the final CSR.

2. Composition of the Council According to Article 16 TEU, the Council is composed of ‘representatives of each Member State at ministerial level, who may commit the government of the Member State in question and cast its vote’. Those representatives may be members of the central government or of a regional government; they are required in any case to have a ministerial level, the capacity of committing the Member State as a whole, and to cast a vote on its behalf.10

16.13

The question of adequate level of representation is of paramount importance, since, according to Article 11(4) of the Council’s Rules of Procedure, the Council may only vote in ‘the presence of a majority of the members of the Council who are, under the Treaties, entitled to vote’. Whenever a vote is taken within the Council, the General Secretariat of the Council verifies whether a critical number of Ministers is present in the room. In the vast majority of cases, for instance where acts applicable to all EU Member States are adopted, the quorum is of fourteen representatives of Member States at ministerial level. In the EMU context, where the decisions concern the euro area, only representatives of the nineteen Member States whose currency is the euro participate in the voting. In such a case, the quorum for decisions to be adopted by the Council is ten.

16.14

According to Article 5 of the Council’s Rules of Procedure, the Commission is a permanent guest to the Council meetings, including in the preparatory bodies of the Council. The same rule applies for the European Central Bank, when it exercises its right of initiative. The Council has however the possibility to decide at simple majority to exclude the Commission or, where applicable, the European Central Bank (ECB) from its deliberations.

16.15

It is also recalled that, according to Article 284(2) TFEU, the President of the ECB is invited to participate in Council meetings when the Council is discussing matters relating to the objectives and tasks of the European System of Central Banks (ESCB).

16.16

In practice, the ECB is a permanent guest to the meetings of the ECOFIN, whether or not it has exercised its right of initiative. In certain circumstances, such as when the Union is conferring a certain mandate to it,11 the European Investment Bank is also invited to its meetings.

16.17

It may happen in certain circumstances that the Council invites to its meetings representatives of other EU institutions or bodies, and even representatives of third parties. In such a situation, the Council decides by simple majority to accept the presence at its meetings of such a third party. Most often, no formal vote is taken on this matter, the acceptance of such a party being implicit. The presence of the third party concerned is limited to the specific item under which it is called to inform and enlighten the Council on the different subjects of

16.18

10 See also Annex I Council’s Rules of Procedure, para 2. 11 See, for illustration, the work in the Council related to the European Fund for Strategic Investments set out under European Parliament and Council Regulation (EU) 2015/1017 of 25 June 2015 on the European Fund for Strategic Investments, the European Investment Advisory Hub and the European Project Investment Portal and amending Regulations (EU) 1291/2013 and (EU) 1316/2013—the European Fund for Strategic Investments [2015] OJ L169/1.

432 EU INSTITUTIONS REPRESENTING MEMBER STATES its competence. The third party cannot attend the proper deliberations between the members of the Council, which are covered, in accordance with Article 6 of the Council’s Rules of Procedure, by the professional secrecy. 16.19

16.20

The representatives of Member States and of the Commission or, where appropriate, of the ECB, may be assisted during the Council meetings by other officials. In practice, where a Council meeting is convened, the Member States’ representation is ensured at different levels: ministerial level, officials originating from the permanent representations (in particular Ambassadors) and officials coming from the competent ministry. In certain situations, it may however happen that not all Member States are represented by a Minister in a meeting. If that is the case, the Permanent Representative of the Member State concerned (or where appropriate his Deputy) expresses the position of his or her government, but when a vote is taken, in accordance with Article 4 of the Council’s Rules of Procedure, that vote is casted by a Minister originating from a different Member State. The maximum number of persons per delegation in the Council meeting room is set by the Council.

3. Preparatory bodies of the Council The work of the Council is structured in a pyramidal manner, with the ministerial level at its top. The ministerial level has the monopoly for adopting substantial decisions in the name of the Council.

16.21

The work of the ministerial level is prepared by the Committee of Permanent Representatives of the Governments of the Member States (hereafter Coreper). The Treaties12 refer to Coreper as a preparatory body of the Council without referring specifically to its two configurations, which have been developed in practice since 1962 in order to respond to its increasing workload. Coreper meets in two configurations: Coreper Part 2 (hereafter Coreper II) and Coreper Part 1 (hereafter Coreper I).

16.22

Coreper II (composed of the Permanent Representatives) traditionally feeds in the work of the following Council configurations: GAC, Foreign Affairs, ECOFIN, and Justice and Home Affairs. Its agenda is reviewed by the Antici group (composed of diplomats in charge with assisting the Permanent Representatives), established in 1975 and named after its first Chairman. The Antici group also settles technical and organizational details and provides the platform for expressing the initial positions of the Member States in view of the incoming Coreper meeting.

16.23

Coreper I (composed of the Deputy Permanent Representatives) prepares the work of the remaining configurations. According to Article 19 of the Council’s Rules of Procedure, any point which is put on the agenda of the Council has to be examined in advance by Coreper, unless the Council at unanimity decides otherwise. Its work is prepared by the Mertens group composed of diplomats in charge with assisting the Deputy Permanent Representatives, and also named after its first Chairman. The Mertens group was set up in 1993 and has, in relation to Coreper I, similar functioning and tasks as the Antici group in relation to Coreper II.

12

See Article 16(7) TEU and Article 240 TFEU.

Council of the EU 433 At its level, Coreper aims at reaching agreement on the different files submitted to the Council. However, the decision-making power is retained by the Council, which has the power either to confirm the agreement reached at the level of the Coreper or to arrive at a different result.

16.24

Coreper has been vested by the Council with the power to adopt eleven types of procedural decisions which are exhaustively listed in Article 19(7) of the Council’s Rules of Procedure. Those decisions may concern: holding a Council meeting in a place other than Brussels or Luxembourg; authorizing the production of a copy of, or an extract from, a Council document for use in legal proceedings; holding a public debate in the Council or not holding in public a given Council deliberation; publicity of the results of votes and statements entered in the Council minutes; the use the written procedure; approval or amendment of Council minutes; publication of a text or an act in the Official Journal of the European Union; consultation of an institution or body wherever such consultation is not required by the Treaties; setting or extending a time limit for consultation of an institution or body; extending the periods laid down in Article 294(14) TFEU relating to the third reading in the context of the ordinary legislative procedure; and approval of letters to be sent to an institution or body.

16.25

As clearly indicated by the European Court of Justice in its judgment in Case C-25/94:

16.26

Coreper is not an institution of the [Union] upon which the Treaty confers powers of its own but an auxiliary body of the Council, for which it carries out preparation and implementation work’ and ‘Coreper’s function of carrying out the tasks assigned to it by the Council does not give it the power to take decisions which belongs, under the Treaty, to the Council.13

A concrete example of those procedural powers of the Coreper is offered, in the legislative process, by the fact that the agreement of the Council to the outcome of the trilogue negotiations14 at the stage of the first reading is as a rule expressed in a letter sent by the chair of Coreper to the chair of the relevant committee of the European Parliament.15 This letter reflects the details of the substance of the agreement, in the form of amendments to the Commission proposal, and indicates the Council’s willingness to accept that outcome, subject to legal-linguistic verification, if the text as such is voted by the European Parliament plenary. The Coreper letter does not produce legal effects per se, it is merely a preparatory act enabling the future adoption by the Council; it is however a highly important political act. At the end of the first reading stage, the Council, at ministerial level, intervenes to approve the European Parliament’s position. Would an act of Coreper produce however legal

13 Case C-25/94 Commission v Council [1996] ECR I-1469, paras 26–27. 14 The trilogues are the tripartite negotiations on legislative files involving the two branches of the legislator: the European Parliament and the Council, as well as the Commission, in its quality of holder of the power of legislative initiative. For more information on trilogues, see the Joint Declaration on practical arrangements for the codecision procedure of the European Parliament, Council and Commission [2007] OJ C145/5 (hereafter Joint Declaration on practical arrangements for the codecision procedure); European Parliament, ‘Codecision and Conciliation—A guide to how the European Parliament co-legislates under the ordinary legislative procedure’ accessed 5 February 2020, as well as Council, ‘Guide to the ordinary legislative procedure’ (QC-04-15-816-EN-N, May  2016). 15 See point 14 Joint Declaration on practical arrangements for the codecision procedure.

16.27

434 EU INSTITUTIONS REPRESENTING MEMBER STATES effects, the Court of Justice has clearly indicated that, the Union being based on the respect of the rule of law, such an act would be challengeable before it.16 16.28

Underneath the Coreper, there are around 150 preparatory bodies that feed in the work of Coreper, which can be divided into two categories: (1) bodies established by the Treaties, at intergovernmental level or by a Council decision;17 (2) committees and working parties established by Coreper to deal with specific issues or files. The General Secretariat of the Council publishes the updated list of those bodies on the website of the Council.18

16.29

In the context of the EMU, the Economic and Financial Committee (hereafter EFC), a permanent body established by the Treaties, deserves a special attention.

16.30

The EFC has been established by Article 109c(2) of the Treaty on the European Communities (introduced by the Maastricht Treaty19), which was succeeded by Article 134 TFEU. The Maastricht Treaty foresaw its set up at the start of the third stage of the Economic and Monetary Union (EMU), which began on 1 January 1999. As for its predecessor, the Monetary Committee created by the Maastricht Treaty, the EFC’s aim is ‘to promote co- ordination of the policies of Member States to the full extent needed for the functioning of the internal market’.

16.31

The EFC has the following tasks: it can deliver opinion at the request of the Council or of the Commission or on its own initiative; it keeps under review the economic and financial situation of the Member States and of the Union and reports regularly thereon to the Council and to the Commission, in particular on financial relations with third countries and international institutions. Without prejudice to Article 240 TFEU relating to the role of Coreper, it contributes to the preparation of the work of the Council referred to in certain provisions of the Treaties,20 relating in particular to budgetary surveillance and carries out other advisory and preparatory tasks assigned to it by the Council. It examines, at least once a year, the situation regarding the movement of capital and the freedom of payments and, as long as there are Member States with a derogation within the meaning of Article 139 TFEU, it keeps under review the monetary and financial situation as well as the general payments system of those Member States.

16.32

The role of the EFC as regards the financial stability of the Union and of its Member States or the budgetary surveillance is also reflected in the secondary legislation. The ‘two-pack’,21 16 Joined Cases C-626/15 and C-659/16 Commission v Council (AMP Antarctique) [2018] ECLI:EU:C:2018:925, para 61. 17 See in particular the Economic and Financial Committee (hereafter EFC), set up by Article 134 TFEU or the Financial Services Committee (hereafter FSC) set up on 18 February 2003 by the Council with a mandate to provide for cross-sectoral strategic reflection separate from the legislative process; to help to define the medium-and long-term strategy for financial services issues; to consider sensitive short-term issues; to assess progress and implementation; and to provide political advice and oversight on both internal and external issues (Council Decision (EC) 2003/165 of 18 February 2003 concerning the establishment of the Financial Services Committee [2003] OJ L67/17). 18 Council of the European Union, ‘Annex I—List of Council Preparatory Bodies’ (15371/17 POLGEN 160, Brussels, 9 January 2018). 19 Treaty on European Union [1992] OJ C191/1. 20 Articles 66, 75, 121(2), (3), (4), and (6), 122, 124, 125, 126, 127(6), 128(2), 129(3) and (4), 138, 140(2) and (3), 143, 144(2) and (3), and 219 TFEU. 21 European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1 and European Parliament and Council Regulation

Council of the EU 435 for instance, entrusts the EFC with a significant role as regards the monitoring of the situation of the Member States facing severe difficulties with regard to their financial stability, of those receiving financial assistance, and those exiting a financial assistance programme (the enhanced surveillance) or as regards the correction of excessive deficit procedure. The detailed provisions concerning its composition are laid down by the Council, on proposal from the Commission, in accordance with the procedure set up by Article 134(3) TFEU.22 The EFC is composed by representatives of the Member States, the Commission and the European Central Bank. It has a permanent chair elected for a renewable two-year term. The President of the EFC may also hold the office of President of the Euro Group Working Group, which is the preparatory body of the Euro Group.

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In the financial services area, the Financial Services Committee23 provides advice and oversight for the Council and the Commission in relation to certain financial market issues. It has the following tasks: providing cross-sectoral strategic reflection (separate from the legislative process, which is entrusted as a general rule, to the Working Party on Financial Services), contributing to defining the medium-and long-term strategy for financial services issues, considering sensitive short-term issues, assessing progress and implementation of different decision or legislative acts, providing political advice and oversight on both internal issues (eg single market, including implementation of the Financial Services action plan) and external issues (eg WTO). It is composed of high-level representatives of the Member States and the Commission and it has a fixed chair appointed from among the representatives of the Member State for two years. The Member State whose representative is appointed chairperson has one additional representative on the Committee during the chairperson’s term of office. The European Central Bank, the relevant Union committees of regulators and the acceding countries enjoy an observer status. The Financial Services Committee reports to the Economic and Financial Committee.

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The Working Party on Financial Services is the standing working party, chaired by the rotating Presidency, and entrusted as a general rule with the examination of any legislative proposal in this area. For practical reasons, it is divided in sub-areas corresponding to each legislative proposal examined. The agenda of each meeting indicates in a clear manner, in brackets, the sub-area concerned. However, the main Banking Union legislative files (for example the Single Resolution Mechanism24 or the European Deposit Insurance Scheme25)

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(EU) 473/2013 of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area [2013] OJ L140/11. 22 See Council Decision of 21 December 1998 on the detailed provisions concerning the composition of the Economic and Financial Committee (98/743/EC) [1998] OJ L358/109 and Council Decision of 31 December 1998 adopting the Statutes of the Economic and Financial Committee (1999/8/EC) [1999] OJ L5/71 lastly revised by of 26 April 2012 on a revision of the Statutes of the Economic and Financial Committee (2012/245/EU) [2012] OJ L121/22. 23 Established by Council Decision of 18 February 2003 concerning the establishment of the Financial Services Committee (2003/165/EC) [2003] OJ L67/17. 24 See Council of the European Union, ‘Establishment of an Ad Hoc Working Party on the Single Resolution Mechanism (SRM)’ (12020/13 EF 142 ECOFIN 679, Brussels, 8 July 2013). Initially, this Working Party was mandated to discuss the Commission legislative proposal on the SRM and it was later extended to examine the implementation of the Single Resolution Mechanism and the Council’s implementing regulation on ex-ante contributions to the Single Resolution Fund. 25 See Council of the European Union, ‘Establishment of an Ad Hoc Working Party on the Strengthening of the Banking Union’ (5006/16 EF 4 ECOFIN 4 CODEC 37, Brussels, 14 January 2016) in charge in particular with the examination of the European Deposit Insurance Scheme legislative proposal.

436 EU INSTITUTIONS REPRESENTING MEMBER STATES have been attributed to ad hoc working parties that were established by Coreper. Once those ad hoc working parties fulfil their mandate or at the expiry at the timeline indicated in their terms of reference, they cease to exist. 16.36

The Financial Counsellors Working Party (also chaired by the rotating Presidency) has a coordination role in view of each ECOFIN meeting, allowing Member States and the Commission to sort out certain organizational aspects of the incoming Council meeting.

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The other preparatory bodies of the ECOFIN configuration are: the Working Party on Own Resources, the Working Party on Tax Questions (divided in: Indirect Taxation and Direct Taxation), the Code of Conduct Group (Business Taxation, which has five subgroups), the High Level Working Party, the Budget Committee, the Working Party on Combating Fraud, the Working Party on Insurance, the Export Credits Group, and the Ad hoc Working Party on the Strengthening of the Banking Union.

B. Functioning of the Council 16.38

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The Council is the only EU institution characterized by constant changes to its composition. Indeed, representatives of Member States change regularly, its Presidency rotates every six months. In those circumstances, its General Secretariat has an important role to play to preserve its institutional memory and the consistent conduct of its proceedings.

1. System of rotating presidencies According to Article 16(9) TFEU, the Presidency of Council configurations other than the Foreign Affairs configuration shall be held by ‘Member States representatives in the Council on the basis of equal rotation, in accordance with the conditions established in accordance with Article 236 TFEU’. The Council is the only institution of the Union that has a short-term rotating Presidency. This system of rotating presidencies may be considered by some cumbersome and inefficient. It has to be underlined, however, that it allows all Union Member States to occupy the driving seat of the institution—a position which confers them direct influence the European agenda for eighteen months (duration of the trio) and the prime responsibility for implementing this agenda of the highest possible speed during six months. Each rotating Presidency comes with team of fully motivated civil servants that for the duration of their own Presidency endeavour to achieve the maximum of results possible.

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The principle of equal rotation aims at allowing all Member States, no matter their size or their geographical location, to exercise the Presidency of the Council. Article 236 TFEU further specifies that the European Council, at qualified majority, decides on the Presidency of Council configuration other than the Foreign Affairs configuration.

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According to Article 1 of the European Council Decision on the exercise of the Presidency of the Council of 1 December 2009,26 adopted on the basis of Article 236 TFEU, the Presidency of the Council for all others configurations than the Foreign Affairs configuration is to be held by ‘pre-established groups of three Member States for a period 26 European Council Decision of 1 December 2009 on the exercise of the Presidency of the Council (2009/881/ EU) [2009] OJ L315/50.

Council of the EU 437 of 18 months’ determined on a basis of equal rotation among the Member States and respecting their diversity ‘and geographical balance within the Union’. This pre-established group is commonly known as the ‘trio’ of presidencies and it elaborates a common programme for the entire period of eighteen months. Each member of the group exercises the Presidency for a period of six months and is assisted in its tasks by the other members of the trio. The added value of the trio resides both in the existence of a common programme for a year and a half and in the assistance the members of the trio can rely upon, which may sometimes take the form of a replacement by a member of the trio of the Presidency in office for certain meetings. Council Decision laying down measures for the implementation of the European Council Decision on the exercise of the Presidency of the Council, and on the chairmanship of preparatory bodies of the Council,27 sets out the order in which the Member States will hold the Presidency of the Council until the end of 2030.

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As regards the Coreper, Article 2 of the European Council Decision establishes that it ‘shall be chaired by a representative of the Member State chairing the General Affairs Council’. It is also recalled that, even in the very specific situation of Foreign Affairs matters, Coreper continues to be presided by the rotating Presidency, despite the fact that both the Foreign Affairs configuration of the Council and its preparatory bodies are presided over by representatives of the High Representative of the Union for Foreign Affairs and Security Policy. This is justified by the specific horizontal role of Coreper, which is, according to Article 19(1) of the Rules of Procedure of the Council, to ‘ensure consistency of the European Union’s policies and actions and see to it that the [certain] principles and rules are observed’.

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The preparatory bodies of the Council (except for the Foreign Affairs configuration and the bodies that have a fixed/elected chair or are chaired by the General Secretariat of the Council28) are also chaired by representatives of the rotating Presidency.

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The following preparatory bodies of the ECOFIN configuration are chaired by a fixed/ 16.45 elected chair: the Economic and Financial Committee, the Financial Services Committee and the Code of Conduct Group (Business Taxation). Articles 1(4), 19(4), 19(6), and 20 of the Council’s Rules of Procedure further elaborate on the role and on the exercise of the Presidency at the different levels.

2. Conduct of proceedings As a general rule, any file, whether it is a legislative proposal, a recommendation from the Commission or other initiative that reaches the Council, is attributed to a working party or to a committee which conducts the ground work at the technical level. During its passage through the Council, the file moves from the working party level to Coreper and then to

27 Council Decision (EU) 2016/1316 of 26 July 2016 amending Decision 2009/908/EU, laying down measures for the implementation of the European Council Decision on the exercise of the Presidency of the Council, and on the chairmanship of preparatory bodies of the Council [2016] OJ L208/42. 28 Council of the European Union, ‘Annex III—List of Preparatory Bodies with a fixed chair’ (15371/17 POLGEN 160, Brussels, 9 January 2018) accessed 5 February 2020.

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438 EU INSTITUTIONS REPRESENTING MEMBER STATES Council. The Presidency of the Council may attribute it to a standing working party or committee or invite Coreper to create a new working party with a specific mandate. 16.48

According to the General Secretariat 2017 note relating to the list of Council preparatory bodies: substantial and important new technical proposals requiring specific expertise should, as a rule, be included within the remit of the competent existing Working Party. If necessary for practical reasons, a specific sub-area may be listed rather than creating a new permanent or ad hoc Working Party. The listing of sub-areas does not imply that Working Party remits are confined to the sub-areas in question; Working Parties cover any other matters falling within their general scope. The Presidency may request the listing of such sub-areas on the basis of practical need.29

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The working party discusses thoroughly the substance of the file concerned and when either there is a reasonable prospect of progress, or when the positions of the Member States are sufficiently clarified at the technical level and a blockage at the technical level is reached, the file is submitted to Coreper, and then to the Council either for confirmation or for further discussions.

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Article 21(2), of the Council’s Rules of Procedure specifies that: [u]‌nless considerations of urgency require otherwise, the Presidency shall postpone to a subsequent Coreper meeting any legislative acts on which the committee or working party has not completed its discussions at least five working days prior to Coreper’s meeting.

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This requirement aims at ensuring the best efficiency possible of the discussions at Coreper level, where files should be sent only where the discussions at the lower level have reached the degree of maturity necessary for a fruitful discussion in Coreper.

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Where the discussions at the Coreper level confirm the agreement reached at the technical level, the file is send to the Council for any formal substantial decision that may, as appropriate, be required. As regards the 2017 revision of the Code of Conduct of the Stability and Growth Pact,30 for instance, after discussions at the level of the EFC, which resulted in the EFC agreement of 15 May 2017, Coreper has approved this revision on 24 May 2017 and the Council has endorsed it during its meeting of 16 June 2017.31

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A file may also reach the Coreper level where there is a need to unlock a situation following the clarification of the positions of the Member States at technical level. Coreper may provide for the necessary guidance allowing for further progress to be made, and in such case 29 Council of the European Union, ‘List of Council Preparatory Bodies’ (15371/17 POLGEN 160, Brussels, 9 January 2018) para 6 accessed 5 February 2020. 30 See Council of the European Union, ‘Revision of the Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format and content of Stability and Convergence Programmes’ (9346/17 ECOFIN 425 UEM 171, Brussels, 18 May 2017); and Council of the European Union, ‘Revised Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format and content of Stability and Convergence Programmes’ (9344/17 ECOFIN 423 UEM 170, Brussels, 18 May 2017). 31 See Council of the European Union, ‘Outcome of the Council Meeting—3549th Council meeting’ (10391/17 (OR. en) PRESSE 36 PR CO 36, Luxembourg, 16 June 2017).

Council of the EU 439 the file returns to the working group, or a discussion at the ministerial level is considered necessary and in such a case the file is transmitted to the Council itself. Where there is an urgent need to adopt an act of the Council and the normal procedure for a Council meeting cannot be followed, there is the possibility to use the written procedure. The use of the written procedure requires, according to Article 12 of the Council Rules of Procedure, that all Member States agree to its use. When the Commission has brought before the matter concerned by that procedure to the Council, its acceptance of the use of the written procedure is also required. Once the procedural decision to use the written procedure has been validly taken by Council or Coreper by unanimity, the substantive decision is taken following the regular voting rules relating to its adoption (which is, in most of the cases, the qualified majority).

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There is also a simplified written procedure, called, according to Article 12(2) of the Rules of Procedure, the ‘silence procedure’. The instances and the conditions where this procedure may be used are exhaustively laid down in Article 12(2): replies to questions from the European Parliament; appointment of members and their alternates of the Economic and Social Committee and of the Committee of Regions; consultation of institutions, bodies, offices or agencies of the Union and the implementation of the common foreign and security policy through the COREU network (which is a protected system of exchange of information between the Union Member States, the Council and the External Action Service).

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The Council’s Rules of Procedure specify in Article 3 how the agenda of the Council is set. Those rules only concern the ministerial level and are therefore not applicable to Coreper or to working parties.

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The provisional agenda of any Council meeting takes into account the Council’s eighteen- 16.57 month programme drafted by the ‘trio’ of presidencies. It is established by the Presidency, with the help of the General Secretariat of the Council. Where a Member State or the Commission requests the General Secretariat to include an item on the agenda at least sixteen days before the relevant meeting of the Council, that item is put on the provisional agenda of the Council. Any such request has to be accompanied to the relevant documents.

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The provisional agenda is sent to the other Member States and to the Commission at least fourteen days before the meeting. It also reaches in the same time the national parliaments, since Protocol No 1 to the Treaties fixes certain deadlines to their benefit as regards draft legislative acts. According to Article 3(4) of the Rules of Procedure, the documents relating to the items put on the provisional agenda have to be sent to all Member States and to the Commission at the latest by the date when the provisional agenda is sent out. The General Secretariat also informs Member States and the Commission of the requests received after the expiry of the sixteen days deadline.

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The agenda of any Council meeting is dived in two parts: legislative deliberations and non- 16.60 legislative activities. The distinction between the two parts is very important because of the publicity regime and of the specific deadlines related to the national parliaments. It is recalled in this context that, according to Article 16(8) TEU, any deliberation and vote on a draft legislative act in the Council is public. Article 7 of the Council’s Rules of Procedure

440 EU INSTITUTIONS REPRESENTING MEMBER STATES further specify how the legislative procedure and openness are organized, in particular in relation to the publicity of documents and the broadcasting of the Council sessions. 16.61

Each part of the agenda contains a list of ‘A’ items and a list of ‘B’ items. The ‘A’ items are those for which an approval of the Council is possible without further discussions, since there is in principle already an agreement on substance reached at the level of the preparatory bodies of the Council. The inscription of an item on this list does not prevent a Member State or the Commission to express an opinion on it at the time of the approval of the point or the possibility to record a statement in the minutes to the Council meeting. The Rules of Procedure foresee that, unless the Council decides otherwise, an ‘A’ item has to be withdrawn from the agenda if it leads to further discussion or if a Member State or the Commission asks for its removal from the agenda. This means that, where an ‘A’ item requires further discussion, the Council may decide, when adopting its agenda by simple majority at the beginning of the meeting, to transform it in a ‘B’ point. The ‘B’ items are inscribed for discussion. The discussion may lead either to the approval or to the conclusion that further work is required at technical level. This does not exclude in practice that a point provisionally inscribed under the ‘B’ items is adopted without a full discussion during the Council meeting. In the Council internal jargon, such items are called ‘false B points’.

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Where items on the agenda bear an asterisk, they may be submitted to a vote at the request of the Presidency, a Member State, or the Commission. If the asterisk has not been put on the provisional agenda, Member States or the Commission may oppose the voting to take place. Only items for which all procedural requirements32 imposed by the Treaties have been complied may be put to a vote.

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The Agenda may also include ‘[a]‌ny other business’ items. Any request for the inclusion of such an item has to be accompanied, according to Article 3(9) of the Rules of Procedure, by an explanatory document. Such items cannot result in the adoption of a decision and as in principle they are not supposed to give rise to a discussion.

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In addition to the deadlines previously mentioned, the setting of the agenda for legislative items has to respect a period of eight-week, which stems from the Protocol No 1 on the role of national parliaments in the EU and from the Protocol No 2 on the application of the principles of subsidiarity and proportionality.

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According to Article 4 of Protocol No 1, an eight-week period has to elapse between the moment where the draft legislative act is made available to the national parliaments in all official languages of the Union and the date where the Council puts on its agenda its adoption or the adoption of a position within the meaning of Article 294 TFEU relating to that draft legislative act. Derogations are possible for urgency reasons that need to be spelled out by the Council in the act or in the position itself.

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Article 4 of Protocol No 1 also establishes that a ten-day period is to be respected between the moment where the draft legislative act is placed on the provisional agenda of the 32 For instance the consultation of the European Central Bank in the cases where the Treaties provide for its mandatory consultation.

Council of the EU 441 Council and the moment where a position on that draft is formally adopted by the Council. Derogations are possible in this case also for urgency reasons that need to be given by the Council explicitly. These derogations have already been invoked in relation to the adoption of the budget of the Union and a recital in the decision adopting the Council’s position on the draft budget states the reasons for the urgency justifying it.33

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The agenda is adopted at the beginning of each Council meeting, by simple majority, except for items that have not been included on the provisional agenda. The inclusion of such new last-minute item requires unanimity within the Council.

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3. Voting There is no formal vote on each item submitted adoption to the Council. According to Article 11 of its Rules of Procedure, the Council votes on the initiative of its President. There is however an obligation for the President of the Council to proceed to voting where the request for a vote originating from a Member State or from the Commission has the support of the majority of the Council’s members. According to Article 11(2) of the Council Rules of procedure, the members of the Council vote in the order of the Member States established in the list of the rotating presidencies, starting with the incoming Presidency of the Council. The voting can only take place if a majority of the members of the Council participating to the vote is present.

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The Lisbon Treaty has established the qualified majority as the general voting rule within the Council. The exceptions to this rule, which are the simple majority and the unanimity, are exhaustively defined by the Treaties. The Treaties also specify the instances where there is recourse to the simple majority and to unanimity.

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Since 1 November 2014, according to Article 16(4) read in conjunction with Article 238(2), where the Council acts on a proposal from the Commission or from the High Representative of the Union for Foreign Affairs and Security Policy (which is the majority of instances), the qualified majority is defined as at least 55 per cent of the members of the Council comprising at least fifteen Member States. The population of those Member States has to comprise at least 65 per cent of the population of the Union. The blocking minority has to include at least four Member States.

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Where the Council does not act on a proposal from the Commission or from the High Representative (for instance where the Council acts following a recommendation from the Commission as it is the case for the draft guidelines of the economic policies of the Member

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33 See for illustration, Recital (3) of Council Decision of 30 October 2013 adopting the Council’s position on draft amending budget No 8 of the European Union for the financial year 2013 (17146/1/12 REV 1 FIN 990, Brussels, 5 December 2012) Annex 2: [G]‌iven the need to adopt a Council position on the new draft budget as soon as possible with a view to a budget being definitively adopted before the beginning of the financial year 2013, thus ensuring the continuity of the Union’s action, it is justified to shorten, in accordance with Article 3(3) of the Council’s Rules of Procedure, the eight-week period for the information of National Parliaments, as well as the ten-day period foreseen for placing the item on the Council’s provisional agenda laid down in Article 4 of Protocol No 1.

442 EU INSTITUTIONS REPRESENTING MEMBER STATES States and of the Union referred to in Article 121(2) TFEU), the qualified majority is defined as at least 72 per cent of the members of the Council comprising at least 65 per cent of the population of the Union. 16.73

Where, under the Treaties, all members of the Council do not participate in the voting, the qualified majority is calculated only on the basis of the participating Member States. According to Article 238(3)(b) TFEU, in such cases, the blocking minority must include at least a number of Member States that represents 35 per cent of the population of the participating Member States plus one Member.34 In the EMU context, this is in particular the case for the measures set out in Article 136 TEU, which concern the coordination and surveillance of the budgetary discipline and the setting of the economic policy guidelines for the euro area Member States, eg the Council recommendations on the economy policy of the euro area, adopted annually,35 or the decisions of the Council imposing sanctions in an imbalance procedure on the basis of Article 3 Regulation (EU) 1174/2011.36

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The simple majority, which was, before the entry into force of the Lisbon Treaty the voting rule by default set out by the Treaties, is currently used in very limited circumstances, in particular for the organization of the General Secretariat of the Council, on procedural questions (see Article 240(2) and (3) TFEU), for inviting the Commission to undertake studies and to submit proposals (Article 241 TFEU), or when adopting the rules governing the different committees provided for in the Treaties (Article 242 TFEU). According to Article 238(1) TFEU, in order for an act to be adopted by simple majority, the majority of the component members of the Council needs to express a positive vote.

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The unanimity is reserved for decisions of particular political significance. In the context of the economic and monetary union, the unanimity is necessary for example when the Council irrevocably fixes, in accordance with Article 140(3) TFEU, the rate at which the euro is to be substituted for the former currency of the new Member State that joins the euro area. Unanimity within the Council is also required, according to Article 113 TFEU, for the harmonization of taxation legislation, or, according to Article 352 TFEU, for matters for which there is no specific legal basis within the Treaties and for which the action of the Union is necessary, within the framework of the Union policies, ‘to attain one of the objectives set out in the Treaties’.37

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According to Article 238(4) TFEU, the abstentions by the Members either present to the meeting or represented are not an obstacle to the adoption of the act concerned by the vote at unanimity. 34 This only applies in instances where the Council acts on proposal from the Commission or from the High Representative. 35 See, for illustration, Council Recommendation of 14 May 2018 on the economic policy of the euro area [2018] OJ C179/1. 36 European Parliament and Council Regulation of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8. 37 The Commission has proposed the use of Article 352 TFEU as a legal basis for the integration of the European Stability Mechanism into the Union framework (see Commission, ‘Proposal for a Council Regulation on the establishment of the European Monetary Fund’ COM (2017) 827 final).

Council of the EU 443

4. Role of the General Secretariat According to Article 240(2) TFEU, the Council is assisted by a General Secretariat, which is placed under the responsibility of a Secretary General. The General Secretariat of the Council also assists the European Council.

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The Secretary General is formally appointed by the Council acting by qualified majority. In practice, his or her appointment is also endorsed by the Heads of States or Government.

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The General Secretariat of the Council is composed of independent civil servants, to which the Staff Regulations of Officials of the European Union and the Conditions of employment of other servants of the European Union38 are applicable. The system of Presidencies of the Council would be difficult to handle in the absence of the General Secretariat of the Council which contributes to the continuation of the work of the institution.

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According to its mission statement:39

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the General Secretariat of the Council ensures that the European Council and the Council operate smoothly and lends them every assistance necessary so they can perform the missions conferred on them by the treaties to further the development of the Union. The General Secretariat provides advice and support to members of the European Council and the Council and to their Presidents in all areas of activity, as well as in the context of ministerial meetings and intergovernmental conferences.

More specifically, the General Secretariat assists the Presidency of the Council, at all working levels, on a daily basis, by organizing the necessary meetings, advising the Presidency, drafting the agenda and, where applicable, the minutes of such meetings. The General Secretariat is also participating, alongside the Presidency, to the negotiations within the Council and between institutions on draft Union acts (in particular those taking place in the framework of trialogues between the European Parliament, the Council and the Commission).

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Under the instructions of the Presidency, the General Secretariat is also in charge with the conduct of the written procedure foreseen in Article 12 of the Council Rules of Procedure. It also draws up every month a summary of the acts adopted by written procedure.

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The Council Legal Service, which is part of the General Secretariat of the Council, provides legal opinions to the Council and its preparatory bodies and represents the Council in judicial proceedings before the Union Courts.

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The General Secretariat of the Council also chairs the following preparatory bodies of the Council: the Security Committee (and its sub-areas), the Ad hoc Working Party on the United Kingdom, the Working Party on Information, the Coordination Committee for Communication and Information Systems (CCCIS), the Working Party on Codification

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38 Council Regulation No 31 (EEC) 11 (EAEC) laying down the Staff Regulations of Officials and the Conditions of Employment of Other Servants of the European Economic Community and the European Atomic Energy Community [1962] OJ 45/1385, as subsequently amended. 39 Council of the European Union, ‘GSC Mission Statement’ accessed 5 February 2020.

444 EU INSTITUTIONS REPRESENTING MEMBER STATES of Legislation, the Working Party of Legal/Linguistic Experts and the Working Party on  E-Law. 16.85

Lastly, the General Secretariat of the Council may fulfil the duties of depositary of agreements concluded by the Union or between Member States, for example, in relation to the Agreement on the transfer and mutualization of contributions to the single resolution fund signed on 21 May 2014 by all Union Member States except for Sweden and the UK.40

C. Specific powers relating to the EMU (legislator, coordination fora, executive powers) 16.86

In the context of the EMU, the Council may act with three different hats: it plays its usual role of legislator, either together with the European Parliament (as in the case provided for in Article 121(6) TFEU in relation to the detailed rules for the multilateral surveillance procedure41), or alone (as in the case of Union financial assistance referred to in Article 122 TFEU42); it has the role of coordination fora of the economic policies of the Member States (see Article 121(1) TFEU), moreover, in accordance with Article 121(3) and (4) TFEU, the Council monitors and assesses economic developments in the Member States and compliance with the broad economic-policy guidelines set for each of them, and where appropriate, it addresses the necessary recommendations to them); lastly, as acknowledged by the Court of Justice,43 it has executives powers either deriving directly from the Treaties or conferred upon it by the legislator in accordance with Article 291(2) TFEU. The Court has clarified that an act which gives the power to the Council to impose fines on a Member State cannot be based on Article 291(2) TFEU, because the imposition of fines is, by nature, an act that cannot be implemented at the level of the Member States and requires therefore an action at Union level.44

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In relation to this last type of powers, it has to be recalled that the Council ensures that the Member States respect the budgetary discipline. In particular, the Council is authorized, by virtue of Article 126 TFEU, to decide that a Member State has or is liable to have an excessive deficit and to address various recommendations and decisions to it.45

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Article 126 TFEU organizes the procedure around the Council powers in an escalation mode. This procedure is further developed by detailed rules and definitions adopted also by 40 See Council of the European Union, ‘Agreement on the transfer and mutualisation of contributions to the Single Resolution fund’ (8457/14 EF 121 ECOFIN 342, Brussels, 15 May 2014). 41 See European Parliament and Council Regulation (EU) 473/2013 of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area [2013] OJ L140/11. 42 See Council Regulation (EU) 2016/369 of 15 March 2016 on the provision of emergency support within the Union [2016] OJ L70/1. See further Chapter 27. 43 See Joined Cases C- 103/ 12 and C- 165/ 12 European Parliament and Commission v Council [2014] ECLI:EU:C:2014:2400, para 50, and Case C- 113/ 14 Germany v European Parliament and Council [2016] ECLI:EU:C:2016:635, paras 55 and 56, as well as Case C-270/12 United Kingdom v European Parliament and Council [2014] ECLI:EU:C:2014:18, paras 78–86 and 98. 44 Case C-521/15 Kingdom of Spain v Council of the European Union [2017] ECLI:EU:C:2017:982, para 49. 45 See Chapter 28.

Council of the EU 445 the Council on the basis of Article 126(14) TFEU46 or on the basis of Article 136 in combination with Article 126(6) TFEU.47 As acknowledged by the General Court, the Council has a large margin of discretion when determining the measures based on Articles 126(9) and 136 TFEU,48 justified by the arbitration to be made amongst different choices of economic policy. However, in its famous judgment of 2004 relating to the excessive deficit procedure concerning Germany and France,49 the Court emphasized that while the Council has indeed a certain margin of discretion in dealing with this matter and that, in certain circumstances, the Council may be unable make a decision because of the lack of the required majority, the Council cannot create new conditions or new procedural steps for dealing with a specific situation which go beyond the rules proscribed by the Treaties or by the secondary law adopted in application of the Treaties.

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The Council acts through the procedure by qualified majority.50 However, according to Article 7 of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG):51

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[w]‌ hile fully respecting the procedural requirements of the Treaties on which the European Union is founded, the Contracting Parties whose currency is the euro commit to supporting the proposals or recommendations submitted by the European Commission where it considers that a Member State of the European Union whose currency is the euro is in breach of the deficit criterion in the framework of an excessive deficit procedure. This obligation shall not apply where it is established among the Contracting Parties whose currency is the euro that a qualified majority of them, calculated by analogy with the relevant provisions of the Treaties on which the European Union is founded, without taking into account the position of the Contracting Party concerned, is opposed to the decision proposed or recommended.

Article 7 TSCG does not alter as such the voting rules in the Council as set out by the Union Treaties; it contains however an obligation in international law of the Member States to have a certain behaviour when a vote in accordance with Article 126 TFEU is required and introduces the reverse qualified majority in the functioning of Article 126 TFEU. It is also recalled that, in accordance with its Article 2(2), the TSCG has to be applied ‘insofar as it is compatible with the Treaties on which the European Union is founded and with European Union law’.

46 See Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6. 47 European Parliament and Council Regulation (EU) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1. 48 Case T-531/14 Sotiropoulou and Others v Council [2017] ECLI:EU:T:2017:297, paras 80 and 81. 49 Case C-27/04 Commission v Council [2004] ECR I-06649, paras 81ff. 50 For the adoption of the measures referred to in Article 126(6) to (9), 126(11) and (12), the Member State concerns is excluded from the voting and the qualified majority of the other Member States is calculated in accordance with Article 238(3) (a) TFEU, 55 per cent of the members of the Council representing the participating Member States comprising at least 65 per cent of the population of these States. 51 Treaty on Stability, Coordination and Governance in the Economic and Monetary Union accessed 5 February  2020.

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446 EU INSTITUTIONS REPRESENTING MEMBER STATES

III. Euro Group A. Organization (composition, role of the EWG) 16.92

The Treaty of Lisbon granted a formal recognition to an informal meeting of Ministers, previously created by a Resolution of the European Council of 13 December 1997 and introduced specific provisions relating to the Euro Group with a view to reinforcing the governance of the euro area, building on the modifications already incorporated in the Treaty establishing a Constitution for Europe pursuant to a French-German proposal to the Convention on Economic Governance.

16.93

According to Article 137 TFEU ‘[a]‌rrangements for meetings between ministers of those Member States whose currency is the euro are laid down by the Protocol on the Euro Group’. Article 1 of Protocol (No 14) annexed to the Treaties, on the Euro Group, sets out that: [t]‌he Ministers of the Member States whose currency is the euro shall meet informally. Such meeting shall take place, when necessary, to discuss questions related to the specific responsibilities they share with regard to the single currency. The Commission shall take part in the meetings . . .

16.94

The managing director of the European Stability Mechanism and a representative of the International Monetary Fund may also participate to the Euro Group meetings. The presence of the IMF is in such case limited to the discussions on the economic programmes to which the IMF participates.

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The Euro Group adopts its programme every six months. As a general rule, it meets once a month, before the Council (ECOFIN) meeting. Since the Euro Group is also in charge with preparing the work for the Eurosummits, as a general rule, the Euro Group is furthermore convened within fifteen days before the Eurosummit.

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The discussions within the Euro Group may either concern specific euro-related questions or larger questions which may have an impact on the fiscal, monetary or structural policies of the Member States of the euro area.52 Amongst these questions, the economic situation and the financial stability of the euro area, the budgetary policies of the Member States of the euro area, the enlargement of the euro area or the terms of the financial assistance for the euro area’s Member States are regularly on its agenda.

16.97

Each Council (ECOFIN) meeting starts by a debriefing by the Euro Group president of the Euro Group meeting.

16.98

According to Article 2 of Protocol No 14 on the Euro Group, the Euro Group is chaired by a president elected (by majority of Member States of the euro area) for a renewable two- and-a-half year-term. The first permanent President of the Euro Group was elected in 2004 in the person of Jean-Claude Juncker (at that time: Prime-Minister and Minister of Finance of Luxembourg), who occupied this position until 2013. He was followed by Jeroen 52 See Eurogroup, ‘Working Methods of the Eurogroup’ (ECFIN/CEFCPE(2008)REP/50842 rev 1, Brussels, 3 October 2008) 1.

Euro Group 447 Dijsselbloem (at that time: Dutch Finance Minister) and, since December 2017, Mário Centeno, Portuguese Finance Minister, is presiding over the Euro Group. The Euro Group is neither one of the institutions of the Union referred to in Article 13(1) TEU, nor a Council configuration in the sense of Article 16(6) TEU. Furthermore, the Council’s Rules of Procedure contain no provision concerning the functioning of the Euro Group. The Euro Group cannot replace the decision-making of the Council, even in matters that relate specifically to the euro area. It is not a body of the Union capable of adopting decisions entailing legal effects.

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The fact that the Euro Group is deprived of any decision-making power and that it cannot replace the Council in its competences under the Treaties is underlined by the European Council Resolution establishing the Euro Group to which reference has been made above which states as follows:

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[b]‌y virtue of the Treaty, the ECOFIN Council is the centre for the coordination of the Member States’ economic policies and is empowered to act in the relevant areas. In particular, the ECOFIN Council is the only body empowered to formulate and adopt the broad economic policy guidelines which constitute the main instrument of economic coordination. The defining position of the ECOFIN Council at the centre of the economic coordination and decision-making process affirms the unity and cohesion of the Community. The Ministers of the States participating in the euro area may meet informally among themselves to discuss issues connected with their shared specific responsibilities for the single currency . . . Whenever matters of common interest are concerned they will be discussed by Ministers of all Member States. Decisions will in all cases be taken by the ECOFIN Council in accordance with the procedures laid down in the Treaty . . .

In its judgment of 20 September 2016,53 the Court of Justice had confirmed that ‘the Euro Group cannot be equated with a configuration of the Council or be classified as a body, office or agency of the European Union within the meaning of Article 263 TFEU’.

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The above judgement has been qualified by the General Court in a case where a number of investors affected by the 2013 bail-in of Cypriot banks claimed compensation for damages as a consequence of decisions taken by, inter alia, the Eurogroup.54 In its judgement, the General Court has confined the case law referred to in the previous paragraph to the actions for annulment under Article 263 TFEU, whilst concluding that actions and conduct of the Euro Group are subject to the control of the Court on account of the non-contractual liability of the Union.

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The General Court clarifies in that case that the purpose of actions for non-contractual liability—ie the possible compensation for acts and conducts of the institutions of the

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53 Joined Cases C-105/15 P to C-109/15 P Mallis and Others v Commission and ECB [2016] ECLI:EU:C:2016:702, para 61. 54 Case T-680/13 K Chrysostomides & Co and Others v Council and Others [2018] ECLI:EU:T:2018:486, paras 105ff (hereafter Chrysostomides & Co and Others).

448 EU INSTITUTIONS REPRESENTING MEMBER STATES European Union—is different to the one-off actions addressed to control the legality of Union’s acts. In the light of the different and complementary purposes of those two types of action, the notion of ‘institution’ subject to the control of the Court under Article 340 TFEU on non-contractual liability is wider than the notion of institutions, bodies, offices or agencies of the Union referred to in Article 263 TFEU (among which the Euro Group is not comprised, according to the Court, as referred to above). Wherever the EU entity is established by the Treaties and its functioning is intended to contribute to the achievement of the Union’s objectives, its actions and conduct may engender the liability of the Union. This is the case of the Euro Group, according to the General Court: it is established by Article 137 TFEU and Protocol No 14 and its actions aim at achieving the Treaties objectives.55 Any contrary solution would clash with the principle of the Union based on the rule of law, in so far as it would allow the establishment, within the legal system of the European Union itself, of entities whose acts and conduct could not result in the EU incurring liability. 16.104

While the Euro Group as such has no role to play in the legislative process, where it is the Council of the Union that intervenes, one has to underline the important part played by the Euro Group President in the shaping of the Banking Union, in particular in the discussions relating to the Single Resolution Mechanism.56

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The growing role of the Euro Group determined the United Kingdom, in 2016, in the context of the discussions on the UK settlement, to ask for a recognition of the fact that the informal meetings of the ministers of the Member States whose currency is the euro should not affect the powers of the Council as an institution upon which the Treaties confer legislative functions and within which Member States coordinate their economic policies. Point 5 of the Section A of the Annex 1 attached to the European Council conclusions of 18–19 February 201657 in particular specified that: in accordance with the Treaties, all members of the Council participate in its deliberations, even where not all members have the right to vote. Informal discussions by a group of Member States shall respect the powers of the Council, as well as the prerogatives of the other EU institutions.

It is recalled that, following the UK referendum of 23 June 2016, in accordance with point 4 of the European Council conclusions of 18–19 February 2016, all the arrangements agreed in the context of the UK settlement have automatically ceased to exist. 16.106

The meetings of the Euro Group are prepared by the Euro Group working group, which has a chair appointed by the Euro Group for a two years term following its election by his pairs. The Euro Group working group is composed of representatives of the euro-area Member States of the Economic and Financial Committee, the European Commission and the European Central Bank. The office of the President of the Working Group is at the General Secretariat of the Council. The secretariat tasks in relation to the Euro Group are 55 Chrysostomides & Co and Others (n 54) para 113. 56 See Commission, ‘Statement—European Parliament and Council back Commission’s proposal for a Single Resolution Mechanism: a major step towards completing the banking union’ (Brussels, 20 March 2014), following the final trilogues in this legislative file accessed 5 February 2020. 57 European Council, ‘European Council meeting’ (EUCO 1/ 16 CO EUR 1 CONCL 1, Brussels, 19 February 2016).

Euro Group 449 divided between the General Secretariat of the Council (which is in charge, beyond the assistance to the President, of logistics) and the EFC Secretariat (which is responsible for the substance).

B. Role in the different crisis58 Since early 2010, the Union and its Member States whose currency is the euro have devised a number of mechanisms to provide financial assistance to Member States suffering problems of solvency and liquidity, more specifically: the Greek loan facility agreement, the European Financial Stability Mechanism (EFSM), the European Financial Stability Facility (EFSF), and the European Stability Mechanism (ESM). As with the Greek loan facility agreement and the EFSF, the ESM is not an institution or body of the Union. It is an international public institution established inter-governmentally through an international treaty by the Member States whose currency is the euro.

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The ESM is endowed with a number of governing bodies. The Board of Governors, which is called to adopt the most fundamental decisions of the ESM (including the granting of assistance and the approval of conditionality attached), is composed of a governor of each ESM Member which ‘shall be a member of the government of that ESM Member who has responsibility for finance’ (Article 5(1) ESM Treaty59). The Board of Governors may be chaired either by the President of the Euro Group, as referred to in Protocol No 14 on the Euro Group annexed to the Treaty on the European Union and to the TFEU, or a Chairperson elected from among its members (Article 5(2) ESM Treaty). Mário Centeno, President of the Euro Group, chairs currently also the Board of Governors of the ESM.

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Because it is called to discuss about ‘questions related to the specific responsibilities [that the Member States participating in the euro area] share with regard to the single currency’, the Euro Group has regularly dealt, since the beginning of 2009, with the management of assistance to Member States suffering problems of solvency or liquidity, in particular: Ireland, Portugal, Greece, or Cyprus. A certain—and legitimate—commixtion of functions, where the members of the Euro Group act in their double capacity as of such and as members of the Board of Governors of the ESM, has to be underlined in this context.

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Under the ESM, assistance is granted by means of different instruments, consisting of loans or credit transactions (see Articles 14–18 ESM Treaty). The granting of assistance is contingent upon compliance with conditionality, appropriate to the financial assistance instrument chosen. Conditionality is reflected in Memoranda of Understanding, to be negotiated and signed between the Commission (acting on behalf of the ESM) and the ESM Member under assistance (see Article 13(3) ESM Treaty).

16.110

58 See also Paul Craig, ‘The Eurogroup, power and accountability’ (2017) 23 European Law Journal 234–49; Joscha Abels, ‘Power behind the curtain: the Eurogroup’s role in the crisis and the value of informality in economic governance’ (2018) European Politics and Society 1–16. 59 Treaty establishing the European Stability Mechanism between the Kingdom of Belgium, the Federal Republic of Germany, the Republic of Estonia, Ireland, the Hellenic Republic, the Kingdom of Spain, the French Republic, the Italian Republic, the Republic of Cyprus, the Grand Duchy of Luxembourg, Malta, the Kingdom of the Netherlands, the Republic of Austria, the Portuguese Republic, the Republic of Slovenia, the Slovak Republic, and the Republic of Finland, signed on 2 February 2012 by the contracting parties.

450 EU INSTITUTIONS REPRESENTING MEMBER STATES 16.111

The procedure for granting assistance and the establishment of conditions attached, is a bilateral or contractual negotiation between two parties, the ESM and the ESM Member asking for assistance. This negotiation takes place outside the EU framework.

16.112

The Euro Group keeps under constant review the situation of the countries benefiting from financial assistance and ensures the post-programme surveillance.

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In the field of financial assistance, agreements at the level of the Euro Group have a simple political value. They are subsequently translated into formal decisions, adopted by the governing bodies of the ESM, which entail legal effects as instruments of international public law. For example, as regards Cyprus, the Euro Group agreement 25 March 2013 relating to the key elements necessary for a future macroeconomic adjustment programme60 was reflected, in legal terms, in the Memorandum of Understanding approved by the ESM Board of Governors on 24 April 2013.

IV. The European Council 16.114

One of the most important institutional novelties brought about by the Treaty of Lisbon is the incorporation of the European Council as an institution of the Union. The European Council is listed as one of the Union’s institutions in Article 13(1) TEU.

16.115

Its powers, composition, organization and functioning are laid down by Article 15 TEU: the main role of the European Council is to provide the Union with the necessary impetus for its development and define the general political directions and priorities thereof. It shall not exercise legislative functions (Article 15(1) TEU). It consists of the Heads of States or Governments of the Member States, together with its president and the President of the Commission. Furthermore, the High Representative for Foreign Affairs and Security Policy is taking part in its work (Article 15(2) TEU). It shall meet twice every six months (Article 15(3) TEU). Except where the Treaties provide otherwise, decisions shall be taken by consensus. When a vote is taken, the President of the European Council and the Commission’s president do not have the right to vote (Article 235(1) TFEU). Its president is elected by a qualified majority of the European Council for a term of two and a half years, renewable once (Article 15(5) TEU). Its functions are described in rather vaguely in Article 15(6) TEU, which does not entrust the president with important executive powers (as proposed by some Member States, notably France during the drafting of the Treaty of Lisbon), but sets out a rather general role for the president, including chairing and organizing meetings.61

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The European Council has adopted its own Rules of Procedure (Article 253(3) TFEU).62 The European Council and its president are assisted by the General Secretariat of the Council (Article 253(4) TFEU).

60 Eurogroup, ‘Statement on Cyprus’ (25 March 2013) accessed 5 February  2020. 61 See in this sense Jean-Claude Piris, The Lisbon Treaty, a Legal and Political Analysis (CUP 2010) 207. 62 See European Council Decision of 1 December 2009 adopting its Rules of Procedure (2009/882/EU) [2009] OJ L315/51.

The European Council 451 The ‘institutionalization’ of the European Council entails two fundamental consequences in legal terms. First, the European Council is empowered to adopt legally binding acts (in around thirty cases), for which it is held to abide by the rules and procedures fixed in specific legal bases. Likewise, the European Council has been added to the list of institutions against which an action for annulment or an action for failure to act may be brought before the Court of Justice (Articles 263 and 265 TFEU). The control of the legality of acts of the European Council by the Court of Justice may also take place through preliminary references (as the case was in the seminal case Pringle, where the legality of the European Council’s decision to amend the Treaties through a simplified amendment procedure, by adding new Article 136(3) TFEU, was questioned).63

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The European Council has always played an important role in the EMU context. Already under the Treaty of Maastricht, which put in place the three stages leading to the creation of the single currency of the Union, the European Council was conferred the power to set the orientation of the economic policies of the Member States and of the Community Its guiding role has translated into the adoption, at the eve of the passing to the third stage of the EMU, in 1997, of the Stability and Growth Pact which strengthens, on a permanent basis, the monitoring and coordination of national fiscal and economic policies with a view to enforcing the deficit and debt related conditions put in place by the Maastricht Treaty. While the implementation of the Pact was in the hands of the Council and of the Commission, the European Council continued to follow its application on a regular basis.

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The global financial crisis and in particular the sovereign debt crisis revealed the shortcom- 16.119 ings of EU economic governance, including the implementation of the Stability and Growth Pact. With a view in particular to improving the budgetary discipline of the Member States and exploring the possible framework for crisis management, the European Council of 25– 26 March 2010 entrusted its President, Herman Von Rompuy, to put in place, together with the Commission, a task force regrouping representatives of the Member States, the rotating presidency of the Council and the ECB. In June 2010, following the progress report of the Task Force, the European Council agreed several orientations, in relation to strengthening both the preventive and the corrective arm of the Stability and Growth Pact, and established the basis of the ‘European semester.64 In its meeting of 28–29 October 2010,65 the European Council endorsed the report of the Task Force66 which came with several recommendations for fiscal discipline, notably through a stronger Stability and Growth Pact, broadening economic surveillance to encompass macro imbalances and competitiveness, deeper and 63 Case C-370/12 Thomas Pringle v Government of Ireland [2012] ECLI:EU:C:2012:756, where the legality of European Council Decision (2011/199/EU) was put into question. Before the entry into force of the Treaty of Lisbon, the Court of Justice excluded the European Council from its control under the regime of non-contractual liability on the ground that only the act or conduct of an institution as per former Article 7(1) EC could give rise to non-contractual liability of the Community. See Order T-346/03 Krikorian and Others v Parliament and Others [2003] ECR I-6037, para 17. For further reading, see Bruno de Witte and Thomas Beukers, ‘The Court of Justice approves the creation of the European Stability Mechanism outside the EU legal order: Pringle’ (2013) 50 Common Market Law Review 805–48. 64 European Council, ‘Conclusions of 17 June 2010’ (EUCO 13/10 CO EUR 9 CONCL 2, Brussels, 17 June 2010). 65 See the European Council, ‘Conclusions of 28-29 October 2010’ (EUCO 25/1/10 REV 1 CO EUR 18 CONCL 4, Brussels, 30 November 2010). 66 Task Force of the European Council, ‘Strengthening Economic Governance in the EU’ (Brussels, 21 October 2010).

452 EU INSTITUTIONS REPRESENTING MEMBER STATES broader coordination, a robust framework for crisis management, and stronger institutions and more effective and rules-based decision-making. 16.120

The European Council intervenes at two occasions in the timetable of the European Semester: in March, when it considers the Annual Growth Survey, the Alert Mechanism Report, the euro area recommendations, and the draft Joint Employment Report prepared by the Council, and in June, when it endorses the country specific recommendations that are to be adopted by the Council.

V. The Euro Summits 16.121

The euro crisis (and specially the solvency crisis of Greece) gave rise to frequent meetings of the Heads of State or Government of the Euro area to discuss the measures to redress such a situation. In a meeting of 26 October 2011, those Heads agreed, inter alia, ten measures to improve the governance of the euro area. The first of the ten measures, related to the Euro Summits, read as follows: there will be regular Euro Summit meetings bringing together the Heads of State or government (HoSG) of the euro area and the President of the Commission. These meetings will take place at least twice a year, at key moments of the annual economic governance circle; they will if possible take place after European Council meetings. Additional meetings can be called by the President of the Euro Summit if necessary. Euro Summits will define strategic orientations for the conduct of economic policies and for improved competitiveness and increased convergence in the euro area. The President of the Euro Summit will ensure the preparation of the Euro Summit, in close cooperation with the President of the Commission.

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Euro Summits were established by the Treaty on Stability, Coordination and Governance in the EMU (TSCG), an agreement concluded under international public law between all Member States of the Union except for the UK and the Czech Republic, which entered into force on 1 January 2013. Article 12 TSCG creates the Euro Summits, and lays down the rules for its organization, composition and functioning.

16.123

Euro Summits are defined as ‘informal’ meetings of the Heads of States or Governments of the euro area, in the image of the Eurogroup (also defined by Protocol No 14 as an informal meeting of ministers), thus underlining the non-institutional character of the Euro Summits. The Heads of States or Governments hence participate in the Euro summits meetings in their national function and not as members of an EU institution. The Heads of States and Governments of the Member States meet in the Euro Summits together with the president of the Commission; the president of the ECB is invited to take part in the meetings.

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The works of the Euro Summit are chaired by a president that shall be appointed by a qualified majority of its members at the same time as the European Council elects its president and for the same term of office. All presidents of the European Council, have been also appointed presidents of the Euro Summits.

16.125

The Euro Summits shall take place when necessary and at least twice a year (Article 12(2) TSCG). In practice, since the entry into force of the TSCG, the rule of the Euro Summit

A CRITICAL ASSESSMENT 453 meeting at least twice a year has not been systematically respected. Meetings have been rather called on a demand basis, either to respond to critical situations (the Greek solvency crisis during the spring/summer 2015) or to discuss on the deepening of the Economic and Monetary Union as a result of the Leaders agenda drawn in December of 2017 (with meetings having taken place in March and June 2018). Article 12(3) TSCG contain a clause of inclusiveness to allow non-euro area Member States that have ratified that Treaty to participate in meetings of the Euro Summits when they deal with competitiveness, the modification of the global architecture of the euro area and the fundamental rules that will apply to it in the future, as well as, when appropriate and at least once a year, in discussions on specific issues of the implementation of the TSCG. As a matter of fact, all current twenty-seven Member States have participated in the two meetings of the Euro Summit of 2018 dealing with the deepening of the EMU referred to in the previous paragraph, thus including the two Member States which had not ratified the TSCG at the moment of drafting Article 12(3) (the Czech Republic and Croatia, that participated in those meetings in the quality of observers). This inclusiveness formula was strongly pushed by countries like Poland at the moment of drafting the TSCG, against the views of some other Member States, notably France, which regarded the Euro Summit as falling within the ownership of the euro area Member States in order to enhance the visibility, coherence and efficiency of its governance.

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Euro Summit meetings are prepared by its president in cooperation with the president of the Commission. The body charged with the preparation of the Euro Summits is the Eurogroup (Article 12(4) TSCG). The Euro Summit has adopted Rules for the organization of its proceedings which largely mimic the Rules of Procedure of the European Council described in Section IV.

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VI. The Role of the European Council and of the Euro Summits During the Financial and Sovereign Debt Crisis of the Euro: A Critical Assessment The political dynamics of the financial and sovereign debt crisis have made the European Council emerge, together with the Council, as the main decision-making body in the EU.67 Integration during the euro crisis has followed an intergovernmental pattern through growing coordination in the European Council and in the Euro Summits (to which separate reference will be made later in this text).68 67 See Uwe Puetter, ‘The European Council—the New Centre of EU Politics’ (2013) European Policy Analysis, 16; Sergio Fabbrini, ‘The democratic governance of the euro’ (2012) Robert Schuman Centre for Advanced Studies Policy Papers 2012/08 27. 68 President Sarkozy stated in a speech in Toulon on 1 December 2011 that: L’Europe se refondera en tirant pragmatiquement les leçons de la crise. La crise a poussé les chefs d’États et de gouvernements à assumer des responsabilités croissantes parce qu’au fond eux seuls disposaient de la légitimité démocratique qui leur permettait de décider. C’est par l’intergouvernemental que passera l’intégration européenne parce que l’Europe va devoir faire des choix stratégiques, des choix politiques. One year before, on 2 November 2010, Chancellor Merkel had sponsored the intergovernmental method in the opening speech of the sixty-first academic year of the College of Europe, by stating that:

16.128

454 EU INSTITUTIONS REPRESENTING MEMBER STATES 16.129

This is especially clear in respect of the Banking Union, where the European Council and the Heads States and Governments of the euro area Member States have designed in rather precise terms the response to be given by the legislator of the Union to the banking and euro area crisis. They so designate the Treaty legal basis to be followed to set up a Single Supervision Mechanism (SSM) (Article 127(6) TFEU). The Heads have also indicated the timetable for negotiations and agreement on the Banking Union proposals. The June 2012 deal asked the legislator to ‘consider’ the Commission’s proposals on supervision as a matter of urgency by the end of 2012, whilst the European Council of 19 October 2012 invited to proceed with work on the legislative proposals on the SSM as a matter of priority, with the objective of agreeing by 1 January 2013.69

16.130

This ‘hyperactivity’ of the European Council and of the Euro Summit entails a number of consequences for the other institutions.

16.131

First, it could relativize the power of initiative of the Commission as well as its role of being, by essence, a political institution. An extremely interesting question, which goes beyond the scope and objective of this contribution, is how to reconcile the European Council’s power to define the general political directions and priorities of the Union (as laid down in Article 15(1) TEU) and the Commission’s power to ‘promote the general interest of the Union and take appropriate initiatives to that end’ (Article 17 TEU).70 Whatever response is given to this question, what is clear is that the Commission is a member of both the European Council (Article 15(2) TEU) and of the Euro Summit (Article 12(2) TSCG) and, as such, it is closely involved in the taking of decisions of both bodies, that agree, as a general rule, by consensus.71

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Second, the European Council and the Euro Summit have ‘funnelled’ the powers of the European Parliament and the Council as co-legislators, marking their tempos and, in some way, guiding their legislative choices. Again, here a very interesting issue arises (and again, its consideration goes beyond the aims of this contribution), namely how to reconcile the European Council’s influence on legislative processes with the Treaty rule that this institution ‘shall not exercise legislative functions’ (Article 15(1) TEU). This question is even more pertinent since the autumn of 2017, when the European Council adopted new working methods complementing the so-called ‘Leaders agendas’. The Leaders agendas’ are addressed to bring to the attention of the European Council matters of special relevance for the Union that are stuck in the middle of the legislative process, so that the deadlock is broken a coordinated European position can be arrived at not just by applying the community method; sometimes a coordinated European position can be arrived at by applying the intergovernmental method. The crucial thing is that on important issues we have common positions. 69 See point 6 of the European Council, ‘Conclusions of 18–19 October 2012’ (EUCO 156/12 CO EUR 15 COCL 3, Brussels, 19 October 2012). 70 The Juncker’s Commission is perceived as more ‘political’ and less ‘technocratic’ in relation to its predecessor in questions related to economic and monetary union. See President’s Jean-Claude Juncker, ‘A New Start for Europe: Opening Statement in the European Parliament Plenary Session’ (Strasbourg, 15 July 2014): ‘The Commission is political. And I want it to be more political. Indeed, it will be highly political’. See the Keynote speech by the then Head of the Cabinet of the President of the European Commission, Martin Selmayr, ‘How political are the institutions of the economic and monetary union? The Cases of the European Central Bank and the European Commission’ (ECB Legal Conference, 1–2 September 2015) 261. 71 See Article 15(4) TEU and Article 6(3) of the Rules for the organization of the proceedings of the Euro Summits.

A CRITICAL ASSESSMENT 455 and discussions accelerated at the level of the legislator.72 It is early to assess the usefulness and results of this new practice. Time will say whether it is used as a genuine chamber for political discussion and impetus or whether it will turn the European Council into a sort of higher legislative chamber above the Council and Parliament, somehow propagating the consensus decision-making (ie, the one of the European Council) to the legislative process, that typically undergoes the rule of qualified majority.

72 The Leaders agendas were proposed as a new working method of the European Council in a letter of President Tusk to the Heads of State or Government ahead of the European Council of October 2017. Since then, each and every European Council has included ‘leaders agendas’ in its discussions.

17

EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS René Repasi

I. Introduction II. The Role of Parliaments: Mediating Legitimacy III. The Role of the European Parliament in EMU

17.1

C. The European Parliament’s functions in EMU

17.4

IV. The Role of National Parliaments

17.9

A. Preliminary Note: The European Parliament as the Parliament of the euro 17.12 B. The functioning of the European Parliament 17.13

A. B. C. D.

Legislative function Political control function Budgetary and election function Inter-parliamentary cooperation

V. Conclusion

17.19 17.97 17.99 17.104 17.109 17.111 17.112

I. Introduction 17.1

The EMU’s legitimacy is precarious. To be precise, it is not the legitimacy of the Economic and Monetary Union (EMU) as such that is precarious since it is set out in the Treaties but of acts adopted within EMU. Monetary policy acts are adopted by the European Central Bank (ECB) equipped with a Primary law independence guarantee1 shielding it against any sort of binding objections from Parliament(s) and governments. In economic policy coordination, the original compromise between the lack of Parliamentary control of European decision-making and the non-legally binding nature of acts taken within economic policy coordination was denounced during the various reforms made in the aftermath of the recent economic and financial crisis. Originally, the non-compliance with recommendations adopted by the Council addressing shortcomings in a Member State’s economic policy conduct would at most lead to financial sanctions in case of serious budgetary disturbances in a country whose currency is the euro. In all other instances, such non-compliance because of divergent policy choices in national Parliaments would be without significant consequences. Crisis-induced reforms of economic policy coordination and the extension of EMU policy-making to measures of financial assistance for Member States in financial distress called the original arrangement off and installed a European system of mainly intergovernmental decision-making

1

Article 130 of the Treaty on the Functioning of the European Union (TFEU).

René Repasi, 17 European Parliament and National Parliaments In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0021

Introduction 457 (in the shape of the European Council deciding on legislative files or the adoption of the Treaty Establishing the European Stability Mechanism (ESM Treaty) or the Treaty on Stability, Coordination and Governance (TSCG)) with a supranational implementation and supervision (in the shape of the troika supervising financial assistance programmes, the Banking Union, reversed qualified majority voting in economic policy coordination or the macroeconomic imbalances procedure).2 In this system national Parliaments are put into a role of ex post legitimizers of policy decisions already taken by their respective governments at intergovernmental level and the European Parliament usually has no say in the control of supervisory and implementation activities of Union institutions or bodies. Jürgen Habermas has called this system ‘post-democratic executive federalism’.3 This 17.2 system depends on intergovernmental decision-making amongst national governments pursuing their respective national interests. In order to reduce these diverse national interests to a common denominator, such decision-making involves the use of vague terms and the shifting of inconvenient decisions to the later stage of policy implementation. Consequently, the political significance of supranational executive bodies being tasked with the uniform implementation and supervision of previously agreed vague legal language grows in political significance compared to the role that was originally assigned to them by the Treaties. This growth in political importance was not accompanied by strengthening Parliamentary oversight. This system had—following Crum— three main implications:4 Political processes within this system operate beyond effective Parliamentary scrutiny. Decision-making follows a logic of international power rather than procedural principles, as enshrined in the EU Treaties for supranational decision- making (such as ‘transparency, the equality of Member States and their right to self- government’).5 The primacy of national governments in EMU prevents, finally, the establishment of any sort of European political arena to debate policy choices. These observations paved the way for the view that democratic legitimacy is lacking in EMU6 and for a call to strengthen the role of Parliaments, especially of the European Parliament, in EMU.7 Whether Parliaments are actually in a position to provide for enhanced democratic legitimacy in EMU and under which conditions will be analysed in the following sections of this chapter: Section III on the European Parliament; and Section IV on national Parliaments. Before turning, however, to this in-depth analysis, the concept of democratic legitimacy that underlies the present chapter and the role of Parliaments therein will be outlined in Section II.

2 Marc Dawson, ‘The Legal and Political Accountability Structure of “Post‐Crisis” EU Economic Governance’ (2015) 53 Journal of Common Market Studies 976. 3 Jürgen Habermas, The Crisis of the European Union: a response (Polity Press 2012) 12 (hereafter Habermas, The Crisis of the European Union). 4 Ben Crum, ‘Saving the Euro at the Cost of Democracy’ (2013) 51 Journal of Common Market Studies 614, 622ff (hereafter Crum, ‘Saving the Euro at the Cost of Democracy’). 5 Crum, ‘Saving the Euro at the Cost of Democracy’ (n 4) 622. 6 Ian Cooper and Julie Smith, ‘Governance Without Democracy? Analysing the Role of Parliaments in European Economic Governance after the Crisis—Conclusions’ (2017) 70 Parliamentary Affairs 728ff. 7 See for instance Habermas, The Crisis of the European Union (n 3) 43; Jean-Claude Juncker and others, ‘The Five Presidents’ Report: Completing Europe’s Economic and Monetary Union’ (Brussels, 22 June 2015).

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458 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS

II. The Role of Parliaments: Mediating Legitimacy 17.4

Max Weber defined a legitimate order as a social order ‘which enjoys the prestige of being considered binding’.8 In other words, legitimacy derives from the belief of those who are subject to an act in the authority of those who adopted this act and in its binding force even if this act goes against their own interests. By that, ‘the action of the person obeying follows in essentials such a course that the content of the command may be taken to have become the basis of action for its own sake’.9 Legitimacy is therefore a belief of each single citizen. Weber distinguishes further between traditional, charismatic, and legal legitimacy.10 The role of Parliaments was addressed in the context of legal legitimacy,11 the prevalent form of legitimacy in Europe. Parliaments, ‘by the process of compromise and balloting . . . create the norms which govern the administrative process. They subject the administration to control, support it by their confidence, or overthrow it by withdrawal of confidence’.12 Weber describes their link to the citizen as ‘imputation’ by means of representation. Representation is based on elections by citizens. In other words, parliaments ‘mediate’ the belief of its electorate. They mediate legitimacy from the source—the citizen—to the object—the acting authority.

17.5

Fritz Scharpf later linked Weber’s definition of legitimacy to Abraham Lincoln’s famous dictum defining democracy as ‘government of the people, by the people and for the people’.13 He therefore distinguished, on the one hand, input legitimacy which refers to the institutional and deliberative participation by and representativeness of the citizens and, on the other hand, output legitimacy which refers to the effectiveness of policy outcomes for the citizens. Viviane Schmidt added throughput legitimacy, which refers to the accountability, transparency, inclusiveness, openness and efficacy of decision-making processes.14 In each type of legitimacy there is a specific role for parliaments. The most obvious role can be identified in view of input legitimacy. Parliaments are the arena in which the different interests of the citizens are articulated, debated and weighed against each other. In order to guarantee the impact of this input on policy outcomes, parliaments dispose of a legislative function to adopt legally binding rules, of the right to form and to dismiss the government, and of budgetary authority. By that, parliaments ensure participation of citizens in the decision- making process.

17.6

Having the arena function of parliaments in mind, one may identify their role with regard to output legitimacy. According to Scharpf, output legitimacy is the ‘capacity to solve problems requiring collective solutions because they could not be solved through individual action, through market exchanges, or through voluntary cooperation in civil society’.15

8 May Weber, Society and Economy (University of California Press 1978) 31 (hereafter Weber, Society and Economy). 9 Weber, Society and Economy (n 8) 215. 10 Weber, Society and Economy (n 8) 157–82. 11 Weber, Society and Economy (n 8) 293–95. 12 Weber, Society and Economy (n 8) 294. 13 Fritz Scharpf, Demokratietheorie zwischen Utopie und Anpassung (Konstanzer Universitätsverlag 1970). 14 Vivien A Schmidt, ‘Democracy and Legitimacy in the European Union Revisited: Input, Output and “Throughput” ’ (2013) 61 Political Studies 14–18 (hereafter Schmidt, ‘Democracy and Legitimacy in the European Union Revisited’). 15 Fritz Scharpf, Governing in Europe (OUP 1999) 11 (hereafter Scharpf, Governing in Europe).

The Role of Parliaments: Mediating Legitimacy 459 By definition, this does not require a parliament. Some even consider parliamentary involvement as a hindrance for output legitimacy since the veto power of a parliament could create a ‘joint decision trap’ which leads to suboptimal policy outcomes.16 The question arises how to define and how to measure an optimal policy outcome. Whilst one may try to define an optimal policy outcome in normative terms, the effectiveness of policy outcomes is measured against the public perception to which extent the policy outcome improves the overall welfare of the citizens and of the common good.17 Output legitimacy is therefore closely linked to the fact how well a policy outcome resonates with citizens’ substantive values. Against this understanding, Parliaments contribute to output legitimacy by providing for an arena, in which, through deliberation, public expectations of ‘good’ policy outcomes are articulated and reflected. Ideally, the entire breadth of citizens’ substantive values and opinions is represented in this arena, so that the discussions therein form at the same time the shape of the policy outcome and inform the public perception of it. A closer look at the genesis of policy outcomes of non-majoritarian institutions such as central banks confirms that, even though they are legally independent from any political influence, these institutions operate in the ‘shadow of politics’. They take public opinion and expectations as articulated in parliaments into consideration when making decisions.18 Parliaments’ role in view of throughput legitimacy lies within their control functions. This 17.7 role can be identified by the existence and quality of controls of expenditure, of parliamentary approval of appointments, of parliamentary investigation rights such as the setting up of committees of inquiry or of access to documents. In bringing these matters into the public light of Parliamentary debate, parliaments ensure the transparency of the decision- making processes. Furthermore, parliaments may form platforms for pluralist interest- based consultation with the civil society. If a body that is elected by the citizens assumes the different roles of a parliament in view of input, output and throughput legitimacy, the system in which this body is placed can be considered as democratically legitimate. Against this background, parliaments can be assigned the following functions:19 the legislative, the political control, the budgetary and the election function. These functions form, in the following, the benchmark to assess the quality of a Parliament’s involvement in EMU and its capacity to mediate its legitimacy to EMU. Being embedded in the general political system of the EU, both the European Parliament (see Section III) and national Parliaments (see Section IV) are to be considered. They form the two pillars of ‘representative democracy’, on which ‘the function of the Union shall be founded’.20

16 Scharpf, Governing in Europe (n 15) 24. 17 Schmidt, ‘Democracy and Legitimacy in the European Union Revisited’ (n 14) 11; Furio Cerutti ‘Why Political Identity and Legitimacy Matter in the EU’ in Furio Cerutti and Sonia Lucarelli (eds), The Search for a European Identity (Routledge 2008) 10–14 (thesis 3). 18 Scharpf, Governing in Europe (n 15) 14; Schmidt, ‘Democracy and Legitimacy in the European Union Revisited’ (n 14) 10. 19 Andreas Maurer, Parlamente in der EU (UTB 2012) 39. 20 Article 10(1) TEU.

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III. The Role of the European Parliament in EMU 17.9

The European Parliament is according to Article 10(2) of the Treaty on European Union (TEU) representing the Union citizens directly. Having been already established by the founding Treaties of the European Coal and Steal Community (ESCS) in 1952 and of the European Economic Community (EEC) in 1957 (called the ‘Assembly’, Articles 20–25 of the Treaty establishing the European Coal and Steel Community (ECSC Treaty) and Articles 137–144 of the Treaty establishing the European Economic Community (EEC Treaty)), the members of the European Parliament (MEP) were first directly elected by the Union citizens in 1979. Article 22(2) TFEU makes clear that any Union citizen residing in any EU Member State can stand as a candidate in elections for the European Parliament. This provision clarifies further that a national of an EU Member States does not, by definition, have to run as a candidate in his or her home Member State but also, under the same conditions as nationals of this Member State, in the country of his or her residence. There is hence no link between the nationality of a potential Member of the European Parliament and the Member State to which the seats in the European Parliament are allocated.21 It is therefore easily imaginable that a national of Member State that has not yet introduced the euro as a currency is a Member of the European Parliament elected as a part of the quota allocated to a Member State that has introduced the euro as a currency.22

17.10

The functions of the European Parliament are defined amongst others by Article 14(1) TEU, which mentions the legislative function, the budgetary function and the function of political control. It furthermore has the function to elect certain top personnel of the EU and to thereby legitimize those that got elected. It finally has a transparency function (Article 15(2) TFEU), by which the general public is informed about the political activities of the EU.

17.11

In the following, the role of the European Parliament in EMU will be considered along the Parliamentary functions it exercises with a view to assess whether it mediates the legitimacy that it disposes of because of the democratic election of its members to EMU-related measures taken at European level. Before turning to an in-depth description and evaluation of the legal framework of these Parliamentary functions in EMU and their exercise by the European Parliament (see Section III.C), the European Parliament as the Parliament that is entitled to rule on matters relating to the euro has to be established (see Section III.A) and the functioning of the European Parliament in the broader context of EU has to be explained (see Section III.B) in order to set the scene for the further analysis.

A. Preliminary Note: The European Parliament as the Parliament of the euro 17.12

As a preliminary note, it is worth mentioning that the European Parliament is the Parliament of the euro and, by that, entitled to decide on matters exclusively relating to

21 European Council Decision (EU) 2018/937 of 28 June 2018 establishing the composition of the European Parliament [2018] OJ L165/1. 22 This was actually the case for Konstantina Kouneva, a Bulgarian national that was elected for the European Parliament in the period between 2014 and 2019 on behalf of the Greek SYRIZA party.

The Role of the European Parliament in EMU 461 the euro in its full composition including members originating from countries that have not yet introduced the euro as their currency. This derives from the fact that the euro is the currency of the Union (Article 3(4) TEU) and that the European Parliament is the institution representing the Union’s citizens (Article 14(2) TEU) irrespective of their actual nationality. This view was contested by some arguing the European Parliament cannot mediate democratic legitimacy to the measures relating to euro area matters as members from non-euro area countries have the right to vote on these measures.23 Yet, the euro and, by that, measures relating to it do not only affect those countries that have currently adopted the euro as their currency but all other Member States that are under a legal obligation to introduce it—except for those that have a Treaty opt-out such as Denmark or, still at the time of writing, the UK. This means that there is a legally well-founded interest also in those Member States to be involved in the definition of the legal framework relating to the euro.24 Whilst the Treaty clearly ruled this possibility explicitly out for governments in the Council (Article 139(4) TFEU), this rule only confirms the general principle, according to which representatives originating from EU countries that can be affected by legal acts adopted by the Union may vote on these acts. This view is also supported by the rules on enhanced cooperation that do not limit the voting rights of Members of the European Parliament. Furthermore, any internal differentiation between MEPs originating from different Member States would amount to a discrimination based on grounds of nationality, which is prohibited by Article 18(1) TFEU, and would violate the principle of equality of Union citizens under Article 9 TEU.25 The European Parliament is therefore to be considered the Parliament of the Euro.

B. The functioning of the European Parliament The European Parliament consisted at the beginning of its ninth term on 2 July 2019 of 751 members.26 After the withdrawal of the United Kingdom from the European Union (EU) on 31 January 2020 the amount of seats was reduced to 705, with twenty-seven of the previously seventy-three seats for the United Kingdom (UK) being redistributed amongst the remaining twenty-seven Member States and forty-six seats remaining reserved for future enlargement rounds of the EU.27 The Treaties require a distribution of the seats in accordance with the principle of degressive proportionality, according to which smaller Member States (in relation to their population) have more political weight in terms of the ratio of the amount of members to population than larger Member States. This principle led amongst others the German Bundesverfassungsgericht in its Lisbon Treaty judgment to the

23 Dutch Council of State, ‘Advice of 18 January 2013’ (W01.12.0457/I) point 5 c) accessed 10 February 2020 (in Dutch). 24 See also Deirdre Curtin and Cristina Fasone, ‘Differentiated representation: is a flexible European Parliament desirable?’ in Bruno de Witte, Andrea Ott, and Ellen Vos (eds), Between Flexibility and Disintegration (Edward Elgar 2017) 118, 128. 25 European Parliament Resolution of 12 December 2013 on constitutional problems of a multitier governance in the European Union (A7-0372/2013). 26 Article 3(2) of European Council Decision (EU) 2018/937 referring to Article 3 of European Council Decision 2013/312/EU of 28 June 2013 establishing the composition of the European Parliament [2013] OJ L181/ 57. 27 Article 3(1) of European Council Decision (EU) 2018/937.

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462 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS conclusion that the European Parliament is not suitable to sufficiently legitimize the EU’s policy actions in democratic terms.28 17.14

The European Parliament is led by its President, its up to fourteen Vice-Presidents and its five Quaestors. They form together the Bureau of the European Parliament, in which the President and the Vice-Presidents have voting rights, whilst the Quaestors only attend meetings of the Bureau in an advisory capacity. They are elected in the first sitting of the European Parliament, which has to take place on the first Tuesday after expiry of the previous legislative term, for a term of two-and-a-half years. After this period the positions shall be renewed for another period of two-and-a-half years. In practice, the person holding the presidency of the European Parliament is exchanged after each period.

17.15

The elected MEPs are organized alongside two lines: political affiliations and thematic fields. The political affiliation of members is reflected by political groups without there being an obligation for a single member to join such a group. Next to these so-called ‘non-attached members’ there are—at the time of writing—seven political groups in the European Parliament.29 In order to form a political group, this group must consist of at least 25 MEPs coming from at least seven different Member States.30 Single MEPs must have a ‘political affinity’ to the political group they would like to belong to. Political groups elect chairs who form the Conference of Presidents (CoP).31 The CoP is the core body of the European Parliament. Next to the chairs of the political groups also the president of the European Parliament belongs to the CoP. One non-attached MEP is invited by the president of the European Parliament to attend the meetings of the CoP without having the right to vote. The CoP takes decisions on the organization of Parliament’s work and on matters of legislative planning. It is also responsible for matters concerning the European Parliament’s relations with the other EU institutions and bodies and with the national parliaments. The CoP draws up the draft agenda of Parliament’s part-sessions. It decides on the composition and competence of committees and committees of inquiry and authorizes the drawing up of own-initiative reports. Given the width of political decision-making competences, the CoP is the place, in which the political groups strike their deals. This is emphasized by the rule that the CoP shall endeavour to reach a consensus although voting can still take place, if necessary, subject to a weighting based on the number of Members in each political group.32

17.16

The work on thematic fields is organized in committees. The European Parliament, on a proposal from the CoP, sets up standing committees, whose responsibilities are defined in an annex to the Rules of Procedure of the European Parliament.33 Besides the European Parliament can also, on a proposal from the CoP, establish special committees with a term of maximum twelve months. Their responsibilities are defined by the decision setting up these committees. Committees elect their chairs who form the Conference of Committee Chairs 28 BVerfG, Judgment of the Second Senate of 30 June 2009, 2 BvE 2/08, paras 284–88. 29 In the order of number of MEPs: European People’s Party (EPP), Progressive Alliance of Socialists and Democrats in the European Parliament (S&D), Renew Europe (RE), Greens/European Free Alliance (Greens/ EFA), Identity and Democracy (ID), European Conservatives and Reformists (ECR), and European United Left— Nordic Green Left (GUE) (9 August 2019). 30 Rule 33(2) of the Rules of Procedure of the European Parliament (9th parliamentary term). 31 Rule 27 of the Rules of Procedure of the European Parliament (9th parliamentary term). 32 Rule 26(3) of the Rules of Procedure of the European Parliament (9th parliamentary term). 33 Rule 206 of the Rules of Procedure of the European Parliament (9th parliamentary term). The responsibilities of the standing committees are currently defined in Annex VI of the Rules of Procedure.

The Role of the European Parliament in EMU 463 (CCC).34 The CCC makes recommendations to the CoP about the work of committees and the drafting of the agendas of part-sessions. It screens the compatibility of draft legislation with Treaty rules on delegated and implementing acts. Its most important function is to manage discussions on horizontal issues between the committees and create a consensus in case of conflicts of competences. It furthermore prepares the Parliament’s contribution to the Commission’s annual working programme and meets with the Council presidencies to prepare and discuss their priorities. Besides participating in the CCC, Committee chairs lead on behalf of the European Parliament the informal trilogue negotiations between the Council, the Commission and the Parliament in the ordinary legislative procedure. At committee level, the political groups are organized around group coordinators.35 Together with the committee’s bureau (chairs and vice-chairs of the committee) the group coordinators draw up the committee’s agenda, take procedural decisions and, most importantly, appoint the responsible rapporteur for a political file. In practice, the coordinators assign rapporteurships to a political group. It is afterwards the responsibility of the group coordinator to allocate a report to a specific MEP. Besides this formal role, group coordinators organize the MEPs form the political group at committee level and their voting behaviour comparably to what in British style Parliaments is called a ‘whip’.

17.17

Having the just outlined modus operandi of the European Parliament in mind allows to understand the inner-Parliamentary mechanisms that are at work when the European Parliament exercises its Parliamentary functions in EMU that will be described and analysed in the following section.

17.18

C. The European Parliament’s functions in EMU 1. Legislative function The European Parliament’s legislative function consists of participating in the adoption of legally binding acts of the EU. Points of exercising its influence on the shape of such acts are the initiation of the legislative procedure, the definition of the final content of the legal act and its final adoption. These cornerstones of the legislative function will structure the following analysis of the European Parliament’s position in EMU when acting in its legislative capacity, The right to initiate any kind of legislative procedure lies almost exclusively with the European Commission (Article 17(2) TEU). The European Parliament may, however, adopt a legislative own-initiative report (INL) under Rule 47 of its Rules of Procedure requesting from the European Commission, pursuant to Article 225 TFEU, to submit a legislative proposal. Once adopted, the Commission is obliged under the Framework Agreement on relations between the European Parliament and the European Commission36 to ‘come forward

34 Rule 29 of the Rules of Procedure of the European Parliament (9th parliamentary term). 35 Rule 214 of the Rules of Procedure of the European Parliament (9th parliamentary term). 36 European Parliament and Commission Framework Agreement on relations between the European Parliament and the European Commission [2010] OJ L304/47 as amended by European Parliament and Commission Agreement amending point 4 of the Framework Agreement on relations between the European Parliament and the European Commission [2018] OJ L45/46.

17.19

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464 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS with a legislative proposal at the latest after 1 year or shall include the proposal in its next year’s Work Programme’.37 If it refuses to submit a proposal, the Commission must give Parliament detailed explanations of the reasons. This tool, which can also be called an indirect right of initiative for the European Parliament, has proven to be rather influential. In a study of 2017 Maurer and Wolf observe that the Commission proposed a legal act in reaction to half of the legislative own-initiative reports adopted between 1994 and 2015 and submitted in one third of the cases legislative proposals that even took up completely what the Parliament originally requested from the Commission.38 Interestingly, these authors also conclude that the less formal non-legislative own-initiative reports (INI) that request from the Commission to make use of its right of legislative initiative had the same success rate as the more formal legislative ones.39 17.21

Besides the indirect right of initiative that affects the outcome of a legislative procedure more politically than legally, the actual powers and possibilities of the European Parliament to influence the content of a legal act after the submission of a proposal by the European Commission depend on the applicable legislative procedure as it is set by the legal base, on which the Commission has based its legislative proposal. The available legislative procedures can be distinguished in accordance with the degree of Parliamentary influence: procedures that allow for targeted changes of the proposed legal text, those that give the Parliament the right to refuse the adoption of the legal act and those that require from the actual decision-making institution to take Parliament’s opinion into account without being bound to it.

17.22

The ordinary legislative procedure (Articles 289(1) and 294 TFEU) embodies the first type of legislative procedures. The European Parliament has the right to amend and to ultimately veto a legislative proposal. The bar for changing a legislative proposal is, however, raising depending on the stage at which the legislative procedure is. Whilst during the first reading a simple majority is sufficient, already an amendment to the Council’s position in the first reading needs to be supported by the majority of the Parliament’s component members in the second reading. This is one of the Parliament’s incentives to get involved into informal trilogues40 during the first reading of a legislative procedure. During this informal negotiation rounds, which take place between the European Commission, the Council and the European Parliament behind closed doors, the three institutions aim for a political compromise between them that takes the shape of a provisional agreement, which is formally approved by the European Parliament in its first reading report and which is thereafter accepted by the Council so that the content of the provisional agreement becomes law. First reading agreements between the institutions making use of informal trilogue negotiations became the new standard for the ordinary legislative procedure. In the legislative period 37 Point 16 of the Framework Agreement on relations between the European Parliament and the European Commission. 38 Andreas Maurer and Michael C Wolf, ‘Agenda-Shaping in the European Parliament and the European Commission’s right of legislative initiative’ in Jörg Ege, Michael W Bauer, and Stefan Becker (eds), The European Commission in Turbulent Times (Nomos 2017) 53, 74, and 79ff (hereafter Maurer and Wolf, ‘Agenda-Shaping’). 39 Maurer and Wolf, ‘Agenda-Shaping’ (n 38) 74, 79ff. 40 Trilogues are legally captured by the Rules 70–74 of the Rules of Procedure of the European Parliament (9th parliamentary term) and the Code of Conduct for negotiating in the context of the ordinary legislative procedure, as approved by the Conference of Presidents on 28 September 2017.

The Role of the European Parliament in EMU 465 of 2009–14, 85 per cent of all ordinary legislative procedures were concluded after the first reading.41 In the period between 2014 and 2016, the European Parliament finalized 135 legislative files during the first reading, eighty-six of which were negotiated by making use of informal trilogues and forty-nine of which were concluded without negotiations.42 The informal trilogues raised transparency concerns.43 In response to these concerns the General Court decided in 2018 that Union citizens have a right to access to the so-called ‘four-column table’ document during ongoing trilogue negotiations.44 This document is vital for these negotiations as it shows the original Commission proposal (column 1), the Parliament’s amendments (column 2), the Council’s position (column 3) and the (provisional) compromise text (column 4).45 It allows therefore to identify which positions were introduced into the negotiations by which institution and the state of compromise found on controversial matters. Amongst the special legislative procedures (Article 289(2) TFEU) there are the ones that require Parliament’s consent, according to which Parliament may veto but not change a proposal (consent procedure), and those that only require Parliament’s opinion, which can ultimately be ignored by the Council (consultation procedure).

17.23

In the consultation procedure the European Parliament has to adopt a report setting out its opinion, the content of which is not binding for the Council. Yet, the Council may not adopt a definitive position on the original Commission proposal without a Parliamentary report as the adoption of this report is an ‘essential formal requirement’ (Article 263(2) TFEU) disregard of which means that the measure concerned has to be declared void by the CJEU under Article 264(1) TFEU.46 The Parliament has therefore the power to delay the adoption of a legal act under the consultation procedure. This power is only limited by the duty of sincere cooperation between the EU institutions.47 The European Parliament may only delay the adoption of its report as long as there are reasons for such a delay that are connected to the legislative proposal under review. One such reason could be the choice of a legal base by the European Commission that provides for lesser Parliamentary influence (such as the consultation procedure) than another legal base although there is no compelling legal reason for this choice.

17.24

In the following, the impact of the European Parliament acting in its legislative capacity on matters falling within the broader area of EMU will be analysed in reference to the policy areas relating to: (a) economic policy coordination; (b) avoidance of excessive government deficits; (c) safeguarding the financial stability of the euro area and in the Member States; (d) monetary policy; and (e) the internal market dimension of EMU.

17.25

41 European Parliament, ‘Activity Report on the Ordinary Legislative Procedure’ (PE 595.931) 10 (hereafter European Parliament, ‘Activity Report’). 42 European Parliament, ‘Activity Report’ (n 41) 19ff. 43 Gijs Jan Brandsma, ‘Transparency of EU informal trilogues through public feedback in the European Parliament: promise unfulfilled’ (2019) 26 Journal of European Public Policy 1464. 44 Case T-540/15 Emilio De Capitani v European Parliament [2018] ECLI:EU:T:2018:167. 45 Christilla Roederer-Rynning and Justin Greenwood, ‘The culture of trilogues’ (2015) 22 Journal of European Public Policy 1148, 1156. 46 Case C-417/93 Parliament v Council [1995] ECR I-1185, para 9; Case 138/79 Roquette Frères v Council [1980] ECR 3333, para 33. 47 Case C-65/93 Parliament v Council [1995] ECR I-643, paras 23ff.

466 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS 17.26

a) Economic policy coordination The scope of economic policy coordination and, hence, of possibly relevant legal bases that determine the European Parliament’s influence of the EU’s legislative activity in this field is to be understood in the context of the guiding principles of Title VIII of the TFEU on economic and monetary policy: stable prices, sound public finances and monetary conditions, and a sustainable balance of payments (Article 119(3) TFEU). This means that all Member States’ policies that impact these guiding principles have to be subject to some sort of coordination by the European level. The Treaties address in Article 126 TFEU explicitly budgetary policy that provides for an excessive deficit. Given that monetary policy is an exclusive supranational matter, economic policies have against this background to be understood as all policies conducted by Member States that are not monetary and that might contribute to an excessive government deficit before such excessive deficit is established.48

17.27

Having this understanding in mind, the Union can adopt legally binding acts with a view to coordinate Member States’ economic policies based on Article 121(6) TFEU. Under this competence, the Union may adopt ‘detailed rules for the multilateral surveillance procedure’. Article 121(6) TFEU refers since the entry into force of the Lisbon Treaty49 to the ordinary legislative procedure so that the European Parliament’s influence on the content of these legal acts is significant. This concerns the convergence of economic policies,50 the pursuit of sound budgetary policies with a view to prevent at an early stage the occurrence of excessive government deficits51 and the prevention and correction of macroeconomic imbalances52 as well as of excessive macroeconomic imbalances.53

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Although the legal base is limited to ‘rules for the . . . procedure’, the legal acts adopted on its basis do not only specify procedural rules but also set substantive goals. In relation to the convergence of economic policies of the Member States, the Union legislator abstains largely from defining any substantive objectives and rather adheres to the goals as they are defined by the broad guidelines and by the country-specific recommendations as they are adopted by the Council under Articles 121(2) and 148(4) TFEU without any Parliamentary involvement. With a view to the pursuit of sound budgetary policies, the Union legislator defined that for ERM2 states a government deficit of 1 per cent of GDP in cyclically adjusted terms, net of one-off and temporary measures, is considered a sound budgetary policy (the so-called ‘medium-term objective’ (MTO)).54 It furthermore clarified situations and 48 See for more details Chapter 28 at paragraphs 28.25–28.40 (on the ‘preventive arm’ of the SGP) and Chapter 29. 49 Previously, the applicable legislative procedure only required the legally non-binding opinion of the European Parliament (see Article 99(5) TEC). 50 The ‘convergence of economic policies’ covers both the ‘Europe 2020’ strategy, which is the successor of the ‘Lisbon strategy’ and the European Employment Strategy. 51 Council Regulation (EC) 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1997] OJ L209/1 and (in parts) European Parliament and Council Regulation (EU) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1. It is worth mentioning that the original Regulation 1466/ 97 and its first amendment by Regulation 1055/2005 were based on the predecessor of Article 121(6) TFEU, which did not refer to the ordinary legislative procedure and involved the European Parliament only in its consultative function. 52 European Parliament and Council Regulation (EU) 1176/2011 of 16 November 2011 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/25. 53 European Parliament and Council Regulation (EU) 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8. 54 Article 2a(2) Regulation (EC) 1466/97. See for more details Chapter 28 at paragraphs 28.27ff.

The Role of the European Parliament in EMU 467 conditions, according to which a Member State is allowed to temporarily deviate from its adjustment path towards the MTO. In relation to macroeconomic imbalances, the Union legislator confined itself to defining a set of imbalances that these indicators must be able to identify, while delegated the definition of indicators for the sake of monitoring macroeconomic imbalances to the Commission.55 In this context, the Union legislator also introduced a difference in treatment of Member States with large current-account deficits as compared to those with large current-account surpluses.56 To foster budgetary disciple and to strengthen the coordination of their economic policies, the Member States decided to deviate from the previous ‘Community’ path of adopting secondary EU law by concluding a ‘Treaty on Stability, Coordination and Governance in the Economic and Monetary Union’ (TSCG) outside EU law. Whilst this exit from the EU law framework insinuates a weakening of the influence of the European Parliament, interestingly the amendments required by the European Parliament during the negotiation of the TSCG were largely accommodated by the Treaty negotiators.57 The European Parliament participated in the negotiations with an ad hoc working group. The main reason for this deep involvement of the European Parliament in the negotiation of an agreement between the Member States can be traced back to the legal relationship between EU law and inter se agreements between Member States.58 If in breach with existing EU primary or secondary law, any provision in an inter se agreement between EU Member States has to be disapplied and disregarded by administrations and courts.59 The TSCG was negotiated by the end of 2011, shortly after the European Parliament had adopted the ‘six-pack’, which modified large parts of the rules applicable to the economic and fiscal policy coordination. It made therefore sense to include the Union legislator in the negotiation for the TSCG in order to ensure that no conflicts between Union legislation based on Article 121(6) TFEU and Treaty text would be created. Although in the case of the TSCG the European Parliament exerted a traceable influence on the content of an agreement between the Member States, it should be mentioned that this was a unique exception. In the parallel negotiations on the ESM Treaty the European Parliament was completely ignored.60 At the time of the negotiations it was not expected that this Treaty would overlap with any existing secondary EU law, which might have prompted a potential involvement of the European Parliament.

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This survey of substantive policy goals that were included into legal acts based on Article 121(6) TFEU shows that the European Parliament when acting in its legislative capacity has the possibility to influence policy goals set for the coordination of the economic policy goals by making use of its rights to amend legislative proposals under the ordinary legislative procedure. The Parliament disposes hence of some sort of influence to set policy goals for Member States and legitimizes their definition at EU level. Whilst it made use of this

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55 Article 4(3) Regulation (EU) 1176/2011. See for more details Chapter 29 at paragraphs 29.34ff. 56 Article 3(2) last sentence Regulation (EU) 1176/2011. 57 Cristina Fasone, ‘The Struggle of the European Parliament to Participate in the New Economic Governance’ (2012) 45 Robert Schuman Centre for Advanced Studies Working Paper 9 (hereafter Fasone, ‘The Struggle of the European Parliament’); European Parliament Resolution of 18 January 2012 on the European Council of 8–9 December 2011 (TA(2012)0002); European Parliament Resolution of 2 February 2012 on the European Council of 30 January 2012 (TA(2012)0023). 58 René Repasi, ‘Völkervertragliche Freiräume für EU-Mitgliedstaaten’ (2013) 48 Europarecht 45 (hereafter Repasi, ‘Völkervertragliche Freiräume für EU-Mitgliedstaaten’). 59 Repasi, ‘Völkervertragliche Freiräume für EU-Mitgliedstaaten’ (n 58) 63ff. 60 Fasone, ‘The Struggle of the European Parliament’ (n 57) 9.

468 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS influence in the context of budgetary policies and of macroeconomic imbalances, it abstained from doing so in the broader context of achieving economic policy convergence. 17.31

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It should be noted that the instruments used by the European Council and the Council to set guidelines for the economic policies of the Member States under Articles 121(2) and 148(2) TFEU, as well as the instruments to ensure compliance with these guidelines in Articles 121(4) and 148(4) TFEU are not considered legislative measures as they are recommendations, which are not legally binding upon the Member States (Article 288(4) TFEU). They will be addressed in the section on the Parliament’s political control function. b) Avoidance of excessive government deficits The avoidance of excessive government deficits is set as a policy goal by Primary law in Article 126(1) TFEU and specified in protocol (No 12) on the Excessive Deficit Procedure and in protocol (No 13) on the Convergence Criteria. Within this frame defined by Primary law the Council may—after having consulted the European Parliament and based on a qualified majority—‘lay down detailed rules and definitions for the application of the provisions of the [Protocol (No 12) on the Excessive Deficit Procedure]’ (Article 126(14)(3) TFEU) and may replace (completely or in parts) this protocol—after having consulted the European Parliament on the basis of a unanimous vote—by ‘appropriate provisions’ in a secondary legal act (Article 126(14)(2) TFEU). The same—replacing a protocol by secondary law—can be done by the Council—after having consulted the European Parliament and on the basis of a unanimous vote—with Protocol (No 13) based on its Article 6.

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The European Parliament’s role in all these legislative procedures is reduced to a consultative one. It can therefore at best delay the adoption of a legal act, but ultimately the Council may adopt the measure without taking on the changes suggested by the Parliament in its report.61 It can therefore not influence the definition of the benchmark, the course and the outcome of the excessive deficit procedure in any formal way. From the perspective of the European Parliament’s effective influence on the content of secondary legal acts, the delimitation of the scope of Article 126(14)(2) TFEU addressing excessive deficits and of Article 121(6) TFEU looking at fiscal policies before they produce excessive deficits is crucial. In the former case the Parliament acts only as a consultant whilst in the latter it is a co-legislator.

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As a starting point for the reflection on the scope of Article 126(14)(2) TFEU it should be noted that this scope is not limited to the one of protocol (No 12). A measure based on Article 126(14)(2) TFEU can go beyond that scope provided that it is geared towards the objective of deterring excessive government deficits as proven by the adoption of the corrective arm of the Stability and Growth Pact, Regulation 1467/97, which was based on this legal base. The definition of government deficit goals and of ratios of government debt to GDP that are significantly below those defined by protocol (No 12) is not covered by the notion of ‘avoiding excessive government deficits’ in Article 126(1) TFEU since these are not ‘excessive’ anymore. Budgetary objectives such as the medium-term objective of 1 per cent of GDP as defined by Article 2a Regulation 1466/97 are so remote from an excessive deficit that they can only be defined under the umbrella of ‘economic policy coordination’, which is specified by legal acts based on Article 121(6) TFEU, than under the

61

See paragraph 17.24.

The Role of the European Parliament in EMU 469 notion of ‘excessive government deficit’. It was therefore already questionable whether the ‘Fiscal Compact’ with its budgetary objective of a ‘structural deficit’ of 0.5 per cent of GDP62 could have been introduced by a ‘revision’ of protocol (No 12) as it was originally suggested by the European Council.63 The incorporation of the Fiscal Compact into Union law on the basis of Article 126(14)(2) TFEU was therefore legally also not convincing.64 The proposed rules aimed at enforcing the medium-term objective defined by a legal act adopted on the basis of Article 121(6) TFEU. The enforcement of such objective must consequently also be based on this legal base involving the co-decision rights of the European Parliament and requiring a qualified majority. In sum, budget objectives that affect annual government deficits and government debts below the thresholds defined by protocol (No 12) can only be adopted as part of the economic policy coordination and, hence, on the basis of Article 121(6) TFEU, in whose scope the European Parliament has a significant role to play as co- legislator. Budgetary objectives that exclusively affect annual government deficits and government debts above these thresholds have to be based on Article 126(14)(2) TFEU. In the area of ‘excessive government deficits’ as defined by Article 126 TFEU and Protocol (No 12) the European Parliament can only delay legislative procedures and try to make use of this ‘delaying’ right in order to politically prompt the Council to take on changes it intends to make to proposals for legal acts.65 This ‘right’ can, however, not be qualified as a legislative one so that the European Parliament’s legislative influence on ‘excessive government deficits’ is not meaningful. c) Safeguarding the financial stability of the euro area and of the Member States Safeguarding the stability of the euro area as a whole only entered into the EU Treaties with the simplified Treaty revision that included Article 136(3) TFEU. This provision confirms that the Member States whose currency is the euro may establish a stability mechanism. Given that EU law does not preclude any such action provided that any stability measure ensures that the recipient Member State pursues a sound budgetary policy,66 Article 136(3) TFEU is purely declaratory and does, hence, also not prevent the Union from adopting measure safeguarding the financial stability of the euro area and in the Member States. The euro area Member States established the European Stability Mechanism (ESM) as the main tool to address threats to the financial stability of its members and to the euro area as a whole on the basis of an international agreement, the conclusion of which was no matter of EU law and required no involvement of the European Parliament.67 On two occasions the Union made use of the possibility to legislate in the area of safeguarding the financial stability of the euro area Member States with the establishment of the European Financial Stabilisation Mechanism (EFSM) on the basis of Article 122(2) TFEU68 and with 62 Article 3(1)(b) TSCG. 63 Herman Van Rompuy, ‘Towards a Stronger Economic Union: Interim Report to the European Council—6 December 2011’ in European Council (ed), The European Council in 2011 (Publications Office of the European Union 2011) 73 accessed 10 February 2020. 64 Commission, ‘Proposal for a Council Directive laying down provisions for strengthening fiscal responsibility and the medium-term budgetary orientation in the Member States’ COM (2017) 824 final. 65 See for more details and the legal limits of this possibility, paragraph 17.24. 66 Case C-370/12 Thomas Pringle v Government of Ireland and others [2012] ECLI:EU:C:2012:756, para 143. 67 See on the ESM Chapter 30. 68 Council Regulation (EU) 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism [2010] OJ L118/1.

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470 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS Regulation 472/201369 on the basis of Articles 121(6) and 136 TFEU. When it comes to safeguarding the financial stability of Member States whose currency is not the euro the Union established a facility providing medium-term financial assistance for Member States’ balances of payments.70 Whilst the European Parliament acted as co-legislator of Regulation 472/2013 and had to give its consent to the ‘Balance-of-Payments’ facility, it only had to be informed of the decision taken by the Council to establish the EFSM. 17.38

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The legislative function of the European Parliament in the area of safeguarding the financial stability of the euro area and in the Member States is more important than what may be concluded from the fact that the ESM as the main actor in this field is outside of EU law. The adoption of Regulation 472/2013 on the basis of Articles 136 and 121(6) TFEU allowed the European Parliament, however, to shape the instrument of the ‘macroeconomic adjustment programme’, which has to be set up by Member States requesting financial assistance and which has to be approved by the Council, significantly.71 Not only must the substance of the draft programme be defined in line with Article 152 TFEU and Article 28 of the Charter of Fundamental Rights on the right of collective bargain, but the Commission must also ensure the consistency between this programme and the ‘memorandum of understanding’ (MoU), the conclusion of which is the necessary pre-condition for receiving financial assistance from the ESM.72 In doing so, the European Parliament exerts in its legislative function influence on the design of the procedure and on some minimum standards for the policy conditionality to grant financial assistance to euro area Member States that are facing threats to their financial stability. Yet, the actual content of the policy conditionality and the decision to grant stability support are not covered by the Parliament’s legislative function and must be approached from the angle of the political control of the main actors: the European Commission and the ESM. d) Monetary policy In matters relating to monetary policy the legislative function of the European Parliament is rather limited in view of the fact that the conduct of monetary policy lies within the ECB’s exclusive competence, which is shielded against political influence by its independence guarantee by Article 130 TFEU. Still, in a number of areas the European Parliament does play a role in its legislative capacity, albeit in a clearly limited manner: – as a co-legislator when modifying the Statute of the ESCB and of the ECB by making use of the ordinary legislative procedure (Article 129(3) TFEU) and when adopting the measures that are necessary for the use of the euro as the single currency (Article 133 TFEU); 69 European Parliament and Council Regulation (EU) 472/2013 of 21 May on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1. 70 Council Regulation (EC) 332/2002 of 18 February 2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments [2002] OJ L53/1. 71 Cristina Fasone, ‘European Economic Governance and Parliamentary Representation. What Place for the European Parliament?’ (2014) 20 European Law Journal 164, 172 (hereafter Fasone, ‘European Economic Governance and Parliamentary Representation’). 72 On the meaning of the macroeconomic adjustment programmes for the political control of the European Parliament over financial assistance programmes, see paragraph 17.69.

The Role of the European Parliament in EMU 471 – as a legislative consultant when conferring additional tasks of prudential supervision upon the ECB (Article 127(6) TFEU), when harmonising rules on the denominations of euro coins (Article 128(2) TFEU), or when adopting implementing rules required by the Statute of the ESCB and of the ECB (Article 129(4) TFEU). Linked to the tasks of the ECB described in Article 127 TFEU is the case of the conferral of additional tasks upon the ECB in relation to the prudential supervision of credit institutions and other financial institutions (Article 127(6) TFEU) worth to take a closer look at. The wording of Article 127(6) TFEU only requires a consultation of the European Parliament. During the negotiations of the regulation establishing the Single Supervisory Mechanism (SSM),73 however, the European Parliament adopted significant amendments to the original Commission proposal,74 which were accommodated by the Council as the sole legislator. In essence, the European Parliament secured a de facto co-decision right within the scope of Article 127(6) TFEU when adopting the SSM regulation.75 This was possible because the creation of the SSM required also an amendment of the regulation establishing the European Banking Authority (EBA),76 which is based on Article 114(1) TFEU. The Parliament succeeded in creating a nexus between the SSM regulation and the EBA Regulation so that a successful amendment of the latter required a quasi-ordinary legislative procedure for the former.77 In doing so, the European Parliament secured an enhanced control over the ECB and a say in the appointment of the chair and the vice-chair of the Supervisory Board of the SSM.78

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e) Internal market dimension of EMU Banking Union forms part of EMU. It allows for facilitating cross-border private risk- 17.41 sharing, the lack of which increases the need for national public risk-sharing that endangers government budgets and has negative implications for the financial stability of the euro area. Banking Union is composed of two equally important elements: substantive rules on regulating financial markets and procedural rules on ensuring a uniform application and enforcement of these rules. The former consists of internal market regulations and directives, which are based on either Article 53(1) TFEU, Article 114(1) TFEU or on both.79 These legal bases refer to the ordinary legislative procedure, which secures a say of the European Parliament in the design of the content of these legal acts. The latter comprises—currently—the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The SSM was based on Article 127(6) TFEU, which refers to the special legislative procedure. But, as shown above,80 the European Parliament secured a de facto co-decision right during the adoption process of the SSM regulation. Whether this de facto co-decision

73 Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63. 74 European Parliament, Amendments adopted on 22 May 2013 (TA(2013)0213). 75 Berthold Rittberger, ‘Integration without Representation? The European Parliament and the Reform of Economic Governance in the EU’ (2014) 52 Journal of Common Market Studies 1174, 1180ff (hereafter Rittberger, ‘Integration without Representation?’). 76 European Parliament and Council Regulation (EU) 1093/2010 of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority) [2010] OJ L331/12. 77 Rittberger, ‘Integration without Representation?’ (n 75) 1180ff. 78 See Chapter 37 at paragraphs 37.79ff for more details on the governance structure of the SSM. 79 See Chapter 36 for the details on the Substantive Financial Market Regulation. 80 See paragraph 17.40.

472 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS right of the European Parliament is a sustainable one will be seen during the next round of amendments, which at the time of writing has not yet been initiated. The SRM is based on Article 114(1) TFEU, which retains Parliament’s right to shape the content of measures proposed on its basis by its reference to the ordinary legislative procedure.

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2. Political control function The European Parliament’s political control function refers to the accountability of EU institutions and bodies for their actions. Accountability can be described as ‘a mechanism by which those in charge of the exercise of public power or public policy-making are subject to continuous control and moreover can be sanctioned in case of bad performance or undesired behaviour’.81 In operationalising this abstract definition of accountability the European Parliament, being the forum at hand, has to define the object of its political control, the processes by which it exercises its control function, the benchmark it wants to apply for its assessment and the effects of the outcome of its judgment.82 These reflections lead to a two-tier accountability framework83 to assess the exercise of the European Parliament’s political control function in EMU. This framework distinguishes between conditions of accountability and instruments for accountability. The first tier refers to the quality benchmark for assessing the behaviour of the institutions or bodies that are to be held to account by the European Parliament. This includes the identification of a yardstick that was defined ex ante against which the performance of an actor is to be assessed. Furthermore, it refers to the quantity and quality of information that forms the basis for any judgment on the performance and to the conditions for accessing it. The second tier looks at the means to remedy consequences of undesired behaviour and to sanction it. These instruments are: – Threat of changing the legal basis, on which the undesired behaviour was based: whilst this instruments derives from the legislative function of the European Parliament, if exercised ex post after an undesired behaviour is identified, it serves as an instrument of accountability. The change of the legal basis as a consequence of the actions taken by the institutions will narrow and change the future course of action of the institution. Whilst this instrument is a very effective one, it matters less in the present context, as the European Parliament cannot initiate any changes of the legal basis on its own motion. The right of initiative lies exclusively with the European Commission.84 This is slightly different when the legal basis is in the Treaties since, pursuant to Article 48(2) TEU, the European Parliament can trigger a Treaty revision procedure. – (Re- )appointment or dismissal of decision- makers: the dismissal or the threat of a denial to reappoint an official may serve as an accountability instrument. This 81 Fabian Amtenbrink and others, ‘The EU’s Role in the G20’ (Study commissioned by the European Parliament, April 2015) 54 building on Fabian Amtenbrink, ‘Towards an Index for Accountability of Informal International Lawmakers?’ in Joost Pauwelyn, Ramses Wessel, and Jan Wouters (eds), Informal International Lawmaking (OUP 2012) 335, 344. 82 Following the six basic questions on accountability presented by Jerry L Marshaw, ‘Accountability and Institutional Design: Some Thoughts on the Grammar of Governance’ in Michael W Dowdle (ed), Public Accountability, Designs, Dilemmas and Experiences (CUP 2006) 115, 118. 83 Developed by Fabian Amtenbrink, The Democratic Accountability of Central Banks: A Comparative Study of the European Central Bank (Hart Publishing 1999) 335ff (hereafter Amtenbrink, The Democratic Accountability of Central Banks). 84 Article 17(2) TEU.

The Role of the European Parliament in EMU 473 requires next to the possibility to actually base such a decision on a performance assessment that the official concerned was effectively able to take a different decision without being dependent on the vote of a collective body or an agreement with other decision-makers. – Overriding decisions or policy choices: a further instrument of accountability is the ex post change of the decision or policy choice made by the institution or body that is held to account. The European Parliament would then take the charge of making the decision over from the institution or body that was initially in charge of doing so. – Refusing to give budgetary discharge or changing the available budget: closely related to the instrument of changing the legal basis, the threat of any changes to the budget of an actor as a consequence of the identification of undesired behaviour works as an effective instrument of accountability. Refusing to grant budgetary discharge or changing the available financial means must be connected to the ex post assessment of any wrong-doing on the part of the institution or body under control. In order to be available as an instrument of accountability, the possibility to adopt budgetary consequences linked to a performance assessment must have been made transparent to the actor involved before it takes up its activities. – Initiating judicial review: finally, the European Parliament could initiate judicial proceedings against institutions or bodies that it holds to account in order to challenge the legality of decisions taken by these institutions or bodies and ask the Court for declaring measures void that were found to be in violation with the law. This instrument of accountability is of particular importance where there is no overriding mechanism available that would allow the Parliament to change decisions or policy choices made by institutions or bodies that are considered undesired. The two-tier accountability framework will serve in the following as a benchmark to assess the degree to which the European Parliament can exercise its political control function in EMU. Several political control mechanisms can be noted in the context of EMU. The first one that will be addressed is the ‘monetary dialogue’ to control the ECB in its conduct of the Union’s monetary policy (a). It is the first accountability mechanism that was established in EMU. Mechanisms that were created later in the other EMU policy areas such as the ‘European Semester’ covering the policy areas relating to convergence of economic policies and the avoidance of excessive government deficits (b) and for the implementation and supervision of the internal market dimension of EMU (d) will be considered in comparison with the ‘monetary dialogue’. Parliamentary involvement in the control of measures safeguarding the financial stability of the euro area and in the Member States (c) differs from the accountability mechanisms mentioned previously insofar as this field includes intergovernmental actors that are located at European level but outside the EU legal framework. Finally, the ultimate overarching political control measure for the European Parliament to establish committees on inquiry will be looked at separately (e). a) Monetary policy (monetary dialogue) The conduct of monetary policy is an exclusive Union competence, the exercise of which is conferred upon the European Central Bank. When exercising powers and carrying out tasks conferred upon it by the Treaties or the Statute of the ESCB and the ECB, the ECB

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474 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS is, amongst others, not allowed take instructions from Union institutions. Union institutions such as the European Parliament may not seek to influence members of the decision- making bodies of the ECB in the performance of their tasks.85 This independence guarantee of the ECB prevents the European Parliament from exercising a fully-fledged political control over the ECB. This independence guarantee is considered necessary in order to protect monetary policy, which is supposed to focus on long-term stability, from the short term considerations of daily politics and from the possibilities to hijack a supranational institution for national interests.86 Yet, the ECB is not deprived of any kind of accountability towards the European Parliament.87 17.46

Any meaningful accountability mechanisms needs— as the first condition of accountability—a yardstick against which the performance of an actor is to be assessed. In the case of monetary policy this yardstick is defined by the primary and secondary monetary policy objective in Article 127(1) TFEU. The primary objective is ‘to maintain price stability’. This objective is in itself too broad to serve as a proper yardstick and needs further definition and quantification. Both is done by the ECB—being the institution that is held to account—by defining price stability as ‘the year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below 2%’.88 In contrast to this rather clear definition, no comparable clarification can be found with regard to the secondary objective, according to which the monetary policy ‘shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union’.89 This blurs the yardstick that is necessary for a strict performance assessment of the ECB’s actions.

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Article 284(3) TFEU establishes the obligation for the ECB to submit an annual report to the European Parliament about its activities, which must be presented by the President of the ECB and be followed by a general debate. The second subparagraph of Article 284(3) TFEU vests the right in the European Parliament to invite the President of the ECB and the other members of the Executive Board to be heard in front of the competent committee. This right to a hearing can also be requested by the President of the ECB and the other members of the Executive Board on their own initiative. These hearings are distinct from the general debate on the annual report of the ECB.

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The hearing under Article 284(3)(2) TFEU established the ‘Monetary Dialogue’ between the European Parliament and the ECB. Primary law only provides for the right to invite members of the Executive Board to the Parliament. It does not establish a legal obligation 85 Article 130 TFEU. For more on the ECB’s independence, see Chapter 14 at paragraphs 14.50ff. 86 Fabian Amtenbrink and Kees van Duin, ‘The European Central Bank Before the European Parliament: Theory and Practice After Ten Years of Monetary Dialogue’ (2009) 34 European Law Review 561, 564 (hereafter Amtenbrink and van Duin, ‘The European Central Bank Before the European Parliament). 87 See Amtenbrink, The Democratic Accountability of Central Banks (n 83). More recently: Deirdre Curtin, ‘ “Accountable Independence” of the European Central Bank: Seeing the Logics of Transparency’ (2017) 23 European Law Journal 28; Fabian Amtenbrink ‘The European Central Bank’s intricate independence versus accountability conundrum in the post-crisis governance framework’ (2019) 26 Maastricht Journal of European and Comparative Law 165 and the special issue of the Maastricht Journal of European and Comparative Law (2019) 26; Mark Dawson, Adina Maricut‐Akbik, and Ana Bobić, ‘Reconciling Independence and accountability at the European Central Bank: The false promise of Proceduralism’ (2019) 25 European Law Journal 75. 88 Decision of the Governing Council of the ECB, ‘A stability-oriented monetary policy strategy for the ESCB’ (Press Release, 13 October 1998) accessed 10 February 2020. 89 Amtenbrink and van Duin, ‘The European Central Bank Before the European Parliament’ (n 86) 571.

The Role of the European Parliament in EMU 475 for them to also accept this invitation. The Rules of Procedure of the European Parliament go therefore beyond what the TFEU requires when it specifies that the ‘President of the European Central Bank shall be invited to attend the meetings of the competent committee at least four times a year in order to make a statement and to answer questions’.90 Upon request the President, Vice-President and other Members of the Executive Board of the ECB can be invited to additional meetings.91 Any MEP may ask the ECB a maximum of six questions per month, which are to be submitted in writing to the Chair of the ECON committee who notifies them to the ECB. All questions that are not answered in writing within a period of six weeks are put on the agenda of the next meeting of the ECON committee with the President of the ECB.92 Although there is no Primary legal obligation to enter into a dialogue with the European Parliament besides the annual report or to reply to written questions, the ECB established a practice of exchange with the European Parliament by accepting its invitations and written questions. In practice, the monetary dialogue consists of a two-hours meeting of the ECON committee, which is opened by an introductory statement of the President of the ECB. Thereafter MEPs can ask questions.93 Whilst the ‘monetary dialogue’ as a means to lay the foundations of accountability should be geared towards the maintenance of price stability as the main benchmark for the performance of the ECB set by the Treaties (Article 127(1) TFEU), the actual exchanges go beyond this objective and also include other fields of economic policy. This can still be seen as being covered by the secondary objective of the ECB, according to which the ECB shall support the general economic policies in the Union. The actual exchanges do, however, not limit themselves to the ECB’s support of the policies but also look at other actors.94

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The independence guarantee of the ECB when conducing its monetary policy with a view to maintain price stability under Article 130 TFEU shields the ECB from any instruments of accountability that would allow the European Parliament to attach any consequences to its assessment of the ECB’s actions. The ‘monetary dialogue’ and the possibility to ask written questions can therefore only be assigned to the first tier of the two-tier accountability framework. The effectiveness of the ‘monetary dialogue’ as a means of accountability is, however, even in its information-gathering function considered to be limited. Amtenbrink and van Duin note in their study of 10 years of monetary dialogue for the period between 1999 and 2009 that ‘serious doubts may be raised as to the extent to which the discussion in the monetary dialogue actually constitutes an effective review of ECB performance’.95 They base their findings on the broadness of the ‘monetary dialogue’, going beyond the policy objectives that oblige the ECB, and the lack of any instruments for accountability that lower the incentives for the European Parliament to get enough of information to make a judgment on the ECB’s performance.96 Collignon and Diessner conclude on the ‘monetary dialogue’ that took place during the economic and financial crisis (between 2009 and 2014) in

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Rule 135(3) of the Rules of Procedure of the European Parliament (9th parliamentary term). Rule 135(4) of the Rules of Procedure of the European Parliament (9th parliamentary term). 92 Rule 140(4) of the Rules of Procedure of the European Parliament (9th parliamentary term). 93 Amtenbrink and van Duin, ‘The European Central Bank Before the European Parliament’ (n 86) 571. 94 Amtenbrink and van Duin, ‘The European Central Bank Before the European Parliament’ (n 86) 571. 95 Amtenbrink and van Duin, ‘The European Central Bank Before the European Parliament’ (n 86) 581. 96 Ibid. 91

476 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS a rather positive way.97 MEPs that engaged with the ‘monetary dialogue’ felt well informed and the President of the ECB during that period, Mario Draghi, showed ‘an increased readiness to discuss its unconventional monetary policy measures with MEPs’.98 Yet, ‘MEPs correctly feel that the dialogue did not make a big difference to the management of the euro crisis’.99 Given the lack of instruments for accountability that Amtenbrink and van Duin already observed, the conclusion is hardly surprising.

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b) European Semester (economic dialogue) The European Semester was introduced in 2010 when reforming the economic governance framework of the EU in the aftermath of the economic and financial crisis with a view to make the framework more efficient and to strengthen the European Parliament’s role in it.100 The semester bundles the processes of the convergence of the Member States’ economic policies (the ‘Europe 2020’ strategy and the European Employment Strategy), of the pursuit of sound budgetary policies and of the avoidance of excessive government deficits (Stability and Growth Pact) and of the avoidance of (excessive) macroeconomic imbalances.101

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Applying the two-tier accountability framework to the European Semester requires to identify, first, all elements that form the conditions, on the basis of which the European Parliament may judge the performance of EU institutions and bodies involved in the European Semester, and, second, all instruments that the European Parliament has at its disposal to attach consequences to the judgment found by it.

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To begin with, a yardstick for the performance assessment in the fields covered by the European semester has to be defined. Given the variety of economic policy coordination processes that are bundled in it, there is not one single yardstick, but multiple ones. The relevant applicable yardstick has hence to be identified individually for each economic policy process under review.

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The coordination of economic policies under Articles 121 and 148 TFEU should be ‘contributing to the achievement of the objective of the Union, as defined in Article 3 of the [TFEU] and in the context of the broad guidelines referred to in Article 121(2)’.102 The goals of the economic and employment policy coordination are specified by integrated guidelines adopted by the Council,103 which are an implementation of the ‘Europe 2020’ strategy for the period between 2010 and 2020 adopted by the European Council on 17 June 2010.104 These broader goals are further specified on an annual basis by the March conclusions of 97 Stefan Collignon and Sebastian Diessner, ‘The ECB’s Monetary Dialogue with the European Parliament: Efficiency and Accountability during the Euro Crisis?’ (2016) 54 Journal of Common Market Studies 1296, 1309ff (hereafter Collignon and Diessner, ‘The ECB’s Monetary Dialogue with the European Parliament’). 98 Collignon and Diessner, ‘The ECB’s Monetary Dialogue with the European Parliament’ (n 97) 1310. 99 Collignon and Diessner, ‘The ECB’s Monetary Dialogue with the European Parliament’ (n 97) 1309. 100 Article 2-a Regulation (EC) 1466/97. See Fasone, ‘European Economic Governance and Parliamentary Representation’ (n 71) 171. 101 See for more details Chapter 27 at paragraphs 27.35ff. 102 Article 120 TFEU 103 The most recent ones at the time of writing are in the field of economic policy coordination: Council Recommendation (EU) 2015/1184 of 14 July 2015 on broad guidelines for the economic policies of the Member States and of the European Union [2015] OJ L192/27, and in the field of employment policy coordination: Council Decision (EU) 2019/1181 of 8 July 2019 on guidelines for the employment policies of the Member States [2019] OJ L185/44, maintaining the guidelines annexed to Council Decision (EU) 2018/1215 of 16 July 2018 on guidelines for the employment policies of the Member States [2018] OJ L224/8. 104 European Council, ‘Conclusions of 17 June 2010’ (EUCO 13/10, Brussels 17 June 2010).

The Role of the European Parliament in EMU 477 the European Council endorsing the Annual Growth Survey of the Commission that outlines the annual priorities and guidance for the Member States’ policies. In the multilateral surveillance procedure, the Commission and the Council have a duty of best efforts to ensure compliance of the Member States with these economic policy coordination goals. The European Parliament must therefore check whether the Commission and the Council in their task to specify the Treaty objectives did not act outside their scope and whether both in ensuring compliance of the Member States attend to the duty of best efforts. Non- compliance of Member States can therefore not in itself form a ground for a bad performance assessment of these institutions. The macroeconomic imbalances procedure intends to detect macroeconomic imbalances 17.55 and to prevent and avoid excessive macroeconomic imbalances.105 ‘Excessive’ means ‘severe imbalances, including imbalances that jeopardise or risk jeopardising the proper functioning of the economic and monetary union’.106 The regulation does not define what a macroeconomic imbalance is. This is to be done on the basis of a ‘scoreboard’ comprising ‘a small number of relevant, practical, simple, measurable and available macroeconomic and macrofinancial indicators for Member States’, which should encompass ‘public and private indebtedness; financial and asset market developments, including housing; the evolution of private sector credit flow; and the evolution of unemployment’ as well as ‘real effective exchange rates; export market shares; changes in price and cost developments; and non- price competitiveness, taking into account the different components of productivity’.107 The scoreboard is set up by the Commission,108 and based on a procedure that is not defined by a provision in the regulation but in recital 12 thereof, which suggests that the Commission should closely cooperate with the Council and the Parliament. When assessing the macroeconomic situation in a Member State ‘[c]‌onclusions shall not be drawn from a mechanical reading of the scoreboard indicators’ but ‘the evolution of imbalances in the Union and in the euro area’ must also be considered.109 The European Parliament must therefore check whether the scoreboard set up by the Commission allows for the identification of macroeconomic imbalances, which is rather difficult to implement as the legal texts do not further clarify what a ‘macroeconomic imbalance’ is. Furthermore, the Parliament must check whether the Commission and the Council in implementing the macroeconomic imbalances procedure applied their own criteria properly and whether they paid due attention to their duty of best efforts to prevent and prompt Member States to correct macroeconomic imbalances. The existence of excessive macroeconomic imbalances can therefore not in itself form a ground to conclude on a bad performance of these institutions. The surveillance of Member States’ budgets aims ultimately at avoiding excessive government deficits.110 The Commission has to monitor the budgets as to whether the ratio of the planned or actual government deficit to gross domestic product exceeds the reference value of 3 per cent as defined in protocol (No 12), and as to whether the ratio of government debt 105 Article 1(1) Regulation (EU) 1176/2011. 106 Article 2(2) Regulation (EU) 1176/2011. 107 Article 4 Regulation (EU) 1176/2011. 108 The scoreboard can be found on the website of the European Commission: accessed 10 February  2020. 109 Article 3(2) Regulation (EU) 1176/2011. 110 Article 126(1) TFEU.

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478 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS to gross domestic product exceeds the reference value of 60 per cent as defined by the same protocol. Based on the fulfilment of this duty the Council may enter into an overall estimation of the budgetary situation including general political considerations and decide on the existence of an excessive deficit. This yardstick is further specified by Regulation 1467/ 97. The actual correction of an excessive deficit by the Member State concerned is not part of the yardstick as both the Commission and the Council are only subject to a duty of best efforts to prompt a Member State to take effective action. The mere existence of an excess over the reference values is therefore not in itself sufficient to consider a bad performance of these institutions. 17.57

The yardstick becomes vaguer with regard to the surveillance of Member States’ budgets before there is a risk of an excessive deficit. The process defined by Regulation 1466/97 aims at preventing, ‘at an early stage, the occurrence of excessive general government deficit’.111 In order to substantiate this objective the regulation requires from Member State the definition of an MTO ‘within a defined range between -1% of GDP and balance or surplus’ and an adjustment path towards it. The Commission and the Council have to monitor the implementation of these goals and are subject to a duty of best efforts, which is what the European Parliament must assess.

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After having specified the relevant applicable yardstick of the various processes bundled in the European semester, in order to identify the degree to which the European Parliament obtains information for holding EU institutions and bodies to account, the obligations on EU institutions and bodies to inform the European Parliament have to be identified. In Primary Law, Article 121(5) TFEU establishes a reporting obligation of the President of the Council and of the Commission on the results of the multilateral surveillance procedure. When the sanction of publishing country-specific recommendations under Article 121(4) TFEU has been utilized by the Council, the President of the latter may be invited by the competent committee of the European Parliament. Regarding the control of Member States’ budgets, the President of the Council is obliged to inform the European Parliament about the adoption of sanctions against Member States under Article 126(11)(3) TFEU. Besides these concrete information obligations the Treaties remain silent on information obligations with regard to all other matters that are part of the European semester, which leaves room for secondary legislation to provide for further pathways for the European Parliament to receive information. When introducing the European semester, the EU legislator made also use of the opportunity to include further means. Following the know model of the ‘monetary dialogue’, this led to the creation of the Economic Dialogue.112

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The Economic Dialogue covers in concrete terms: – information provided by the Council on the broad guidelines of economic policy pursuant to Article 121(2) TFEU; – general guidance to Member States issued by the Commission at the beginning of the annual cycle of surveillance (the Annual Growth Survey); – any conclusions drawn by the European Council on orientations for economic policies in the context of the European Semester;

111 112

Article 1 Regulation (EC) 1466/97. Article 2-ab Regulation (EC) 1466/97.

The Role of the European Parliament in EMU 479 – the results of multilateral surveillance; – any conclusions drawn by the European Council on the orientations for and results of multilateral surveillance; – any review of the conduct of multilateral surveillance at the end of the European Semester; – Council recommendations addressed to Member States in accordance with Article 121(4) TFEU in the event of significant deviation from the adjustment path towards the MTO; – sanctions adopted in the event of a failure to take action to remedy a significant deviation from the adjustment path towards the MTO;113 – Council recommendations addressed to Member States in the event of excessive macroeconomic imbalances;114 – sanctions adopted in the event of non-compliance with the corrective action plan to remedy excessive macroeconomic imbalances;115 – the specification of the content of the draft budgetary plan as set out in a harmonized framework;116 – the results of the discussion of the Eurogroup on the Commission opinions on draft budgetary plans of the Member States to the extent that they have been made public;117 – the overall assessment of the budgetary situation and prospects in the euro area as a whole made by the Commission;118 – Council opinion on the economic partnership programme presented by a Member State, for which the Council decided that an excessive deficit exists under Article 126(6) TFEU, and Council decisions taken under Article 126(8) or (11) TFEU;119 – Council decisions under Article 126(6), Council recommendations under Article 126(7) TFEU, notices under Article 126(9) TFEU and Council decisions under Article 126(11) TFEU;120 – sanctions adopted in the event of non-compliance with budgetary policy objectives laid down in the Stability and Growth Pact after the Council has decided that an excessive deficit exists in a Member State (Article 126(6) TFEU);121 – fines adopted in the event of failure to take effective action against an excessive deficit by a Member State after the Council decided to make its policy recommendations public (Article 126(8) TFEU);122 – enhanced surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability.123 113 Article 3 Regulation (EU) 1173/2011 referring to Articles 4 and 5(1) of this Regulation. 114 Article 14 Regulation (EU) 1176/2011 referring to recommendations adopted under Articles 7(2), 8(2), and 10(4) of this Regulation. 115 Article 6 Regulation (EU) 1174/2011 referring to sanctions adopted under Article 3 of this Regulation. 116 Article 15(1)(a) Regulation (EU) 473/2013. 117 Article 15(1)(b) Regulation (EU) 473/2013 referring to opinions adopted by the Commission under Article 7(1) of this Regulation. 118 Article 15(1)(c) Regulation (EU) 473/2013 referring to the overall assessment made by the Commission under Article 7(4) of this Regulation. 119 Article 15(1)(d) Regulation (EU) 473/2013 referring to acts adopted by the Council under Articles 9(4) and 12(3) of this Regulation. 120 Article 2a(1) Regulation (EC) 1467/97. 121 Article 3 Regulation (EU) 1173/2011 referring to Article 5 of this Regulation. 122 Article 3 Regulation (EU) 1173/2011 referring to Article 6 of this Regulation. 123 Article 18 Regulation (EU) 472/2013 referring to the ‘application of this Regulation’ and limiting the dialogue to the Council and the Commission.

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Within these dialogues on the outlined issues of economic policy coordination and budgetary policy control, the ‘competent committee of the European Parliament may invite the President of the Council, the Commission and, where appropriate, the President of the European Council or the President of the Eurogroup to appear before the committee’ to discuss any matter relating to these issues.124 The competent committee is the European Parliament’s Committee on Economic and Monetary Affairs (ECON). Whilst there is a right for the committee to invite the highest representatives of the EU institutions and bodies representing the governments (European Council, Council and Eurogroup) and of the Commission, only the Council and the Commission are obliged to regularly inform the European Parliament on matters relating to issues that can be discussed within an economic dialogue.125 Only when it comes to the results of the multilateral surveillance procedure, the President of the Eurogroup is also obliged to report annually to the European Parliament.126 The wording of the provision makes clear that there is no legal obligation for the invited persons to actually accept the invitation and to appear in front of the competent committee. Given the political implications of a ‘no-show’, the practical relevance of lacking legal consequences for a representative of an EU institution refusing to take part in an economic dialogue is rather low.

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The Council is subject to a special justification obligation. The rules on the Economic Dialogue expect from the Council ‘to, as a rule, follow the recommendations and proposals of the Commission or explain its position publicly’.127 The provision does not specify the addressee of the Council’s public explanation. But given that it is mentioned as a paragraph of the provision on the Economic Dialogue and not as one of the provisions on the European Semester, it must be understood as a tightened explanation obligation of the Council vis-à- vis the European Parliament.128

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The timeline of economic dialogues follows the one of the European semester.129 The semester begins in November and finishes in July. There are three periods of economic dialogues: between November and January on the Annual Growth Survey (AGS), which forms the benchmark for the entire semester cycle, with the Commission and the Council, in May/June on the draft country-specific recommendations, which translate the abstract benchmark into concrete policy suggestions for Member States, with the Commission and in July on the implementation of the semester cycle with the Council.130 With this timeline the European Parliament debates the major milestones of the European Semester process at the moment of their adoption with the aim of having a de facto possibility to influence the content of them.131 This political leverage of the Parliament is even greater given that in 124 Article 2-ab(1) Regulation (EC) 1466/97. 125 Article 2- ab(4) Regulation (EC) 1466/ 97, Article 2a(2) Regulation (EC) 1467/ 97, and Article 14(3) Regulation (EU) 1176/2011. 126 Article 2-a(4)(2) Regulation (EC) 1466/97. 127 Article 2-ab(2) Regulation (EC) 1466/97. 128 Diane Fromage, ‘The European Parliament in the post-crisis era: an institution empowered on paper only?’ (2018) 40 Journal of European Integration 281, 286 (hereafter Fromage, ‘The European Parliament in the post-crisis  era’). 129 On the timeline of the European Semester, see Chapter 27 at paragraphs 27.38ff. 130 Fromage, ‘The European Parliament in the post-crisis era’ (n 128) 287; European Parliament, ‘Economic Dialogue with the other EU Institutions under the European Semester Cycles (2014–2019)’ accessed 10 February  2020. 131 Fromage, ‘The European Parliament in the post-crisis era’ (n 128) 287ff.

The Role of the European Parliament in EMU 481 previous years the debate on the AGS took already place in plenary despite the fact that the rules on the Economic Dialogue only provide for debates in the competent committee.132 The Economic Dialogue is an instrument that serves the first tier of the two-tier accountability framework. It helps the European Parliament as the forum that should hold the Commission, the Council, the European Council and the Eurogroup to account for their policy actions at EU level to gather information about their performance.133 However, even in fulfilling the information-gathering function, the Economic Dialogue is fragmentary as only the Council and the Commission are under an obligation to provide information, whilst the European Council is not covered by such an obligation and the Eurogroup is only subject to information duties on the results of the multilateral surveillance procedure. This lack of an obligation to continuously inform Parliament is particularly critical when it comes to the Eurogroup as there is little transparency regarding its discussions and deliberations. There are no minutes of Eurogroup meetings, only brief summaries are sent to the participants of these meetings. Only when discussing opinions of the Commission on the draft budgetary plans of euro area Member States and on the budgetary situation and prospect in the euro area, are the results of those discussions of the Eurogroup to be made public ‘where appropriate’.134 Even within the extensively regulated Economic Dialogue it is difficult for the European Parliament to gain sufficient information to effectively exercise its political control function vis-à-vis the European Council and the Eurogroup. Although the Economic Dialogue is meant to be a tool for laying the foundations of accountability, it is not completely suitable to achieve this goal as important EU actors are exempt from the information obligations it creates.135

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When it comes to instruments for accountability, the European Semester lacks possibilities to attach consequences to a judgment of the Parliament on the EU actors’ performance in the policy areas covered by the semester. The European Parliament only has the option to act in its general legislative capacity on the basis of Article 121(6) TFEU in order to change the legal framework for the European semester ex post by adopting a legislative own-initiative report.136 Yet, powers and procedures set by Primary law, such as the ones foreseen in Article 121(2)–(5) TFEU, as well as in Article 126 TFEU, are excluded from this instrument, as changing these would require a Treaty amendment. The European Parliament has hence no legal possibility to override decisions and policy choices made within economic policy coordination, budget control or the macroeconomic imbalances procedure.137

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The Economic Dialogue as the only means at the disposal of the European Parliament to exercise its political control function when it comes to the economic policy coordination, the budgetary control and the macroeconomic imbalances procedure should nevertheless not be underestimated in its effects,138 but it certainly is no means that creates a lot of

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132 European Parliament, ‘European Semester Improvement’ accessed 10 February 2020. 133 René Repasi, ‘Implementation of the Lisbon Treaty. Improving Functioning of the EU: Economic and Monetary Policy’ (Study commissioned by the European Parliament, May 2016) 45 (hereafter Repasi, ‘Implementation of the Lisbon Treaty’). 134 Article 7(5) Regulation (EU) 473/2011. 135 Repasi, ‘Implementation of the Lisbon Treaty’ (n 133) 45. 136 See paragraph 17.20 on the legislative function of the European Parliament in EMU. 137 Repasi, ‘Implementation of the Lisbon Treaty’ (n 133) 46. 138 Fromage, ‘The European Parliament in the post-crisis era’ (n 128) 287ff.

482 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS pressure on the acting EU institutions or bodies. As it was mentioned elsewhere on the basis of interviews with EU officials: ‘the Economic Dialogue is “one of those soft things” that the Council can afford to give in’.139 With a view to the extension of the Economic Dialogue in the ‘two-pack’ regulations of 2013 it was said that ‘the Economic Dialogue “came back in the Two-Pack”, and it was “symbolically nice for the Parliament [to have it] but the substance did certainly not change” ’.140

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c) Safeguarding the financial stability of the euro area and in the Member States Measures adopted to safeguard the financial stability of the euro area and in the Member States are to a large extent covered by the Economic Dialogue. This does not, however, also apply to the European Stability Mechanism (ESM) for which a separate accountability regime applies. The ESM is established on the basis of an agreement between the euro area Member States outside the EU legal framework. It is hence outside the scope of any accountability mechanism of the EU and is therefore also not accountable to the European Parliament. Whilst being formally outside the EU legal framework, the ESM makes extensively use of EU institutions,141 which triggers the need for accountability mechanisms. Identifying the applicable yardstick as the first condition for accountability, in essence, the EU institutions and bodies involved have to address serious difficulties with respect to the financial stability of the euro area as a whole or of the Member States whose currency is the euro with a view to safeguarding it. The term of ‘financial stability’ is, however, as such not providing for a clear yardstick and needs further clarification in order to be made operational. The ECB suggests to define ‘financial stability’ as ‘a condition in which the financial system—which comprises financial intermediaries, markets and market infrastructures—is capable of withstanding shocks and the unravelling of financial imbalances. This mitigates the prospect of disruptions in the financial intermediation process that are severe enough to adversely impact real economic activity’.142 This comes close to the definition given in legal academia, according to which financial stability is ‘ a supranational foundational objective, having the nature of public good, as result of which Europe is in a generalized and lasting state of economic growth and welfare as the main normative instruments . . . are able to prevent and manage risks or shocks’.143 In sum, a state of financial stability is reached when shocks can be absorbed by the private financial sector without having to revert to public financial support and without negative spill-over effects on the real economy. Given the multitude of ways to achieve such a state and uncertainties as to measure it, the objective of financial stability remains too vague in order to form a clear-cut yardstick for the performance of the actors involved in realising it. But it certainly serves as an approximate value for a performance assessment. Furthermore, it is worth to recall that actors involved in safeguarding the financial stability of the euro area as a whole and in the Member States may not 139 Edoardo Bressanelli and Nicola Chelotti, ‘The European Parliament and economic governance: explaining a case of limited influence’ (2018) 24 Journal for Legislative Studies 72, 76 (hereafter Bressanelli and Chelotti, ‘The European Parliament and economic governance’). 140 Bressanelli and Chelotti, ‘The European Parliament and economic governance’ (n 139) 77. 141 On the details and the extent of the involvement of the European Commission and of the ECB in the ESM, see Chapter 30 at paragraphs 30.68ff. 142 ECB, ‘Financial stability and macroprudential policy’ accessed 10 February 2020. 143 Gianni Lo Schiavo, The Role of Financial Stability in EU Law and Policy (Wolters Kluwer 2017) 53.

The Role of the European Parliament in EMU 483 violate other EU law, including the Charter of Fundamental Rights of the EU, and that this duty is also part of the benchmarks for the accountability check. In terms of access to information and information exchange, the managing director of the main actor in this field, the ESM, regularly attends hearings before the European Parliament’s Economic and Monetary Affairs Committee (ECON).144 These hearings are modelled after the ‘monetary dialogue’ and the Economic Dialogue. Furthermore, given that the ESM is chaired by the President of the Eurogroup, one might consider the Economic Dialogue with the President of the Eurogroup as a means to hold the ESM indirectly to account in terms of information gathering. The competent committee of the European Parliament may, within this dialogue, discuss with the President of the Eurogroup matters relating to safeguarding the financial stability of the euro area and in the Member States, which would also cover the activities of the ESM.

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More importantly, however, when it comes to measures aiming at safeguarding the financial stability of the euro area and in the Member States, the European Parliament has a special information right with regard to macroeconomic adjustment programmes.145 Such programmes have to be prepared by Member States that request financial assistance when they experience or are threatened with serious difficulties with respect to their financial stability. These programmes must be ultimately approved by the Council. According to the rules governing the macroeconomic adjustment programme, the Commission has to orally inform the chair and the vice-chairs of the ECON committee about the state of negotiations and drafting of macroeconomic adjustment programmes and of the conclusions drawn from monitoring their implementation. Indirectly, the European Parliament receives, via this obligation to inform, information about the content and the state of negotiations of MoUs under the ESM Treaty as well as information about the monitoring of the implementation of MoUs. This derives from the fact that under Article 7(2)(2) Regulation 472/2013 the ‘Commission shall ensure that the memorandum of understanding signed by the Commission on behalf of the ESM ( . . . ) is fully consistent with the macroeconomic adjustment programme approved by the Council’. The regulation creates an obligation of synchronising the MoU with the macroeconomic adjustment programmes.146 Since the MoU under the ESM Treaty must be fully consistent with the macroeconomic adjustment programme, by receiving information about macroeconomic adjustment programmes the European Parliament is also informed about the content and the evaluation of ESM MoUs.

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In terms of instruments for accountability, the European Parliament has no tools at its disposal as a consequence of the fact that the main actors in safeguarding the financial

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144 See European Parliament, ‘In- depth analysis: European Stability Mechanism (ESM): Main Features, Instruments and Accountability’ (PE 497.755, April 2018) 13. 145 Article 7(1)(5) and (4)(3) Regulation (EU) 472/2013. 146 Whilst this synchronization is easy to realize with regard to new requests, there are doubts as to whether a MoU that was signed by the Commission before the entry into force of Regulation (EU) 472/2013 has to be adapted to a later macroeconomic adjustment programme. There is no legal obligation to synchronize older MoU with later macroeconomic adjustment programmes. See René Repasi, ‘Judicial protection against austerity measures in the euro area’ (2017) 54 Common Market Law Review 1123, 1148 (hereafter Repasi, ‘Judicial protection against austerity measures in the euro area’). For a different view: Menelaos Markakis and Paul Dermine, ‘Bailouts, the legal status of Memoranda of Understanding, and the scope of application of the EU Charter’ (2018) 55 Common Market Law Review 643, 655ff.

484 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS stability of the euro area are either located outside the EU legal framework, such as the ESM, or are of purely intergovernmental nature, such as the Eurogroup. It might hold the Commission as a college to account for a potential mismanagement in the negotiation and monitoring of MoUs and for violating the Treaties in doing both by voting on a motion of censure (Article 234 TFEU). The legal duty that would be violated by the Commission would be its obligation under Article 17(1) TEU ‘to refrain from signing a memorandum of understanding whose consistency with EU law it doubts’147 and the resulting duty to prevent any kind of violation of EU law in the process of negotiating and implementing an MoU.148 Whilst a legal case could be made for basing a motion of censure against the Commission under Article 234 TFEU, the political costs for dismissing the entire college because of the mismanagement in the area of safeguarding the financial stability seem to be out of proportion so that such motion would hardly ever be successful—bearing in mind that the political responsibility lies with the ESM Board of Governors and, by that, with the collective of the finance ministers of the euro area Member States.

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d) The internal market dimension of EMU The internal market dimension of EMU focuses on financial market regulation and its uniform enforcement. Whilst the European Parliament is involved in this dimension of EMU as a fully-fledged co-legislator in defining the substantive rules of financial market regulation,149 it is rather a bystander when it comes to the political control of the European bodies entrusted with the supervision of financial market products and actors. Credit institutions are supervised by the European Banking Authority (EBA) and the SSM, and their resolution is managed by the SRM. Securities are supervised by the European Securities and Markets Authority (ESMA),150 and insurance companies are supervised by the European Insurance and Occupational Pensions Authority (EIOPA).151 The relevant applicable yardstick as the fundamental condition for accountability consists when assessing the performance of actors in the field of internal market law of two elements: the overarching goals to ensure the functioning of the internal market, the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State, on the one hand, and the relevant secondary legal acts the implementation of which the actor in question has to supervise, on the other. The broadness of the overarching objectives, their unclear relationship and the difficulty to quantify them makes it complicated to monitor them.152 This leads ultimately to a broad leeway for actors involved in internal market supervision, the limits of which become the subject of the performance assessment. The overarching objectives can hence only be considered as 147 Joined Cases C-8/15 P to C-10/15 P Ledra Advertising Ltd and others v European Commission and European Central Bank (ECB) [2016] ECLI:EU:C:2016:701, para 59. 148 Repasi, ‘Judicial protection against austerity measures in the euro area’ (n 146) 1154. 149 See paragraph 17.41. 150 Regulation (EU) 1095/2010. 151 Regulation (EU) 1094/2010. 152 Fabian Amtenbrink and Rosa M Lastra, ‘Securing Democratic Accountability of Financial Regulatory Agencies—A Theoretical Framework’ in R V De Mulder (ed), Mitigating Risk in the Context of safety and security. How Relevant is a Rational Approach? (Rotterdam: Erasmus School of Law & Research School for Safety and Security (OMV) 2008) 125, 127 (hereafter Amtenbrink and Lastra, ‘Securing Democratic Accountability of Financial Regulatory Agencies’).

The Role of the European Parliament in EMU 485 approximation values for the performance check, which in itself waters already down the accountability of the actors involved.153 When examining further conditions of accountability and at instruments for accountability in order to assess the degree and the quality of the political control exercised by the European Parliament vis-à-vis European bodies entrusted with the supervision of financial markets, a distinction has to be drawn. On the one hand there are those agencies that were created by the Union legislator on the basis of a secondary legal act (the European Supervisory Authorities (ESA)154 and the SRM). On the other hand, there are Primary law EU institutions, such as the ECB, that have been assigned supervisory tasks. This distinction can be explained by the position of the respective European body in the hierarchy of bodies in the EU. Whilst the former were created by the Union legislator and are therefore located underneath them (which manifests itself by the fact that the Union legislator can change the rules governing these bodies), the legal source of the latter is Primary law, which gives them the same rank as the Union legislator. This difference in rank already allows for a different set of instruments when it comes to getting information in order to assess the performance of the body as well as when it comes to attaching consequences to a given performance assessment.

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ESAs are accountable to the European Parliament and the Council, according to their founding regulations.155 Accountability arrangements foreseen by the founding regulations compensate for the independence granted to them by the same regulations.156 In terms of conditions of accountability ESAs have to submit an annual report157 and an annual and multi-annual work programme158 to the European Parliament. The Parliament may also invite the Chairperson to make a statement before it and to submit a report in writing on the main activities. Any question put to the Chairperson by MEPs have to be answered.159 This results, in practice, in annual hearing of the chairperson in the European Parliament’s ECON Committee and the participation of ESAs in ECON scrutiny, policy and legislative hearings.160 Evidence shows that Parliament makes regularly use of its rights to receive information from ESAs.161 It should be noted that the revision of the ESA founding regulations, which entered into force on 1 January 2020, has introduced a transparency obligation for decisions adopted by the Board of Supervisors. According to this, the Board has to

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153 Amtenbrink and Lastra, ‘Securing Democratic Accountability of Financial Regulatory Agencies’ (n 152) 127; Eva Hüpkes, Marc Quintyn, and Michael Taylor, ‘The Accountability of Financial Sector Supervisors: Principles and Practice’ (2005) IMF Working Paper WP/05/51, 11. 154 The European Supervisory Authorities are EBA, ESMA, and EIOPA. 155 Article 3(1) Regulation (EU) 1093/2010 of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority) [2010] OJ L331/12; Regulation (EU) 1094/2010 of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority) [2010] OJ L331/ 48; Regulation (EU) 1095/2010 of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority) [2010] OJ L331/84 (hereafter altogether: ‘ESA Founding Regulations’). The ESA Founding Regulations were recently revised by Regulation (EU) 2019/2175 of 18 December [2019] OJ L334/1. 156 Articles 1(5) and 42 ESA Founding Regulations. 157 Articles 3(3) and 43(5) ESA Founding Regulations. 158 Article 43(4) and (6) ESA Founding Regulations. 159 Article 3(4) ESA Founding Regulations. If issues raised by MEPs concern confidential matters, the Chairperson shall hold, upon request, confidential oral discussions behind closed doors with the Chair, Vice- Chairs, and Coordinators of the ECON committee (Article 3(8)). 160 See Niamh Moloney, The Age of ESMA: Governing EU Financial Markets (Hart Publishing 2018) 88ff (hereafter Moloney, The Age of ESMA). 161 Moloney, The Age of ESMA (n 160) 89ff.

486 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS provide the Parliament within six weeks from the date of the meeting with a comprehensive and meaningful record of the meeting of the Board that enables a full understanding of the discussions, including an annotated list of decisions.162 17.75

In terms of instruments for accountability the European Parliament has a broad range of instruments at its disposal. First and foremost, it can change the legal basis of an ESA given that ESAs are established by a secondary legal act, provided that the European Commission presents a legislative proposal. Furthermore, it can override policy choices made by ESAs in their rule-making capacity163 by objecting delegated acts that were developed by an ESA but formally adopted by the Commission for reasons of interinstitutional balance,164 or by revoking the delegation.165 The European Parliament is fully involved in the control of the budgets of the ESAs and has to grant budgetary discharge.166 In terms of (re-)appointment or dismissal of decision-makers the European Parliament has less powers. The chairperson of an ESA is appointed by the Council based on a shortlist of qualified candidates, which was drawn up by the respective Board of Supervisors, with the assistance of the Commission, subject to a right of objection by the Parliament, which gives Parliament the ultimate say when it comes to the (re-)appointment of the chairperson. It can, however, not dismiss the chairperson on its own motion. Although the Parliament formally removes the person concerned from office, this can only be done following a decision of the Council, adopted after consulting the Board of Supervisors.167 The dismissal of the chairperson is hence no autonomous instrument for Parliament to hold ESAs to account.

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Most notably, the European Parliament has no possibility to review and override decisions taken by ESAs acting in their supervisory capacity, in contrast to their policy choices made in their rule-making capacity.168 In general, all ESAs can adopt decisions directly applicable to financial market operators when other secondary law allows for the temporary prohibition or restriction of financial activities in situations of threats to the orderly functioning and integrity of financial markets and stability,169 in the event of a breach of Union law by the actually competent national authority,170 in emergency situations where the actually competent national authority did not take necessary actions171 and in cases of disagreement between competent national authorities in cross- border situations.172 Besides, ESMA in particular can adopt directly applicable decisions with regard to short-selling,173 Credit Rating Agencies,174 and trade 162 Article 43a ESA Founding Regulations. 163 See on that capacity Chapter 20 at paragraphs 20.31–20.36. 164 Article 13 ESA Founding Regulations. 165 Article 12 ESA Founding Regulations. 166 Article 64(9) and (10) ESA Founding Regulations. 167 Article 48(5) ESA Founding Regulations. This procedure was revised by Regulation (EU) 2019/2175, which strengthened the Council at the expense of the European Parliament. Prior to this, the European Parliament’s removal of a chairperson was dependent upon a decision of the Board of Supervisors without any involvement of the Council. 168 See on that capacity Chapter 20 at paragraphs 20.37–20.45. 169 Article 9(5) ESA Founding Regulations. For further details on the temporary intervention powers of ESAs: Raffaele D’Ambrosio, ‘The temporary intervention powers of the European Banking Authority and the European Securities and Markets Authority: content and limits’ (2018) 19 ERA Forum 33–47. 170 Article 17(6) ESA Founding Regulations. 171 Article 18(4) ESA Founding Regulations. 172 Article 19(4) ESA Founding Regulations. 173 Article 28 Regulation (EU) 236/2012, the legality of which was confirmed by Case C-270/12 United Kingdom v European Parliament and Council of the European Union [2014] ECLI:EU:C:2014:18. 174 Articles 21–25 Regulation (EC) 1060/2009 and Article 36a thereof on fines.

The Role of the European Parliament in EMU 487 repositories.175 Although the exercise of these powers is subject to judicial control, it escapes any political ex post control. This lack of ex post control is compensated by the need for a prior decision of the Commission that is ignored by national competent authorities before any decision can be taken by an ESA or by the need for a prior decision of the Council determining the existence of an emergency situation. These ex ante control mechanisms do, however, not include the European Parliament. Parliament controls therefore the supervisory powers of the ESAs only when defining these powers in the empowering legal act. The accountability situation is the somewhat different to the one of the ESAs when it comes to the Single Resolution Mechanism (SRM).176 Whilst in terms of laying the conditions of accountability, the European Parliament is fully informed about the SRM’s activities, it has only few instruments at its disposal to attach any consequences to a negative performance assessment. The Single Resolution Board (SRB) has to submit an annual report to the European Parliament and the Chair presents it there in public. At the request of the Parliament, the Chair participates in a hearing by the competent committee and the SRB has to reply to questions posed by MEPs orally or in writing. The SRB Chair meets for a confidential oral discussion behind closed doors with the Chair and Vice-Chairs of the ECON committee to discuss matters that are necessary for the exercise of the political control function of the Parliament. In terms of instruments for accountability, the European Parliament has a say in the appointment and removal of the Chair, the Vice-Chair and the four full-time members of the Board. More specifically, Parliament may approve or reject a proposal made by the Commission for the appointment of the Chair, the Vice-Chair, and four full-time members of the Board.177 Since the term of office is not renewable,178 the Parliament’s veto right on appointments does not equal an instrument of accountability as acting personnel cannot be reappointed. Removal from office requires also the approval of the European Parliament, but such a removal cannot be initiated by the Parliament as a consequence of its performance assessment. It has only the right to inform the Commission about its view that the Chair, Vice-Chair or one of the four full-time members of the Board appointed by EU institutions fulfils conditions for their removal.179 It remains then within the discretion of the Commission whether it proposes the removal to the Council that ultimately decides on it after the approval of the Parliament. The possible dismissal of leading personnel of the SRM can therefore not be considered a proper instrument of accountability. The European Parliament moreover does not grant any budgetary discharge as the budget of the SRM is not considered to be a part of the Union budget.180 Finally, the European Parliament is also not involved in the ex post control of SRB decisions, especially those on the adoption of a resolution scheme.181 Only the Commission and the Council have the right to object 175 Article 73 Regulation (EU) 648/2012. 176 Article 45 Regulation (EU) 806/2014. The relationship between the SRB and the European Parliament defined by this article has been specified by and Agreement between the European Parliament and the Single Resolution Board on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the Single Resolution Board within the framework of the Single Resolution Mechanism [2015] OJ L339/58. 177 Article 56(6)(3) Regulation (EU) 806/2014. 178 Article 56(5) Regulation (EU) 806/2014. There is an exception for the first Chair, Vice-Chair and four full- members of the SRB as their term is limited to three years and can be once renewed for a term of five years, Article 56(7) Regulation (EU) 806/2014. 179 Article 56(9)(2) Regulation (EU) 806/2014. 180 Article 57 Regulation (EU) 806/2014. 181 Article 18(7) Regulation (EU) 806/2014.

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488 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS decisions taken by the SRB and request changes to it. The Parliament is not mentioned in this procedure. In sum, the European Parliament gathers enough information in order to assess the SRB’s performance properly. Yet, it has no effective instruments at its disposal to attach any consequences to its assessment. 17.78

Finally, when examining the Single Supervisory Mechanism (SSM), the degree of accountability of the main European actor within the SSM, the ECB, vis-à-vis the European Parliament is less intense compared to the ESAs or the SRB. This mainly derives from the fact that the ECB is an EU institution created and governed by Primary law. Its main task is the conduct of monetary policy and ‘when exercising the powers and carrying out the tasks and duties conferred upon [the ECB] by the Treaties’ the ECB’s independence is guaranteed by Article 130 TFEU. Whether the same independence applies to the ECB when exercising tasks of banking supervision is a matter of academic debate.182 Given that the wording of Article 130 TFEU refers to a conferral by the Treaties and not by means of secondary law and given that banking supervision could also have conferred upon a Union agency on the basis of Article 114(1) TFEU without requiring a comparable independence guarantee as the one foreseen for the ECB when conducting monetary policy, the more convincing reasons speak in favour of a non-application of Article 130 TFEU to the ECB when exercising tasks of banking supervision. Yet, Article 19 SSM Regulation establishes a secondary legal independence guarantee for the ECB when acting as single supervisory authority. As a counterbalance for the independence guarantee the SSM Regulation provides for an accountability of the ECB vis-à-vis the European Parliament in its Article 20. In terms of conditions for accountability, the ECB submits an annual report to the European Parliament, which the Chair of the Supervisory Board presents in public to it. At the request of the Parliament, the Chair participates in a hearing in front of the competent committee on the execution of the banking supervisory tasks. The ECB has to reply to questions submitted by MEPs orally or in writing. The SSM Chair meets for a confidential oral discussion behind closed doors with the Chair and Vice-Chairs of the ECON committee to discuss matters that are necessary for the exercise of the political control function of the Parliament.183 In terms of instruments for accountability, the European Parliament has no possibilities to attach any consequences to its assessment of the ECB’s performance. It takes part in the appointment procedure of the Chair and the Vice-Chair of the Supervisory Board by giving its approval to a proposal made by the ECB. But since it cannot initiate the removal of the Chair and the Vice-Chair on its own motion and since the Chair’s term in not renewable so that a possible approval of the Parliament for a reappointment is not needed, the Parliament’s involvement in the appointment procedures does not equal a proper instrument of accountability. Furthermore, the European Parliament does not grant discharge to the ECB’s budget. It can also not override any decisions taken by the Supervisory Board. In sum, the European Parliament has access to enough information to conduct a proper assessment of the ECB’s performance within the framework of the SSM, but it cannot attach any consequences to its assessment. 182 In favour, eg Christoph Ohler in Chapter 37 at paragraph 37.76; against, eg René Repasi, ‘Limits and opportunities for the ECB in the multi-tier governance’ (Study commissioned by the European Parliament, January 2013) 17. 183 Detailed arrangements for the information exchange were made in the Interinstitutional Agreement between the European Parliament and the European Central Bank on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB within the framework of the Single Supervisory Mechanism [2013] OJ L320/1.

The Role of the European Parliament in EMU 489 Given the lack of any serious instruments for accountability with regard to the ECB and to the SRB, the direct exchange between the European Parliament and both the ECB and the SRB in the shape of the personal hearings is not only an important means to gather information but becomes the only somewhat meaningful instrument of accountability as the respective Chair has to face questions from MEPs. The exchanges between the chair and the European Parliament were modelled after the example of the ‘monetary dialogue’184 and can hence be called ‘Banking Dialogue’. It is worth mentioning that the dialogue with the Chair of the SRB and Chair of the Supervisory Board take place separately. One might therefore consider these as separate dialogues.185 Given the interconnections between banking supervision and banking resolution, the comparable accountability situation of the SRB and the SSM and the centralized coordination of the Banking Dialogue in the European Parliament with the ‘Banking Union Working Group’, the direct exchanges of the European Parliament with the SRB and the Supervisory Board are considered to be part of one and the same ‘Banking Dialogue’. This Dialogue takes place in the shape of regular hearings, ad-hoc exchanges and confidential meetings as well as of replies in writing to questions asked by MEPs. The regular exchanges are prepared by external experts briefing the ECON Committee of the European Parliament. The Parliament’s ‘Banking Union Working Group’ (BUWG), which is composed of the Chair, the four Vice-Chairs, and eight MEPs of the ECON Committee, ‘monitors the implementation of the Single Supervisory Mechanism (SSM) and of the Single Resolution Mechanism (SRM)’ and ‘scrutinizes the exercise of the European Central Bank’s tasks as bank supervisor and the exercise of the Single Resolution Board’s tasks as resolution authority for significant and cross border banking groups established within participating Member States’.186 The BUWG has its own working programme, meets regularly and decides on the topics to be covered by expert briefings.187 External experts are chosen from a list set up by the Directorate-General Internal Policies of the Union of the European Parliament following an open tender procedure, which is valid for the entire legislative term. Besides, the European Parliament’s Economic Governance Support Unit (EGOV) provides for in-house expertise and briefing papers. In practice, there are on the average three exchanges with the Chair of the Supervisory Board and with the Chair of the SRB per year.188 Next to these open and public exchanges, the European Parliament can also access confidential information in a secure reading room.189 A qualitative assessment of the ‘Banking Dialogue’ with the SSM by Amtenbrink and Markakis reveals that

184 See, on the monetary dialogue, paragraphs 17.48ff. 185 See for example Fabian Amtenbrink and Menelaos Markakis, ‘Towards a Meaningful Prudential Supervision Dialogue in the Euro Area? A Study of Interaction between the European Parliament and the European Central Bank in the Single Supervisory Mechanism’ (2019) 44 European Law Review 3–23 (hereafter Amtenbrink and Markakis, ‘Towards a Meaningful Prudential Supervision Dialogue in the Euro Area?’) calling the exchange with the Chair of the Supervisory Board ‘prudential supervision dialogue’. 186 European Parliament accessed 10 February 2020. 187 Amtenbrink and Markakis, ‘Towards a Meaningful Prudential Supervision Dialogue in the Euro Area?’ (n 185) 16. 188 See for the SSM: European Parliament, ‘Accountability arrangements and legal base for hearings in the European Parliament’ (August 2019) accessed 10 February 2020; for the SRM: European Parliament, ‘Accountability arrangements and legal base for hearings in the European Parliament’ (August 2019) accessed 10 February  2020. 189 Amtenbrink and Markakis, ‘Towards a Meaningful Prudential Supervision Dialogue in the Euro Area?’ (n 185) 17.

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490 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS MEPs make actively use of their right to question the Chair of the Supervisory Board, but frequently put also forward questions on monetary policy issues, which the Chair of the Supervisory Board declines to comment on.190 These authors flag the lack of a clear benchmark against which MEPs could check the performance of the SSM as a shortcoming of the Dialogue as this leads to a rather diffuse exchange between the institution that is supposed to hold to account with the one that is supposed to be held to account.191 Finally, they consider it a general weakness of the accountability arrangements that there are separate actors with separate exchange channels responsible for an activity that economically is hard to separate (monetary stimulus for financial market operators, their supervision and resolution). In sum, the ‘Banking Dialogue’ certainly increases the need for the SRB and the ECB to explain themselves in front of a bigger public and serves its purpose to improve the flow of information between them and the European Parliament but it cannot be considered a meaningful instrument of accountability.

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e) Extraordinary control measures: Committees of Inquiry The ultimate instrument for the European Parliament to exercise its political control function is to set up a committee of inquiry. In matters relating to EMU, this instrument is of particular interest as it is not limited by the ECB’s independence guarantee, as it also covers Member States’ actions and as it also allows to look at executive actions that undermine EU law without having crossed the threshold of a violation of law. Given the broadness of topics that this instrument is able to cover and given the lack of political control instruments at the disposal of the European Parliament in EMU, the demand to set up a committee of inquiry became an important and controversial Parliamentary instrument of last resort in politically sensitive fields such as the activities of the ‘troika’ or harmful tax competition. Before looking into the practice of Parliamentary inquiries in matters relating to EMU, the functioning and the conditions for setting up a committee of inquiry will be looked at briefly. Under Article 226 TFEU the European Parliament may do so in order to investigate ‘alleged contraventions or maladministration in the implementation of Union law’. Rule 208 of the Rules of Procedure of the European Parliament specifies that subject-matter of a committee of inquiry can be ‘the act of an institution or body of the European Union, of a public administrative body of a Member State, or of persons empowered by Union law’. The Parliament can hence also investigate the actions of Member States. Only subject-matters ‘where the alleged facts are being examined before a court and while the case is still subject to legal proceedings’ are excluded. The first possible group of subject-matters relates to ‘contraventions’, which require an alleged specific breach of Union law by Union institutions, Member States’ authorities or persons empowered by Union law. The second group refers to ‘maladministration’, which may occur even when Union law is applied correctly. To put it differently, any shortcomings in the implementation of Union law are sufficient. This broad understanding is supported by the rules applicable to the European Ombudsman, who under Article 228 TFEU investigates complaints concerning instances of maladministration. The Ombudsman defines the term ‘maladministration’ as follows: ‘Maladministration occurs 190 Amtenbrink and Markakis, ‘Towards a Meaningful Prudential Supervision Dialogue in the Euro Area?’ (n 185) 20. 191 Amtenbrink and Markakis, ‘Towards a Meaningful Prudential Supervision Dialogue in the Euro Area?’ (n 185) 23.

The Role of the European Parliament in EMU 491 when a public body fails to act in accordance with a rule or principle which is binding upon it.’192 This broad understanding of the term of ‘maladministration’ is reflected by the report of the European Parliament’s Committee of Inquiry on alleged contraventions or maladministration in the implementation of EU law in relation to BSE, in which the Committee considered it ‘maladministration’ that the Member State UK ‘has failed to ensure the proper application of . . . measures and has not carried out the necessary checks’.193 This highlights that, although there is a general compliance with EU rules, the lack of proper implementation is captured under Article 226 TFEU. Accordingly, the range of topics that a Committee of Inquiry can investigate is rather broad. In procedural terms, one quarter of MEPs can request to set up a committee of inquiry. Such request must precisely specify the subject of the inquiry and include a detailed statement of the grounds for it. The request is addressed to the President of the Parliament in his capacity as chair of the Conference of Presidents to put the request on the agenda of the next meeting of the CoP. The CoP adopts on the basis of the request a proposal to set up a committee of inquiry, which is put to a plenary vote. Only after a majority of the plenary voted in favour of installing a committee of inquiry, such committee can formally be set up. Neither the CoP nor the plenary may amend the subject of inquiry as defined by the requesting MEPs.194 Given that the plenary may only approve or reject a request for setting up a committee of inquiry, the question arises whether the CoP is legally obliged to put any request to a vote or whether it enjoys discretion to assess the admissibility of the request with a view to the legal requirements set by Article 226 TFEU. The protection of the minority rights in the European Parliament speaks in favour of a mere duty of the CoP to put the request on the agenda of the plenary without any control rights involved. Yet, since also the European Parliament is bound by the limits set by Article 226 TFEU, which would be checked by the Court of Justice under Article 263(1) TFEU, it is more convincing to allow the CoP to state on the legality of the request. This right has, however, to be interpreted strictly in the light of the fact that the right to set up a committee of inquiry is in its essence a right of the Parliamentary minority. Only unambiguous violations of the limits of Article 226 TFEU, which are the lack of any identifiable contravention or maladministration in the implementation of Union law, the lack of alleged facts or pending legal proceedings, can constitute the object of a rejection by the CoP to put a request to set up a committee of inquiry on the agenda of the plenary. In the context of EMU, this issue arose when in January 2015 a group of 192 MEPs requested a committee of inquiry on investigating tax rulings that were made public in the context of the ‘LuxLeaks’ scandal, where the so-called ‘International Consortium of Investigative Journalists’ uncovered tax evasion in Luxembourg at the time when Jean-Claude Juncker was prime minister of the Grand Duchy.195 Based on an opinion of the legal service of the European Parliament, which apparently criticized the request for having failed ‘to specify the object of investigation and [lacking] clarity in identifying the 192 The European Ombudsman, ‘Annual Report of 1997’ [1998] OJ C380/13. 193 European Parliament, ‘Report on alleged contraventions or maladministration in the implementation of Community law in relation to BSE, without prejudice to the jurisdiction of the Community and national courts’ (A4-0020/97). 194 Rule 207(1)(2) of the Rules of Procedure of the European Parliament (9th parliamentary term). 195 Aline Roberts, ‘Parliament shuns committee of inquiry into Luxleaks’ (Euractiv, 6 February 2015) accessed 10 February 2020 (hereafter Roberts, ‘Parliament shuns committee of inquiry into Luxleaks’).

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492 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS offences to be examined’,196 the CoP rejected the admissibility of the request to set up a committee of inquiry. This reasoning is rather on the edge of the presently suggested strict interpretation given that it is the very purpose of a committee of inquiry to bring up ‘clarity in identifying the offences to be examined’. 17.83

After having been formally set up, the committee of inquiry has to draft a report within 12 months from its constitutive meeting, a period which may twice be extended by three months.197 Pursuant to Decision 95/167,198 the committee of inquiry has the right to invite witnesses, organize hearings and request access to documents. It can, however, not force people to appear in front of it. The access to documents can also be refused for reasons of secrecy or of public or national security. Recommendations put forward in the concluding report of the committee of inquiry are not binding but the responsible standing committees must monitor the implementation of the recommendations and report thereon.199

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The committee of inquiry is the strongest political control instrument available to the European Parliament. In the field of EMU, it was used once as a reaction to the ‘Panama Papers’, which was another discovery of the ‘International Consortium of Investigative Journalists’. In June 2016 the European Parliament set up the ‘Committee of Inquiry to investigate alleged contraventions and maladministration in the application of Union law in relation to money laundering, tax avoidance and tax evasion’ (PANA),200 whose concluding report was adopted by the plenary on 16 November 2017.201

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If the requirements for setting up a committee of inquiry are not met or the question whether they are fulfilled cannot be answered with certainty, the European Parliament can also decide to establish a temporary special committee under Rule 207 of the Rules of Procedure or to conduct a standing committee inquiry. The former resembles the committee of inquiry, only it has no investigative powers. In the field of EMU special committees were established in order to investigate harmful tax practices in the Member States. The first of these special committees was set up instead of a temporary committee of inquiry in the abovementioned ‘LuxLeaks’ case.202 After the adoption of the concluding report,203 a follow-up special committee to continue the work of TAXE 1 was established (TAXE 2).204 Building on the findings of the TAXE 1 and TAXE 2 committees205 and of the PANA committee of inquiry the 196 Roberts, ‘Parliament shuns committee of inquiry into Luxleaks’ (n 195). 197 Rule 207(11) of the Rules of Procedure of the European Parliament (9th parliamentary term). 198 Decision of the European Parliament, the Council and the Commission of 6 March 1995 on the detailed provisions governing the exercise of the European Parliament’s right of inquiry [1995] OJ L113/1. 199 Rule 207(13) of the Rules of Procedure of the European Parliament (9th parliamentary term). 200 European Parliament Decision (EU) 2016/1021 of 8 June 2016 on setting up a Committee of Inquiry to investigate alleged contraventions and maladministration in the application of Union law in relation to money laundering, tax avoidance and tax evasion, its powers, numerical strength and term of office [2016] OJ L166/10. 201 European Parliament, ‘Report on the inquiry into money laundering, tax avoidance and tax evasion’ (A8- 0357/2017). 202 European Parliament Decision of 12 February 2015 on setting up a special committee on tax rulings and other measures similar in nature or effect, its powers, numerical strength and term of office [2015] OJ C310/ 42: TAXE 1 committee. 203 European Parliament resolution of 25 November 2015 on tax rulings and other measures similar in nature or effect (A8-0317/2015). 204 European Parliament Decision of 2 December 2015 on setting up a special committee on tax rulings and other measures similar in nature or effect (TAXE 2), its powers, numerical strength and term of office [2015] OJ C399/201. 205 European Parliament resolution of 6 July 2016 on tax rulings and other measures similar in nature or effect (A8-0223/2016).

The Role of the European Parliament in EMU 493 European Parliament installed the latest special committee on financial crimes, tax evasion and tax avoidance (TAX3),206 whose concluding report was adopted by the plenary on 26 March 2019.207 The policy recommendations of these committees despite being non- binding influenced the legislative agenda of the European Commission. The introduction of a mandatory country-by-country reporting by multinationals of profits and taxes was recommended by TAXE 1 and later proposed by the Commission.208 The instrument of a standing committee inquiry was used in 2014 in order to investigate the role and operations of the so-called ‘troika’ (ECB, Commission, and IMF) with regard to the euro area programme countries. There was one inquiry made by the ECON committee209 and one on the social aspects of the troika’s actions by the Employment committee (EMPL).210 Committees can make use of their own set of instruments such as organising public hearings, ordering expert analyses and setting up delegation visits for the purpose of drawing up a non-legislative own-initiative report under Rule 54 of the Rules of Procedure of the European Parliament. A committee inquiry is a suitable instrument where the investigations look into a situation that cannot be qualified either as ‘contravention’ or ‘maladministration’ in terms of Article 226 TFEU in order to set up a committee of inquiry or where the current state of knowledge about the alleged misbehaviour is not sufficient for drawing up a mandate.

3. Budgetary function In its budgetary function the European Parliament defines the financial means available for policy areas and for policy actors, controls the proper use of these means and grants discharge to those executing and administering the budget. The Parliament’s budgetary function does not only allow for checking on the use of finances but also serves more generally as a tool to control the activities of those financed by these sources. Postponing discharge or changing the available financial means as a consequence of a performance assessment made by the Parliament has serious implications on the behaviour of the institution or body funded by these financial means. The Parliament’s budgetary function applies to all financial means that are part of the general budget of the Union. In the area of EMU one can distinguish between budgets allocated to institutions and bodies entrusted with tasks in EMU and budget lines that finance EU funding for tasks related to EMU. The latter refers to the European Financial Stabilisation Mechanism (EFSM) and to a possible euro area budget.211 The EFSM grants loans or 206 European Parliament Decision of 1 March 2018 on setting up a special committee on financial crimes, tax evasion and tax avoidance (TAX3), and defining its responsibilities, numerical strength and term of office [2018] OJ C129/65. 207 European Parliament Resolution of 26 March 2019 on financial crimes, tax evasion and tax avoidance (A8- 0170/2019). 208 Commission, ‘Proposal for a Directive amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches’ COM (2016) 198 final. 209 European Parliament Resolution of 13 March 2014 on the enquiry on the role and operations of the Troika (ECB, Commission, and IMF) with regard to the euro area programme countries (A7-0149/2014). 210 European Parliament resolution of 13 March 2014 on Employment and social aspects of the role and operations of the Troika (ECB, Commission, and IMF) with regard to euro area programme countries (A7-0135/2014). 211 At the time of writing the European Commission has proposed a Reform Support Programme on the basis of Articles 175 and 197(2) TFEU that should serves achieving economic and social convergence and strengthening of resilience to stabilize the functioning of EMU: Commission, ‘Proposal for a Regulation on the establishment of the Reform Support Programme’ COM (2018) 391 final. More concretely, the euro area Member States want to create a Budgetary Instrument for Convergence and Competitiveness (BICC) within this

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494 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS credit lines to Member States, which are financed by borrowing-and-lending operations of the EFSM on financial markets that are guaranteed by the Union budget.212 The use of the Union budget guarantee is controlled by the European Parliament together with the Council in accordance with general EU budget law. The regulation does not provide for any additional say of the European Parliament in the procedure of granting a loan or disbursing it. Given that the legal base of the EFSM is Article 122(2) TFEU, the Parliament was also not involved in defining the legal base and the conditions for the EFSM to act. Accordingly, the European Parliament can only raise objections within the procedure granting discharge to the Commission based on reasons relating to the use of the general Union budget. Against the background of the function of the EFSM, this would only be the case once the guarantees in the Union budget are called upon, which would require a beneficiary Member State defaulting on its obligations. As long as the beneficiary Member States services its debts (principal and interest payments) the European Parliament would not get involved into the EFSM. The various proposals for a euro area budget also do not provide for a deeper involvement of the European Parliament than the one foreseen by the general EU budget law and by the legislative procedure for the adoption of the legal base for disbursements.213 17.89

Whilst the loose inclusion of the European Parliament as compared to the Council in funding operations related to EMU matters seems to be a common pattern in the legal acts framing these funding operations, it remains legally questionable. This derives from a combined reading of the principles of the unity of the EU budget and its completeness, as enshrined in Article 310 TFEU, and of the (shared) democratic budgetary authority of the European Parliament, as foreseen by Article 14(1) TEU. Read together, these principles want to ensure that the delicate system of checks and balances between the EU institutions and the Member States (principle of unity and completeness) and the European Parliament’s role in it (principle of democratic budgetary control and principle of institutional balance) established by series of Treaty revisions is upheld. It means that all revenues and all expenditures of the Union are part of one EU budget, which is set up by the Parliament and the Council and the implementation of which is controlled by these institutions. In other words, whenever the Union budget is liable for something, Parliament must have been involved in either defining ex ante the conditions for making use of the Union’s funds or by raising a veto ex post against draft decisions that authorize payments, which ultimately might have to be borne by the Union budget. The ex ante dimension is supported by Article 310(3) TFEU that clarifies that there can be no appropriation without a corresponding legally binding Union act providing a legal basis for it, in the adoption of which the Parliament is involved in accordance with the applicable legislative procedure. If, for reasons linked to the complexity of the subject-matter concerned, the conditions laid down by this legal act are rather vague or if the applicable legislative procedure does not provide for a meaningful involvement of the Parliament, the ex post dimension becomes more relevant so that the Parliament must be involved in the appropriations process. The European programme, see Eurogroup, ‘Term sheet on the Budgetary Instrument for Convergence and Competitiveness’ (Press Release, 14 June 2019) accessed 10 February  2020. 212 Commission, ‘Communication to the Council and the Economic and Financial Committee on the European Financial Stabilisation Mechanism’ COM (2010) 713 final, 2ff. 213 Current proposals are based on Article 175(3) TFEU, which refers to the ordinary legislative procedure.

The Role of the European Parliament in EMU 495 Globalisation Adjustment Fund (EGF) is an example for this:214 mobilising a financial contribution for active labour market measures needs a decision by the Council and the Parliament after the Commission concluded that the conditions for such contribution are met.215 The counter-example is the EFSM, where the Parliament is neither involved in the setup of the mechanism nor in the appropriations process. This omission of the Parliament in this particular case can be justified by the legal base of the EFSM, which is Article 122(2) TFEU, that requires that the Parliament is only informed about the use of this article afterwards. This is, however, a clearly distinguishable situation and, at best, an exception from the abovementioned legal rule. Besides funding from the EU budget for tasks related to EMU, Union institutions and bodies that are entrusted with tasks in EMU have to be evaluated against the principle of Parliament’s budgetary authority. In order to be subject of the Parliament’s budgetary authority, the respective budget of the institution or body must be part of the general EU budget. This already rules out the ESM’s budget, as the ESM is not part of the EU legal and budgetary framework. Furthermore, the ECB’s budget is excluded from the European Parliament’s oversight for a similar reason. The ECB has, according to Article 282(3) TFEU, an own legal personality and is independent in the management of its finances.216 The ECB’s budget is therefore not part of the general budget of the Union. The same holds true for the budget of the SRB, although it is a Union agency and, by that, derives its own legal personality from EU secondary law and not, as is the case for the ECB, from primary law.217 The SRB informs the European Parliament about its budget, the budgetary management and the final accounts as well as the provisional for the preceding year. The European Parliament does, however, confirm the budget or grants discharge to the SRB.

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The situation is somewhat different when it comes to the ESAs. Here the European Parliament approves together with the Council the establishment plan of the ESAs and authorizes the appropriations for the balancing contribution of the general EU budget to the respective ESA.218 If the management board of an ESA intends to implement any project which may have significant financial implications for the funding of its budget it has to notify the European Parliament and the Council of it, which may issue an opinion that has as an effect to halt the implementation of the project.219 Finally, the European Parliament grants discharge to the respective ESA, following a recommendation of the Council.220

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4. Election function The election or appointment function of the European Parliament is one of the most politically relevant functions the Parliament has. By appointing a specific person for a certain position, the Parliament awards both the person and the position the legitimacy it disposes of. Seen from the perspective of awarding legitimacy, the Parliament should also be able to withdraw the legitimacy it once awarded to a person under predefined conditions. The fact 214 European Parliament and Council Regulation (EU) 1309/2013 of 17 December 2013 on the European Globalisation Adjustment Fund (2014–2020) [2013] OJ L347/855. 215 Article 15(4) Regulation (EU) 1309/2013. 216 For more on the ECB’s financial independence, see Chapter 14 at paragraph 14.56. 217 Article 58 Regulation (EU) 806/2014. 218 Article 63(5) ESA Founding Regulations. 219 Article 63(7) ESA Founding Regulations. 220 Article 64(10) ESA Founding Regulations.

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496 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS that in some instances the conditions for the appointment and for the dismissal of certain personnel differ shows that the role of the European Parliament is not always to award its legitimacy to a certain person or position but to control the selection process of candidates whose legitimacy to act has a different source (such as the Treaties or national governmental legitimacy). 17.93

In relation to EMU the most important appointment procedure is the one of the Commissioner responsible for economic and monetary affairs. This person is appointed as part of the college of Commissioners by the European Council after a vote of consent by the European Parliament.221 Although the Parliament has no formal right to block the appointment of a single Commissioner, in practice, each candidate has to appear in front of the responsible committee(s) for an intense public hearing and can be rejected by the responsible committee(s).222 A candidate will only be invited to this hearing if the legal affairs committee has not concluded that a candidate is unable to exercise his functions due to a conflict of financial interests.223 Immediately after the hearing, the chair(s) and the party group coordinators of the responsible committee(s) evaluate the candidate’s performance. If they reject a candidate unanimously, the Chair has to submit a letter of rejection. If there is no approval by coordinators representing a majority of two-thirds of the committee membership, the approval of a candidate is put to a vote by all the members of the responsible committee(s). If the candidate reaches no majority amongst these members, the chair submits a letter of rejection.224 Although these letters are not legally binding and therefore do not legally have the effect to reject a candidate, the Parliament understands a rejection of a single candidate as a reason to reject the entire college of Commissioners under Article 17(7)(3) TEU. The rejection of a single candidate has therefore in practice as a consequence that the Member State concerned has to propose a new candidate to the president-elect of the European Commission. Although Parliament made use of this right at multiple occasions in the past, it never concerned a candidate for the portfolio relating to EMU.225

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As with regard to the appointment of the Commission, also with regard to the dismissal the European Parliament can only file a motion of censure of the entire college of Commissioners but not of single Commissioners.226 Under the Framework Agreement on relations between the European Parliament and the European Commission,227 however, the Parliament may ask the President of the Commission to ‘seriously consider whether to request’ a single Commissioner to resign, in accordance with the respective right to do so under Article 17(6) TEU.228 If the president of the Commission makes use of this right, the Commissioner concerned is under an obligation to step down. Following such request from the Parliament the President may either require the resignation of the Commissioner concerned or explain his refusal to do so before Parliament. Until the time of writing, the 221 Article 17(7)(3) TEU. 222 Rule 125(4) in conjunction with Annex VII of the Rules of Procedure of the European Parliament (9th term). 223 Article 2(3) of Annex VII. 224 Article 4 of Annex VII. 225 The only exception was the UK candidate Jonathan Hill who should be responsible for the ‘financial stability, financial services and Capital Markets Union’ in the Juncker commission (2014–2019). He had to appear for a second hearing in front of the ECON committee, after which he got approved by the members of the committee. 226 Article 234 TFEU. 227 Framework Agreement on relations between the European Parliament and the European Commission [2010] OJ L304/47. 228 Point 5 thereof.

The Role of the European Parliament in EMU 497 Parliament has not yet made use of this right. In the context of EMU, this right might play an important role as the portfolios a Commissioner for economic and monetary affairs has to handle are highly political and publicly observed. If a serious infraction leads to a loss in confidence in the responsible Commissioner in the European Parliament, it will be quite difficult for a president of the Commission to defend a rejection to ask this Commissioner to resign in public. With a view to the other actors in EMU, the European Parliament’s right to appoint and to dismiss personnel is more limited than with a regard to the Commission. The Chairperson of the ESAs is appointed by the Council, based on a shortlist of qualified candidates drawn up by the respective Board of Supervisors, which the European Parliament can object after a public hearing.229 The Chairperson is formally removed by the Parliament but only following a decision of the Council, adopted after consulting the Board of Supervisors.230 It cannot dismiss the Chairperson on its own motion. The appointment and dismissal of the Chair, the Vice-Chair and the four further full-time members of the SRB231 as well as of the Chair and the Vice-Chair of the SSM Supervisory Board232 follow the same model: the European Parliament organizes a public hearing of a candidate proposed by another body and votes on approving this proposal, followed by which the Council appoints the selected persons. In the case of the SSM the proposal is made by the ECB and in the case of the SRB by the European Commission. The difference between both procedures is that before proposing concrete candidates for the SRB the Commission has also to submit a shortlist of candidates to the European Parliament. Removal of SSM or SRB personnel requires also the approval by the European Parliament of a proposal submitted by the ECB (in the case of the SSM) or by the Commission (in the case of the SRB). In contrast to the ESAs, however, the European Parliament may inform the ECB (in the case of the SSM) or the Commission (in case of the SRB) of potential reasons to remove a certain person, to which these institutions have to respond.

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The least influence the European Parliament exercises on the appointment and dismissal of the President, the Vice-President, and the other members of the ECB Executive Board. They are appointed by the European Council after a consultation of the European Parliament. The responsible committee invites the candidates for these positions to give a public statement in front of it and to answer to questions by MEPs. After that hearing the committee votes on whether to approve the nomination or not. If a candidate is rejected the President of the European Parliament asks for the withdrawal of the nomination.233 The European Council is not bound by this vote and can appoint the person irrespective of the negative vote of the Parliament. In its 1998 resolution on democratic accountability in the third phase of EMU the European Parliament therefore ‘calls on the governments of Member States not to appoint candidates that do not have the approval of the European Parliament [and] calls, in the light of this experience, for legal consolidation of this practice at a later stage’.234

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229 Article 48(2) ESA Founding Regulations. 230 Article 48(5) ESA Founding Regulations. 231 Article 56 Regulation (EU) 806/2014. 232 Article 26 Regulation (EU) 1024/2013. 233 Rule 130 of the Rules of Procedure of the European Parliament (9th legislative term). 234 European Parliament Resolution on democratic accountability in the third phase of EMU [1998] OJ C138/ 177, point 16.

498 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS This call did, however, not matter when in 2012 the European Parliament refused to approve the nomination of Yves Mersch due to the failure to consider any female candidates for the vacancy.235 The European Council proceeded with his nomination. The Parliament was, however, able to at least delay the nomination procedure as it scheduled the necessary hearing for four months after the end of the mandate of José-Manuel González-Páramo whom Mersch was supposed to replace. There is no possibility foreseen for the European Parliament to remove any member of the Executive Board of the ECB.

IV. The Role of National Parliaments 17.97

National Parliaments represent the second wing of representative democracy, on which the function of the Union is founded.236 They primarily legitimize and control their respective national governments acting in the Council, the Eurogroup, the European Council and the Euro Summit. Protocol (No 1) on the role of national Parliaments in the European Union and Protocol (No 2) on the application of the principles of subsidiarity and proportionality provides them with a role in EU decision-making and recent secondary legislation established formal exchange channels between national Parliaments and the European Commission, the ECB and some Union agencies in the area of EMU.

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In the following, the involvement of national Parliaments when exercising their Parliamentary functions in EMU-related matters will be described and analysed in the order of the respective function: the legislative function (see Section IV.A), the political control function (see Section IV.B) and the budgetary and election function (see Section IV.C). The perspective is here on how these functions are affected by EMU-related measures and how national Parliaments exercise their functions within the scope of EMU. Given the transnational nature of EMU, a final section will address the inter-Parliamentary cooperation in EMU affairs (see Section IV.D).

A. Legislative function 17.99

In their legislative function, national Parliaments adopt national laws and ratify international Treaties. They are the arena for national policy choices. The formation of a national political will through elections for Parliament and subsequent deliberations in Parliament characterize the mediation of legitimacy undertaken by national Parliaments. As long as the content of laws is defined by choices made in this process, national Parliaments fulfil their function as legitimacy-mediators. From this perspective the role of national Parliaments in the European decision-making process is only a minor one. National Parliaments cannot define the content of European legal acts.

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The total exclusion of national Parliaments from defining policy choices at European level becomes, however, less convincing the more these choices have as a consequence that 235 European Parliament Decision of 25 October 2012 on the Council recommendation for appointment of a Member of the Executive Board of the European Central Bank (A7-0348/2012). 236 Article 10(1) TEU.

The Role of National Parliaments 499 national political choices that differ from the European ones do not matter anymore. In issues relating to EMU this may occur in three situations: first, the definition of policy choices in Union legal acts based on Union competences by means of directives or regulations that have subsequently either be implemented by national laws or be applied by national authorities; second, national economic and fiscal policy choices are framed by Council recommendations that encourage certain economic policy choices or condemn a certain spending behaviour and require fiscal restraint; and third, macroeconomic adjustment programmes or ‘memoranda of understanding’ are negotiated with and approved by Union institutions that define national policy choices in return for financial assistance. The first situation concerns mainly the internal market dimension of EMU when the Union legislator adopts financial market regulation.237 The level of intrusion into the national political process is here the least significant as Union acts can only be adopted on the basis of Union competences transferred upon the Union by the EU Treaties, which were once ratified by national Parliaments. In other words, national Parliaments delegated the definition of political choices to the Union legislator. In order to review whether Union legislature has not surpassed the limits set by the Treaties protocol (No 2) provides with the ‘Early Warning Mechanism’ for a procedure to object any encroachment upon national prerogatives. Under Article 3 of Protocol (No 1) national Parliaments may send a reasoned opinion to the presidents of the European Parliament, the Council and the Commission within eight weeks after having received a draft legislative act claiming that this draft violates the principle of subsidiarity, which includes the excess over the limits of Union competences. If the number of these reasoned opinions represents at least one third of all the votes allocated to the national Parliaments the draft must be reviewed by the Commission (so-called ‘yellow card’). If the amount of reasoned opinions represents more than a simple majority of national Parliamentary chambers, the European Parliament and the Council must vote on the compatibility of the draft with the principle of subsidiarity if the Commission upholds it (so-called ‘orange card’).238 If the proposal does not receive either a majority of the votes cast in the European Parliament or a majority of 55 per cent of the members in the Council, the proposal fails. Besides, underneath the level of Treaty rules, since 2006, national Parliaments are invited by the European Commission to submit any sort of political and legal observations to its proposal beyond subsidiarity and competence-related issues (‘political dialogue’ or ‘Barroso initiative’),239 which the Commission is committed to consider in its drafting of legislative proposals. None of these instruments allow for a single national Parliament to veto EU draft legislative acts. Ultimately, the European policy choice supersedes any divergent national policy choice.

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The second interference of EU policy preferences with national policy choices takes place in economic policy coordination and budgetary control. Country-specific recommendations may suggest different policy choices to national legislators than the ones they intend to pursue. Once national budget entails excessive deficits, the existence of which the Council has formally acknowledged, Council recommendations may be addressed to the Member

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237 See paragraph 17.41. 238 Article 7 of Protocol (No 2). 239 Commission, ‘A Citizens’ Agenda: Delivering Results for Europe’ COM (2006) 211, 8ff; for further details see Davor Jančić, ‘The Barroso Initiative: Window Dressing or Democracy Boost?’ (2012) 8 Utrecht Law Review 78.

500 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS State concerned with suggestions how to bring the excessive deficit to an end. Those recommendations are, in contrast to the means, by which the Union interferes with national policy choices in the first situation, not legally binding. The national legislature may choose to ignore conflicting Union policy preferences. If national policy choices by a Member State whose currency is the euro produce excessive macroeconomic imbalances that are not remedied after Council recommendations,240 diverging policy choices of the national legislature may result in financial sanctions if they lead to a significant departure from the adjustment path towards the MTO although the Council required to take action,241 or if they imply an excessive deficit that is not addressed after the Council asked for policy action.242 Whilst being inconvenient, ultimately, financial sanctions do not prevent national Parliaments from adopting laws with content that diverges from EU policy preferences. The lack of a legally binding effect and the ultima ratio consequences of ‘only’ having to pay fines sets off against the interference of Union policy preferences with national policy choices that take place within economic policy coordination and budgetary surveillance. 17.103

The most problematic case is the situation in which the Member State concerned is in financial distress. In this situation the national government turns to the ESM and requests financial support. In order to receive financial assistance the government in question has to negotiate with the European Commission, in liaison with the ECB and the IMF, an MoU setting out policy choices the Member State concerned has to make in return.243 The implementation of these policy choices has to be made through national legislation. Whilst the measure takes the shape of national law, the policy choices embodied in it are European. In theory, the national Parliament of the Member State concerned is free to refuse the adoption of laws containing policy choices it disagrees with. The consequence of such refusal is, however, that ESM financial assistance would not be paid out or would be discontinued, which might trigger a sovereign default: ‘In short, austerity measures can be characterized as measures whose substance is determined by a different actor than the one that is competent to adopt them.’244 Non-compliance is legally possible—in contrast to the first situation considered in this section—but sanctioned with such high costs that national Parliaments will not insist on diverging policy choices—in contrast to the second situation considered in this section. The case of Cyprus—as a proof that national Parliaments have more political leeway to resist than assumed—is not a strong case:245 The Cypriot Parliament refused in March 2013 to enact a law that would allow for a bank ‘bail-in’ not exempting deposits below 100,000 euro.246 This requirement from the political agreement between the Eurogroup and Cyprus was, however, in breach of Directive 94/19 on deposit-guarantee schemes,247 which defined the amount covered by national deposit guarantee schemes to be 100,000 euro. By rejecting the implementation of the Eurogroup agreement, the Cypriot 240 Article 3 Regulation (EU) 1174/2011. 241 Articles 6(2) and 10(2) Regulation (EC) 1466/97. 242 Article 126(11) TFEU. 243 Article 13(3) ESM Treaty. See Chapter 30 at paragraphs 30.41ff for more details on MoUs. 244 Repasi, ‘Judicial protection against austerity measures in the euro area’ (n 146) 1124. 245 In favour of this as an example of national Parliament’s remaining political leeway: see Chapter 30 at paragraph 30.146 with reference to Koen Lenaerts, ‘EMU and the EU’s constitutional framework’ (2014) 39 European Law Review 753, 766. 246 See Repasi, ‘Judicial protection against austerity measures in the euro area’ (n 146) 1126 in fn 10. 247 European Parliament and Council Directive 94/19/EC of 30 May 1994 on deposit-guarantee schemes [1994] OJ L135/5, as amended by Directive 2009/14/EC [2009] OJ L68/3.

The Role of National Parliaments 501 Parliament only defended the EU legal order but not an actually diverging national policy choice. This loss in Parliamentary freedom to define policy choices when acting in its legislative function is de facto justified by the need for financial assistance but constitutionally at least questionable, even more given that the definition of policy preferences at European level is not politically controlled by the European Parliament, but only by some of the main creditor countries within the ESM.248

B. Political control function As with regard to the legislative function, when acting in their political control function, national Parliaments control their respective national governments.249 When it comes to parliamentary scrutiny of EU affairs, one can distinguish six different models in accordance with the intensity to which a national Parliament holds its government to account:250 Traditional scrutinizers, policy shaper, government watchdog, public forum, expert, and European player. The ‘traditional scrutinizer’ Parliament examines draft legislative proposals ex ante in specialized committees and does not debate the government’s activities at European level. The ‘policy shaper’ aims at influencing its government’s position in EU affairs ex ante before the EU has adopted any legally binding acts. In doing so, it has the possibility to mandate the government. The ‘government watchdog’ type of national Parliament does not have the formal right to mandate its government but holds it ex post to account with a large degree of publicity involved. The ‘public forum’ kind of Parliament understands Parliamentary scrutiny as a means to inform the public so that its scrutiny processes consist mainly of public debates in plenary ex ante and ex post. The ‘expert’ group is characterized by producing in-depth reports of European policy projects and to gain access to the EU policymakers by reaching out to in-house and external expertise. Finally, the category of ‘European player’ places itself into the broader network of national and European Parliaments in order to gain information and to make use of European policy channels such as the Commission’s political dialogue or the Early Warning Mechanism in order to directly influence EU affairs.

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In policy processes relating to EMU national Parliaments that understand their main role as scrutinizers of Union legislative activities can hardly exercise their political control function properly, given that many of these processes are not legislative.251 The same holds true for national Parliaments that focus on ex post control rather than on ex ante control, as the outcome of EMU-related policy processes cannot be altered once decisions are taken so that

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248 See paragraph 17.105. 249 Sandra Kröger and Richard Bellamy, ‘Beyond a Constraining Dissensus: The Role of National Parliaments in Domesticating and Normalising the Politicization of European Integration’ (2016) 14 Comparative European Politics 131–53. 250 Following Valentin Kreilinger, National Parliaments in Europe’s post-crisis economic governance (Hertie School of Governance 2019) 48ff (hereafter Kreilinger, National Parliaments in Europe’s post-crisis economic governance), building on: Olivier Rozenberg and Claudia Hefftler, ‘Introduction’ in Claudia Hefftler and others (eds), The Palgrave Handbook of National Parliaments and the European Union (Palgrave Macmillan 2012) 1, 30ff; and Wolfgang Wessels and others, ‘Democratic Control in the Member States of the European Council and the Euro zone summits’ (Study commissioned by the European Parliament, January 2013) 41ff with a classification of national Parliaments. 251 Kreilinger, National Parliaments in Europe’s post-crisis economic governance (n 250) 49.

502 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS these Parliaments can only debate impactful decisions after the fact.252 The ‘expert’ kind of national Parliament seems also to be less influential in EMU-related affairs than in general EU affairs given the highly specialized nature and complexity of the subject-matter and the emergency of decision-making that does not allow for much expert input.253 The emergency of certain decisions also hints at the main weakness of national Parliaments that are strong in ex ante control. Yet, national Parliaments that are in a position to mandate their government before EMU-related decisions are taken have proven to be the most influential in terms of political control. The German Parliament may serve as a case in point. Under the German law on the financial participation in the ESM254 the German government may only approve a proposal for an ESM decision or abstain from voting on such a proposal after the plenary of the German Parliament has taken an affirmative decision to that effect. This led to a situation, in which, for example, the policy conditionality for Greece was discussed by the German Parliament.255 Since the ESM takes, in principle, decisions by mutual agreement,256 the German Parliament has effectively obtained a veto right in ESM matters. This is even more true given that Germany, Italy and France257 have also a veto right in the emergency voting procedures, in which a qualified majority258 is sufficient.259 17.106

The recent reforms of economic governance at EU level bore the need for a stronger involvement of national Parliaments in mind. In the ‘two-pack’ reform, national Parliaments of a euro area Member State got the right to invite the Commission to present its opinion on draft budgetary plans,260 its recommendation to correct an excessive deficit,261 its recommendation to a Member State to either adopt precautionary corrective measures or to prepare a draft macroeconomic adjustment programme in case of the presence of significant adverse effects on the financial stability of this Member State262 to the Parliament. Moreover, the Commission may be invited to an exchange of views with the national Parliament of a Member State during enhanced surveillance263 and during the implementation of a macroeconomic adjustment programme.264 The Commission has to inform the national Parliament concerned of enhanced surveillance measures265 and report to it on its assessments in the period of post-programme surveillance.266 Whilst these exchanges provide for a possibility to enter into direct exchanges with the European Commission, these exchanges should not be consider as part of some sort of accountability mechanism. Being an EU institutions the

252 Kreilinger, National Parliaments in Europe’s post-crisis economic governance (n 250) 50ff. 253 Kreilinger, National Parliaments in Europe’s post-crisis economic governance (n 250) 52. 254 ‘Gesetz zur finanziellen Beteiligung am Europäischen Stabilitätsmechanismus’ (ESMFinG) Bundesgesetzblatt I (2012) 1918. 255 See in detail on the involvement of the German Parliament in the third rescue package for Greece: Kreilinger, National Parliaments in Europe’s post-crisis economic governance (n 250) 167ff. 256 Article 4(3) ESM Treaty. 257 France has no specific law on the Parliamentary involvement in ESM matters, see Kreilinger, National Parliaments in Europe’s post-crisis economic governance (n 250) 163ff who considers France ‘an example where the aim of parliamentary involvement was to showcase support for the government’ (at 164). 258 A qualified majority is calculated in relation to the shares of an ESM member in the capital stock of the ESM. 259 Article 4(4) and (5) ESM Treaty. 260 Article 7(3) Regulation (EU) 473/2013. 261 Article 11(2) Regulation (EU) 473/2013. 262 Article 7(8)(b) Regulation (EU) 472/2013. 263 Article 7(9) Regulation (EU) 472/2013. 264 Article 7(11) Regulation (EU) 472/2013. 265 Article 3(1)(2) Regulation (EU) 472/2013. 266 Article 14(3) Regulation (EU) 472/2013.

The Role of National Parliaments 503 European Commission is to be held to account for its activities by the European Parliament. Yet, the European Commission must provide reasons for its activities to national Parliaments, the policy choices of which are affected by opinions and recommendations adopted by the European Commission. This ensures a higher degree of political sensitivity on the part of the European Commission in the process of adopting its own positions. Also in the Banking Union national Parliaments have been given the right to enter into exchanges with the ECB (in the case of the SSM)267 and with the SRB (in the case of the SRM).268 Both the ECB and the SRB must submit annual reports on the SSM and on the SRM to national Parliaments, which may address to both their reasoned observations on these reports. They may request both the ECB and the SRB to reply in writing on observations and questions submitted to it by national Parliaments and they may invite the Chair of the SSM as well as the one of the SRB to participate in an exchange of views together with a representative of the national competent authority. The Banking Dialogue with national Parliaments can be seen as a sort of accountability mechanism, albeit being a weak one, given the particular kind of mixed administration between European and national authorities in the Banking Union,269 which is a departure from the principle that institutions can only be held to account by Parliaments which are at the same level as they are located.

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In monetary policy national Parliaments have no comparable position. According to the ECB, in the field of monetary policy, ‘national parliaments . . . lack the legitimacy to judge’.270 Nevertheless the President of the ECB entered into informal exchanges with national Parliaments when deemed politically sensitive.271

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C. Budgetary and election function National Parliaments are affected in the exercise of their budgetary function by the second and third situation mentioned previously (budgetary surveillance272 and financial assistance273) in the same way as in the exercise of their legislative function. Whilst this might lead to the conclusion that EU budgetary surveillance and financial assistance programmes restricted the budgetary autonomy of national Parliaments, interestingly, the introduction of more constraining budgetary surveillance rules strengthened national Parliaments in their capacity to control the spending behaviour of their respective governments.274 267 Article 21 Regulation (EU) 1024/2013. 268 Article 46 Regulation (EU) 806/2014. 269 Diane Fromage and Renato Ibrido, ‘The ‘Banking Dialogue’ as a model to improve parliamentary involvement in the Monetary Dialogue?’ (2018) 40 Journal of European Integration 295, 302, and 304; Gijsbert Ter Kuile, Laura Wissink, and Willem Bovenschen, ‘Tailor Made Accountability Within the Single Supervisory Mechanism’ (2015) 52 Common Market Law Review 155, 171. 270 ECB, ‘The Accountability of the ECB’ Monthly Bulletin (November 2002) 45, 49; Davor Jančić, ‘Accountability of the European Central Bank in a Deepening Economic and Monetary Union’ in Davor Jančić (ed), National Parliaments after the Lisbon Treaty and the Euro Crisis: Resilience or Resignation? (OUP 2017) 141, 150. 271 Davor Jančić, ‘Accountability of the European Central Bank in a Deepening Economic and Monetary Union’ (n 270) 152ff. 272 See paragraph 17.102. 273 See paragraph 17.103. 274 Cristina Fasone, ‘Taking budgetary powers away from national parliaments? On parliamentary prerogatives in the Eurozone crisis’ (2015) European University Institute Working Papers Law 2015/37, 20ff (hereafter Fasone, ‘Taking budgetary powers away from national parliaments?’).

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504 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS The impact of EU law on the national Parliaments’ budgetary capacity can against this background best be described as ‘a double standard of protection of parliamentary prerogatives’.275 The ex post ‘rubberstamping’ of intergovernmental Treaties such as the TSCG and the ESM Treaty as well as of financial rescue packages for Member States in financial distress or of MoUs as a pre-condition for receiving financial assistance hollowed the national Parliaments’ budgetary function out, on the one hand. Within the European semester, on the other hand, national Parliaments’ powers to scrutinize their governments’ budgetary policies got strengthened to the extent that they have better access to information on the spending behaviour of their governments. It is, however, observed that national Parliaments make use of these enhanced powers ‘only in the lower ranges of accountability mechanisms (information, consultation and debate)’.276 17.110

The election function of national Parliaments remains unaffected by EMU. National Parliaments are not involved in the appointment procedures of Union institutions or bodies implementing and supervising EMU-related matters. By the same token, EMU rules do not interfere with national appointment procedures with the notable exception of Article 130 TFEU and the ruling out of the possibility for national Parliaments to seek to influence the members of the decision-making bodies of the national central banks.

D. Inter-parliamentary cooperation 17.111

The lack of effective Parliamentary scrutiny in the European semester led to the introduction of the Inter-Parliamentary Conference on Stability, Economic Coordination and Governance (SECG conference) based on Article 13 TSCG.277 The SECG conference was established in 2013 and gave itself after lengthy discussions rules of procedure in 2015.278 The SECG conference convenes twice per year (once in Brussels during the European Parliamentary week and once in the second half of the year in the country that holds the Council presidency during that period). The conference is co-chaired by the European Parliament and the national Parliament of the Council presidency during the period in which the conference convenes. Being the only permanent co-chair, this chairing role of the European Parliament gives it a significant influence on the definition of the agenda of the conference. Whilst some considered the SECG conference as an opportunity to strengthen Parliamentary political control in EU Economic governance, given the weak position both the European Parliament and national Parliaments have,279 in reality the SECG conference 275 Fasone, ‘Taking budgetary powers away from national parliaments?’ (n 274) 20ff. 276 Ben Crum, ‘Parliamentary accountability in multilevel governance: what role for parliaments in post-crisis EU economic governance?’ (2018) 25 Journal of European Public Policy 268, 275. 277 Ian Cooper, ‘The Interparliamentary Conference on Stability, Economic Coordination and Governance (the “Article 13 Conference”)’ in Nicola Lupo and Cristina Fasone (eds), Interparliamentary Cooperation in the Composite European Constitution (Hart Publishing 2016) 247; Nicola Lupo and Elena Griglio, ‘The conference on stability, economic coordination and governance: filling the gaps of parliamentary oversight in the EU’ (2018) 40 Journal of European Integration 358. 278 Rules of Procedure of the Interparliamentary Conference on Stability, Economic Coordination and Governance in the European Union accessed 10 February 2020. 279 Ben Crum and John E Fossum, ‘Practices of Inter-Parliamentary Coordination in International Politics: the European Union and beyond’ in Ben Crum and John E Fossum (eds), Practices of Inter-Parliamentary Coordination in International Politics: the European Union and beyond (ECPR 2013) 1, 2ff.

Conclusion 505 is a weak instruments whose discussions are hardly noticed: ‘It is unlikely that the SECG Conference will contribute to any enhancement of democracy within EMU’.280 This is due to a fluctuating amount of members of the European Parliament and of national Parliaments participating in this conference, leading to an ever changing composition, and due to the fact that its cycle is not synchronized with the one of the European semester. The full potential of Inter-Parliamentary cooperation with regard to mutually strengthening and coordinating each other’s role in scrutinising European institutions and national governments throughout the policy processes in EMU is not tapped.

V. Conclusion The far-reaching absence of Parliaments in the EMU undermines, as a matter of principle, the democratic legitimacy of acts adopted within EMU. The poor inclusion of Parliaments must hence be well-argued and limited to the absolute necessary. The independence guarantee for the ECB was to be justified by its limited policy mandate to primarily ensure price stability281 and by the fact that it is underpinned by an accountability exchange with the European Parliament.282 Outside of its monetary policy mandate—when acting within Banking Union or ‘in liaison’ with the Commission in setting up financial assistance programmes—the rationale for precluding Parliaments to scrutinize the ECB becomes less compelling. This holds equally true for the extensive absence of Parliaments in scrutinising the European Commission or other Union actors in the area of economic policy coordination, budgetary surveillance or financial assistance programmes. In order to mitigate the evident lack of democratic legitimacy that would come along with a complete exclusion of Parliaments in the decision-making procedures, accountability arrangements between the executive actors and the European Parliament were established. These arrangements were modelled after the ‘monetary dialogue’, whose purpose was to put a drop of democratic legitimacy into a policy area that enjoys Primary legal independence. The newly established arrangements share the latter’s flaws. Although these dialogues allow for laying proper foundations for holding the actors involved to account, the absence of meaningful instruments to attach consequences to an assessment by the Parliament of the performance of these actors makes these dialogues weak mechanisms to mediate democratic legitimacy from Parliaments to these actors.

17.112

The overall picture of how both the European Parliament and national Parliaments can exercise their Parliamentary functions in EMU-related affairs is highly ambiguous. With the political control function being toothless, the emphasis lies on the legislative function. Currently, democratic legitimacy is mediated to executive actors via ex ante involvement of Parliament when defining the legal base for policy actions of these actors. Looking at the ‘six-pack’ and ‘two-pack’ reforms, the European Parliament was rather successful in strengthening the ex ante influence of Parliament both at European as well as at national level. In order to overcome doubts raised with regard to EMU’s democratic legitimacy,

17.113

280 Fromage, ‘The European Parliament in the post-crisis era’ (n 128) 289. 281 Article 127(1) TFEU. 282 Amtenbrink, The Democratic Accountability of Central Banks (n 83) 378ff speaks of a trade-off between central bank independence and democratic accountability.

506 EUROPEAN PARLIAMENT AND NATIONAL PARLIAMENTS the ex post dimension of Parliamentary involvement must be addressed in the future. This cannot be done by the European Parliament alone. It can hold EU actors to account, but it is powerless when it comes to national governments in the (European) Council or in intergovernmental arrangements. When scrutinising their governments’ actions at European level in EMU affairs national Parliaments have to respond to the challenge that in doing so they do not only defend their national interests but also European interests. Inter-Parliamentary cooperation horizontally and vertically is key to meet this challenge. In order to mediate fully-fledged democratic legitimacy to EMU, the existing ‘executive federalism’ has to be controlled by comparably strong interconnected ‘Europe of Parliaments’.

18

THE EUROPEAN COMMISSION Kees van Duin*

I. Introduction II. The Institutional Role of the European Commission A. General principles B. The role of the European Commission in EMU

18.1 18.3 18.3 18.6

III. The Financial, Economic, and Sovereign Debt Crises: EMU in Flux

A. Economic Union B. EU financial assistance mechanisms C. Financial markets and Banking Union

IV. Conclusion and Outlook

18.13 18.17 18.29 18.36 18.46

I. Introduction The European Commission is one of the key European Union (EU) institutions and has been so ever since the early days of European integration. At the same time, its role and the manner in which it exercises its various functions differ widely between the various EU policy domains. This chapter will zoom in on one such specific policy domain, namely the Economic and Monetary Union (EMU). Notably, since the Treaty of Maastricht in 1992, the European Commission has been one of the key players in the elaboration of this specific policy field in all its aspects: in the original setting up and further development of EMU, as an instigator of policy developments, and in applying its rules and regulations. At the same time, the exact nature and content of the role that the Commission plays has strongly evolved over the years. Most recently, the financial and economic crisis that erupted in 2007/2008 and its follow up have profoundly affected the policy area of EMU including the role the Commission plays in the EMU framework.

18.1

After a brief description of the general role that the European Commission plays as an institution in the context of EU law, this chapter will dive deeper into the institutional role played by the European Commission in the various elements that make up the current EMU framework. Specific focus will lie on three different EMU policy areas: Economic Union, Financial Union and the EU’s emergency financial assistance mechanisms. The chapter will conclude with some reflections on possible future developments.

18.2

* The views expressed in this chapter are those of the author and do not necessarily represent those of the Dutch Ministry of Social Affairs and Employment and/or the European Commission. Kees van Duin, 18 The European Commission In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0022

508 THE EUROPEAN COMMISSION

II. The Institutional Role of the European Commission A. General principles 18.3

The general principles that govern the role of the European Commission as an institution in the European Union are set out in the EU Treaties. Article 17(1) of the Treaty on the European Union (TEU) sets out a number of different functions that the Commission performs. Notably, it states that ‘the Commission shall promote the general interest of the Union and take appropriate initiatives to that end’. In this regard it is key to note that, in general, Union legislative acts can only be adopted on the basis of a Commission proposal, and that also other acts shall be adopted on the basis of a Commission proposal where the Treaty so provides.1 Moreover, the article states that the Commission is to ‘ensure the application of the Treaties, and of measures adopted by the institutions pursuant to them’, to ‘oversee the application of Union law under control of the Court of Justice of the European Union’ and to ‘exercise co-ordinating, executive and management functions as laid down in the Treaties’. Specifically, the Commission is also responsible for executing the EU budget, managing programmes and ensuring the Union’s external representation.2

18.4

The manner in which the Commission is to perform these tasks is also set out in the same article. Here it states that the Commission shall be completely independent, neither seeking nor taking instructions from any government of other institution, body, office or entity.3 At the same time, the Treaty states that the Commission as a body shall be responsible to the European Parliament, with the European Parliament having the possibility to vote on a motion of censure for the Commission as a whole.4

18.5

In institutional terms therefore the Commission can be described as the EU’s executive arm,5 with roles varying from (political) agenda setting and policy-maker, notably through the issuance of proposals for legislation, to application, administration and enforcement of the EU policy framework.6

B. The role of the European Commission in EMU 18.6

When applying the general institutional role of the European Commission to the context of Economic and Monetary Union a number of specific features stand out. The natural starting point for this analysis is the 1992 Treaty of Maastricht.7 Here, the path was set for the progressive establishment of an Economic and Monetary Union involving the coordination of 1 See Article 17(2) TEU. 2 Except for the area of common foreign and security policy, where this role is played by the High Representative of the Union for foreign affairs and security policy, see Article 18 TEU. 3 See Article 17(3) TEU. 4 See Article 17(8) TEU. 5 See eg accessed 3 February 2020, where the Commission describes itself as such. 6 See also Fabian Amtenbrink and Hans Hermann Bernard Vedder, Recht van de Europese Unie (6th edn, Boom Juridische Uitgevers 2017) 78ff. 7 See Chapter 2 of this work.

The Institutional Role of the European Commission 509 economic and fiscal policies combined with a common monetary policy and common currency,8 which laid the roots for the creation of EMU in its current setup.9 Starting out with the issue of monetary policy, it is safe to say that the role of the Commission 18.7 was very limited in all its possible dimensions ranging from agenda setting and policy- maker to application and enforcement of rules. Notably since the responsibility for defining and implementing the monetary policy of the Community was placed squarely in the hands of the newly set up European System of Central Banks (ESCB),10 composed of the national central banks of the Member States and the European Central Bank (ECB).11 As we will see later on in this chapter, however, the Maastricht Treaty did include some possibilities for the European Commission to instigate a process for definition of the tasks of the ECB.12 Looking at the issue of coordination of economic and fiscal policies, the original setup of the system gave a key position to the EU Member States. Notably Member States were to ‘regard their economic policies as a matter of common concern and co-ordinate them in the Council’.13 At the same time, however, the Commission had a role both in instigating policy developments as well as application and enforcement of the system of coordination.

18.8

In the coordination of economic policies, the possibilities for the Commission to propose legislation were limited to putting forth those acts adopting detailed rules elaborating the coordination procedures.14 The Commission did just that already in the early days of EMU by proposing regulations elaborating the Stability and Growth Pact.15 The Commission however went beyond its legislative tools to also instigate policy developments through the setup of an informal process of peer pressure and policy learning in the area of economic policies aimed at promoting ‘convergence to the top’,16 most notably in the context of the so- called Lisbon Strategy which ran from 2000 until 2010.

18.9

In both processes, the Commission was not just the institution that put the process itself on the table, it also was the institution that put forward the proposals for the actual content of this coordination process. In the coordination of economic policies for instance, it was the Commission that had the first move in recommending a draft of the broad guidelines for economic policy,17 which in the coordination process form the substantial delineation of what economic policy in the context of the EU Treaties actually concerns.18

18.10

8 Part Three, Chapter VI of the Treaty establishing the European Community (TEC). 9 For the sake of brevity, earlier attempts at establishment of Economic and Monetary Union, notably in the nineteen seventies will not be covered in this chapter. For a more elaborate overview of the history of EMU, see Chapter 1 of this work; and eg Horst Ungerer, A concise history of European monetary integration: From EPU to EMU (Quorum Books 1997). 10 Article 105(2) TEC. 11 Article 106(1) TEC. 12 See eg Article 105(6) TEC. 13 Article 103(1) TEC. 14 Article 103(5) TEC and Article 104c(14) TEC. 15 Council Regulation (EC) 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1997] OJ L209/1; Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6. 16 Fabian Amtenbrink, Jakob de Haan, and Olaf Caspar Hendrik Marie Sleijpen, ‘The Stability Pact—Placebo or Panacea?’ (1997) 8 European Business Law Review 202–10, 233–38. 17 Article 103(2) TEC. 18 For the first batch of Broad Economic Policy guidelines, calling for policies to return to a ‘non-inflationary, strong and employment creating growth’, see Council Recommendation 94/7/EC of 22 December 1993 on the broad guidelines of the economic policies of the Member States and of the Community [1994] OJ L7/9.

510 THE EUROPEAN COMMISSION 18.11

Moreover, the Commission was also the institution first responsible for the application and enforcement of the system. In this regard, it was eg the Commission that submits reports to the Council on the economic situation in the Member States19 and it was the Commission that instigated the process of country specific recommendations when a Member State, in the context of the coordination of economic policies, failed to act in accordance with the broad economic policy guidelines or jeopardized EMU functioning.20

18.12

The Commission’s role in application and enforcement of the coordination of Member State policies was further elaborated for the specific area of the prevention of excessive government deficits and debts. Although it was the Member States’ responsibility to avoid excessive deficits, the Commission was tasked with monitoring for and reporting on gross policy errors by the Member States.21 Moreover, the application of the system by means of possible follow up recommendations and sanctioning was also done by the Council on a recommendation from the Commission, something which already from the early days proved to a challenging role for the Commission to play.22

III. The Financial, Economic, and Sovereign Debt Crises: EMU in Flux 18.13

From the point of view of institutional setup, the main characteristics of EMU as set out in the Maastricht Treaties remained largely intact until the financial crisis that started in 2007/ 2008.23 In the years following, with the crisis developing from a financial to an economic to a sovereign debt crisis, significant faultiness and deficiencies were identified in the original setup of EMU, which contributed to if not exacerbated the eruption and development of the crisis. In response to this growing awareness, the European Union rapidly pursued a revision of EMU’s institutional setup, along two lines: the introduction of crisis management for Member States, and enhanced crisis prevention by fixing structural design flaws in the EMU setup.24

18.14

Crisis management tools for Member States in the original EMU setup were largely absent.25 The need for additional steps in this regard became apparent with Greece’s sovereign

19 Article 103(3) TEC. 20 Article 103(4) TEC. 21 Article 104c(1), (2), (3) TEC. 22 Article 104c(7), (9), (11), and (12) TEC. For an example of the difficulties in the relationship between Commission and Council in this regard see Case C-27/04 Commission of the European Communities v Council of the European Union [2004] ECR I-6649. Here the Commission took the Council to Court for its decision not to adopt sanctions proposed by the Commission for Germany and France in Commission recommendations pursuant to Article 104(8) and (9) TEC. 23 For an overview of some of the changes that had not taken take place already in the early years, Davide Balestra, Kees van Duin, and Maarten Masselink, ‘Europese Coördinatie van economisch beleid en begrotingsbeleid’ in Jan Donders and Flip de Kam (eds), Jaarboek Overheidsfinanciën 2014 (Wim Drees Stichting voor Openbare Financiën 2014). 24 Kees van Duin and Fabian Amtenbrink, ‘New dynamics in the decision-making in the wake of euro-crisis’ in Adam Lazowski (ed), Research Handbook on EU Institutional Law (Edward Elgar Publishing 2016) (hereafter van Duin and Amtenbrink, ‘New dynamics in the decision-making in the wake of euro-crisis’). 25 Notably exceptions were Article 122(2) TFEU, which laid out the possibility to grant Union financial assistance to a Member State seriously threatened with severe difficulties caused by natural disasters or

EMU in Flux 511 debt crisis and ensuing inability to fund itself in the market in 2009/2010. The (largely improvised) first Greek emergency loan package relied on ad hoc bilateral loans from other Member States, rapidly followed by the set-up of a structural system for emergency funding. The European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism (EFSM) were set up in May 2010 and subsequently used for additional emergency loan packages for Ireland, Portugal and a second package for Greece.26 The EFSF was then superseded by the new and improved permanent European Stability Mechanism (ESM)27 in September 2012,28 which has been used in the last emergency loan packages for Spain and Cyprus29 and the third package for Greece.30 The parallel process of improving crisis prevention by fixing structural design flaws in the EMU was aimed at fixing a number of weaknesses in the system that the crisis brought to the fore. The Stability and Growth pact and notably the excessive deficit procedure had proven to be insufficient in effectively curbing government deficit and debt developments. Moreover, the economic developments in Member States such as Ireland and Spain showed that even in countries with relatively favourable budgetary positions, developments in the real economy and financial markets could lead to vulnerabilities that, when unchecked, could lead to rapid deterioration and large negative spill over effects to other Member States. Furthermore, the developments in the financial sector clearly showed the dichotomy between the large rise in cross-border and pan-European financial sector activities, and the fragmented regulation, supervision, and resolution in the EU, that remained largely national.

18.15

The changing institutional structure due to the setup of new policy instruments as well as the changes made to existing instruments were to varying extents instigated by the European Commission and had across the board profound effects on the intuitional role the European Commission plays in Economic and Monetary Union. The following sections will dive deeper into the various sub-elements; economic union, financial assistance mechanisms, and financial markets.

18.16

exceptional occurrences beyond its control, and Article 143 TFEU which sets out possibilities for mutual assistance for a Member State that is experiencing balance of payment difficulties. However, this facility is only open to EU countries outside the euro area. See Council Regulation (EC) 332/2002 of 18 February 2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments [2002] OJ L53/1. 26 See Council Regulation (EU) 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism [2010] OJ L118/1, the EFSF framework agreement, and the Treaty establishing the European Stability Mechanism. 27 See further Chapters 12 and 33 of this work. 28 Arguably, and although the EFSM is still formally active, the ESM also takes over the role played by the EFSM, as the first Preamble of the ESM Treaty states that the European Stability Mechanism ‘will assume the tasks currently fulfilled by the European Financial Stability Facility and the European Financial Stabilisation Mechanism in providing, where needed, financial assistance to euro area Member States’. 29 Commission, ‘The Financial Sector Adjustment Programme for Spain’ (2012) Occasional Papers 118; Commission, ‘The Financial Sector Adjustment Programme for Cyprus’ (2013) Occasional Papers 149. 30 See the website of the European Stability Mechanism (ESM) accessed 3 February 2020.

512 THE EUROPEAN COMMISSION

A. Economic Union 18.17

Responding to the deficiencies in the system that the economic and financial crisis laid bare, the Commission actively pursued its role as policy instigator, making a wide array of proposals to strengthen the EU system of economic coordination.31

18.18

The first concrete steps were taken by the European Commission in its ‘six pack’ of legislative proposals which were published on 29 September 2010 and entered into force on 13 December 2011.32 To improve the credibility of the sanctioning mechanisms and decrease room for political discretion by the Member States, the package introduced additional sanctions in the form of (non-)interest bearing deposits kicking in earlier in the process and increased automaticity in SGP application by the introduction of reversed qualified majority voting (reversed QMV) in the Council. The package also increased focus on debt developments through operationalization of the debt criterion by the introduction of quantifiable rules for debt reduction. The ‘six-pack’ also included a Directive on minimum requirements to strengthen the ability of national budgetary frameworks to ensure sustainable public finances on a national level.

18.19

Related to the need for widening the view on budgetary developments and associated monitoring efforts, the ‘six-pack’ also introduced the concept of ‘macroeconomic imbalances’ as an area for more intensive monitoring. This term was broadly defined as being ‘any trend giving rise to macroeconomic developments which are adversely affecting, or have the potential adversely to affect the proper functioning of the economy of a Member State, or of the economic and monetary Union, or of the Union as a whole’.33 The Commission as part of the ‘six-pack’ proposed two regulations setting out a specific coordination and monitoring procedure for such developments, based on indicators ranging from developments in competitiveness through financial sector, private debt and housing market, including ultimately for euro area Member States the possibility of financial sanctions.34

18.20

Moreover, the general process for coordination of economic policies by means of peer pressure and policy learning that took place in the context of the Lisbon Strategy was replaced in 2010 by the so-called ‘Europe 2020’ strategy supported by a more focussed, streamlined and internally consistent coordination process known as the ‘European Semester’.35

18.21

Following these early developments, budgetary frameworks in the Member States were further strengthened with the adoption of the Treaty on Stability, Coordination and 31 See already van Duin and Amtenbrink, ‘New dynamics in the decision-making in the wake of euro-crisis’ (n 24). 32 Council Regulation (EU) 1177/2011 of 8 November 2011 amending Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2011] OJ L306/33; European Parliament and Council Regulation (EU) 1175/2011 of 16 November 2011 amending Council Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2011] OJ L306/12; European Parliament and Council Regulation (EU) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1 and Council Directive 2011/ 85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41. 33 Article 2(1) European Parliament and Council Regulation (EU) 1176/2011 of 16 November 2011 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/25. 34 Regulation (EU) 1176/2011; European Parliament and Council Regulation (EU) 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8. 35 See section 1a Regulation (EU) 1175/2011.

EMU in Flux 513 Governance (TSCG), an intergovernmental treaty signed by 25 Member States36 on 2 March 2012 and entering into force on 1 January 2013. This Treaty put further obligations on signatory Member States to strengthen national budgetary frameworks and added additional elements of enforcement to the SGP. Even though the Commission was not formally the instigator of this Treaty, which in its legal nature is a separate Treaty between the Member States outside of the EU Treaties, the reason for choosing this instrument had little to do with the role of the Commission but was arguably more of a practical nature. In the political discussions on the TSCG it became rapidly apparent that the UK (and the Czech Republic) would not be willing to participate, which made a solution within EU law not possible. This is also apparent by the fact that some elements of the TSCG have subsequently been brought into the EU legal framework via one of the two regulations making up the ‘two-pack’, proposed by the Commission and entering into force on 30 May 2013.37 Finally, there are two more developments so far in further strengthening the system of economic governance. Firstly, the issuing of a Council recommendation on the setup by the Member States of National Productivity Boards to analyse developments and policies in the field of productivity and competitiveness, thereby contributing to foster ownership and implementation of the necessary reforms at the national level.38 The second development was the establishment of a European fiscal board, providing independent advise to the European Commission on the exercise of the EU’s fiscal rules.39 Here too, the Commission as policy instigator had a key role in putting forward the proposals to this effect.

18.22

Besides the leading role that the Commission took in the development of the revised system of economic coordination, looking at the actual system that was created it becomes readily apparent that its role in the system itself was also greatly strengthened. Here too one can differentiate between the roles of policy instigator and that of monitoring, applying and enforcing the system.

18.23

Considering the role of policy instigator within the new system, the revised setup includes a number of elements were the definition of what is being coordinated and monitored is put largely in the hands of the Commission. Two examples most prominently come to the fore here: the open definition of what is a ‘macroeconomic imbalance’ and the focus of the EU wide economic priorities in the European Semester.

18.24

As set out earlier, the definition of what constitutes a macroeconomic imbalance is very broad and general, leaving ample room for interpretation to the Commission in deciding what it actually is and which types of imbalances it gives most attention to. The analysis is somewhat delineated by means of the ‘scoreboard’ of indicators and the related policy areas mentioned in the legislation (ie covering both internal Member State developments such as private debt and housing, and external developments such as export market shares and cross border investment positions)40 but this list is explicitly non-exhaustive, can be changed by

18.25

36 All except the UK and the Czech Republic. 37 European Parliament and Council Regulation (EU) 473/2013 of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area [2013] OJ L140/11. 38 Council Recommendation of 20 September 2016 on the establishment of National Productivity Boards [2016] OJ C349/1. 39 Commission Decision (EU) 2015/1937 of 21 October 2015 establishing an independent advisory European Fiscal Board [2015] OJ L282/37. 40 Article 4 Regulation (EU) 1176/2011.

514 THE EUROPEAN COMMISSION the Commission itself (in close cooperation with the Council and European Parliament), and is part of the broader ‘Alert Mechanism Report’ which starts the process. Moreover, it only serves as a first indication, with actual imbalances only being identified on the basis of a subsequent ‘in depth review’41 performed by the Commission. In applying the system since its entry into force in 2011 the freedom the Commission has in deciding on the areas of focus has become quite clear. Thus, for instance, the scoreboard itself was adjusted by the Commission in subsequent rounds, notably to include indicators that increase attention for social developments such as long term and youth unemployment.42 Also, the number and types of imbalances identified by the Commission shifted in subsequent rounds of application, showing a shift in emphasis, for example, from dealing with the unwinding of housing market bubbles towards countries experiencing current account surpluses.43 18.26

Concerning the European Semester, the annual process leading up to country specific recommendations to the Member States starts out November each year with the identification of EU-wide priorities in the so-called ‘Annual Growth Survey’. This Annual Growth survey is then discussed and concluded upon in the Council, with the European Council officially setting the EU wide priorities in its Spring session in March. The practice of this process has shown that the Commission has been quite effective in setting the content of these priorities, with Council and European Council discussions largely performing the role of endorsing the views set out by the Commission. In this sense, the Commission has for instance effectively shifted focus of the coordination process throughout the years, including by highlighting the special interrelationships within the euro area as compared to the wider EU as a whole, the need to promote investment and increasing attention for social and employment related issues.44

18.27

Next to the role of policy instigator, the role of the Commission in the monitoring, application and enforcement of the revised framework of economic surveillance has also seen a significant strengthening compared to the original EMU setup. In the application of the system, the Commission proposes various courses of action available to the Council, from the issuing of recommendations, moving Member States into different surveillance categories, and ultimately the issuing of sanctions.45 Even though it still is the Council that ultimately decides, the role of the Commission was very much strengthened in this regard by the before mentioned introduction of reversed Qualified Majority Voting in key parts of the procedures. Under this rule, a Commission proposal is deemed to be adopted by the Council unless a qualified majority of the Council rejects the proposal within a certain limited timeframe. Important examples in this regard are the decision on non- compliance by the Member State with the actions required under the excessive imbalance procedure46 and decisions to apply sanctions under the excessive deficit procedure.47 41 Article 5 Regulation (EU) 1176/2011. 42 See in this regard already eg Commission, ‘Economic governance review Report on the application of Regulations (EU) 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013’ COM (2014) 905 final; Commission, ‘On steps towards completing Economic and Monetary Union’ COM (2015) 600 final. 43 See also Commission, ‘The Macroeconomic Imbalance Procedure. Rationale, Process, Application: A Compendium’ (2016) Institutional Paper 39 (hereafter Commission, ‘The Macroeconomic Imbalance Procedure’). 44 See eg COM (2015) 600 final. 45 See eg Articles 6 and 7 Regulation (EU) 1176/2011 and Article 3 Regulation (EU) 1174/2011. 46 Article 10(4) Regulation 1176/2011. 47 Articles 4 and 6 Regulation (EU) 1173/2011.

EMU in Flux 515 Moreover, the monitoring of the situation in the Member States in its various aspects is squarely in the hands of the Commission, leading to regular reports as well as possibilities for procedural steps to be proposed any time the Commission sees fit. In the ‘two-pack’ regulation on enhanced surveillance48 the Commission even acquired a self- standing right to decide to put a Member State under enhanced surveillance if it considers the Member State to be experiencing or threatened with serious difficulties with respect to its financial stability which are likely to have adverse spill-over effects on other Member States in the euro area.49 Thus, obliging the Member State to adopt measures aimed at addressing the sources or potential sources of difficulties, while the Commission is free to request a whole range of additional information and perform regular review missions.50 The range of motion accorded to the Commission has given it a significant amount of leeway in deciding on how to actually pursue the process of economic coordination and how to apply the various instruments at its disposal. In the years since the entry into force of the system the Commission has pursued different avenues in this regard in the aim of reaching the overarching objectives of instigating policy reforms for sustainable growth and job creation and the prevention and correction of harmful imbalances and excessive deficits. For instance, the Commission in the early years of the macroeconomic imbalances procedure decided to go beyond the ‘no imbalance, imbalance, excessive imbalance’ differentiation in the legislation to create a number of different subcategories in labelling countries performance, relating those to differences in intensity of monitoring and surveillance, while at the same time refraining from proposing to open the (sanction based) excessive imbalance procedure.51 Also, in applying the Stability and Growth Pact, the Commission in 2015, triggered by the weak economic situation at the time, undertook to interpret existing rules in such a manner as to encourage effective implementation of structural reforms, promote investment and take better account of the economic cycle in Member States.52 Moreover, also in the SGP, the Commission has largely refrained from moving to the possibility to induce sanctions on the Member States.53

18.28

B. EU financial assistance mechanisms Looking at the development and current institutional setup of the EU’s financial assistance mechanisms it becomes readily apparent that these mechanisms do not automatically fit in the standard EU framework. In fact, such assistance mechanisms were largely absent in the 48 European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1. 49 Article 2(1) Regulation (EU) 472/2013. 50 Article 3 Regulation (EU) 472/2013. 51 Commission, ‘The Macroeconomic Imbalance Procedure’ (n 43). 52 Commission, ‘Making the best use of the flexibility within the existing rules of the Stability and Growth Pact’ COM (2015) 12 final. 53 With the notable exception of the Commission proposal and subsequent Council decision to block nearly 500 million euro worth of Cohesion fund commitments for Hungary, see Council Implementing Decision 2012/ 156/EU of 13 March 2012 suspending commitments from the Cohesion Fund for Hungary with effect from 1 January 2013 [2012] OJ L78/19.

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516 THE EUROPEAN COMMISSION original EMU setup.54 This lack of precedent together with the urgency for action in the heat of the sovereign debt crisis made for some legal and institutional novelties in the setting up of the new system which took place partially outside of the standard EU decision-making process. This in turn had a significant effect on the role of the European Commission in this area. 18.30

Based on a strong impetus from Heads of State and Government, it was first and foremost the Member States taking decisions on the measures needed using whatever legal format was most convenient.55 Starting with the agreement on the provision of bilateral loans to Greece by euro area Member States, the European Council and related ‘Euro-summits’, as well as the ECOFIN Council and the Eurogroup took a decisive leading role in forming the EU’s crisis response measures.56 The terms for provision of bilateral loans to Greece were, for instance, agreed in the Eurogroup in April 2010 following general political orientations set by Heads of State and Government, as was the actual provision of these loans in May 2010.57 The EFSF setup in May 2010 was again illustrative of the legally flexible approach taken by the Member States, being setup as a limited liability company under Luxembourg law (Société Anonyme), and disputes governed by (English) private law.58 The now permanent rescue mechanism ESM continues in this manner, also being installed as a public international organization by way of a separate treaty outside of the EU framework.59 Finally, one of the regulations making up the earlier mentioned ‘two-pack’ sets out rules for enhanced surveillance of euro area Member States experiencing or threatened with serious difficulties with respect to their financial stability.60

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Looking at these developments from the point of view of the European Commission and its various institutional roles it is obvious that its role as policy instigator in this area was severely limited in favour of the Member States as represented in the European Council, ECOFIN Council and Eurogroup. It, however, was not fully absent, since some of the crisis measures still found their legal basis in the EU treaties. Notably, the EFSM, created on the basis of Article 122(2) TFEU, and therefore on a proposal from the Commission61 played a complementary (be it financially limited) role in the set-up of the EU’s crisis management tools. Moreover, the ‘two-pack’ regulation mentioned above is based on the EU Treaties, specifically Articles 136 and 121 TFEU, and therewith originates in a Commission proposal as well.

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At the same time, throughout the development of the current setup in this area, the role of the European Commission in the application and enforcement of the various emergency funds has been and still is significant. This becomes apparent when taking a closer look at the setup of the European Stability Mechanism as laid down in its founding treaty. 54 As mentioned before exceptions here are Articles 122(2) and 143 TFEU. 55 See already van Duin and Amtenbrink, ‘New dynamics in the decision-making in the wake of euro-crisis’ (n 24). 56 See eg European Council, ‘Statement by the Heads of State or Government of the European Union on Greece’ (Brussels, 11 February 2010); European Council, ‘Statement by the Heads of State of Government of the Euro Area’ (Brussels, 25 March 2010). 57 See Eurogroup, ‘Statement by the Eurogroup’ (Brussels, 2 May 2010). 58 See framework agreement on the EFSF. 59 For more extensive coverage see Part VII of this work. 60 Regulation (EU) 472/2013. 61 See Regulation (EU) 407/2010.

EMU in Flux 517 The setup of the ESM is such that in general the actual decision-making takes place in the ESM Board of Governors and for some more specific elements the ESM Board of Directors. These bodies specifically instituted under the ESM Treaty consist of representatives from the signatories to the ESM Treaty, which are the EU Member States that form part of the euro area. As such, it is notably the ESM board of governors that may decide to grant stability support to an ESM Member in the form of a financial assistance facility,62 a decision which is in principle taken by mutual agreement, ie the unanimity of the members participating in the vote.63 In this role, the two bodies act as decision-makers not unlike the Member States in the Council in the context of the various elements of economic union that were set out in the previous paragraph. In its decision-making, these bodies rely heavily upon the European Commission for the assessment of the situation and the underpinning of the actual substance of the decision to be taken. Specifically, when an ESM member addresses a request for stability support to the chairperson of the board of governors, the chairperson shall entrust the European Commission to assess the existence of a risk to the financial stability of the euro area as a whole or of its Member States, to assess whether public debt is sustainable, and to assess the financing needs concerned. The Commission is not fully autonomous in this analysis, as it needs to work in liaison with the ECB in this overall assessment and, where appropriate and possible, needs to conduct the sustainability assessment of public debt together with the IMF. However, it is the main institution in this process of assessment, which forms the basis for the decision by the board of governors on whether to grant support to the member in question.64 Moreover, the European Commission can influence the voting procedure for the granting of such aid. In the event the Commission and the ECB both conclude that a failure to urgently adopt a decision to grant or implement financial assistance would threaten the economic and financial sustainability of the euro area, the voting procedure shifts from mutual agreement to a qualified majority of 85 per cent of the votes cast.65

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This key role of the European Commission finds its way into all the subsequent steps of the application and implementation of the financial assistance programs. However, there is a marked demarcation here in that its role is more pronounced in the setting and monitoring of the policy actions to be undertaken by the Member State in question than it is in setting the actual financial terms and conditions of the financial assistance provided. The ESM treaty for instance provides that the European Commission—in liaison with the ECB and, wherever possible, together with the IMF—shall negotiate, with the ESM Member concerned, a memorandum of understanding (an ‘MoU’) detailing the conditionality attached to the financial assistance facility. At the same time, however, it is the Managing Director of the ESM that prepares a proposal for a financial assistance facility agreement, including the financial terms and conditions and the choice of instruments. Both elements then require approval by the ESM board of governors.66 In the subsequent implementation it is then the Commission that monitors compliance with the conditionality attached to the financial assistance facility.67 In assessing the adequacy of the financial assistance foreseen as well as the

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62 63 64 65 66 67

Article 13(2) of the Treaty establishing the European Stability Mechanism (ESM Treaty). Article 4(3) ESM Treaty. Article 13 ESM Treaty. Article 4(4) ESM Treaty. Article 13(3) and (4) ESM Treaty. Article 13(7) ESM Treaty.

518 THE EUROPEAN COMMISSION possible disbursement of tranches, it is the board of governors based on a proposal from the managing director and having received a Commission report that decides.68 18.35

The exact nature of the Commission actions and competences in this entire process is elaborated in the ‘two-pack’ regulation on enhanced surveillance69 mentioned above. The rules set out therein confirm the general key role of the Commission in application and regular monitoring of the financial assistance programs with some interesting nuances that further emphasize the wide range of its possibilities for action. For instance, the Member State receiving the financial assistance is required to provide the Commission with all the information that the Commission considers necessary for the monitoring.70 Also, in the case of insufficient administrative capacity or significant problems in the implementation of the programme the Member State shall seek technical assistance from the Commission, which may constitute, for that purpose, groups of experts composed of members from other Member States and other Union institutions or from relevant international institutions.71

C. Financial markets and Banking Union 18.36

The area of financial market regulation and the development of a ‘Banking Union’ is the third and final key element of the setup of the EU’s Economic and Monetary Union to be discussed.72 Here too the crisis had a profound impact, with the system created including quite a number of novelties as compared to the original EMU setup. In general, from a very early stage of the crisis there has been a great push towards ambitiously and quickly developing further rules in three core areas; financial market regulation, supervision and recovery and resolution.73 The European Commission in its role as policy setter was instrumental in setting out the new setup in this area, also related to the fact that here, and unlike the situation we saw with the EU emergency assistance mechanisms, the measures taken found their legal basis largely within the EU treaties.74

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The first element that was taken up was the elaboration of a strengthened system of European financial regulation, with the development of the so-called ‘Single Rulebook’: common rules inter alia in the area of bank capital requirements, deposit guarantee schemes, and recovery and resolution tools for banks in crisis.75 The early days of the crisis also saw 68 See eg Article 15(5) ESM Treaty. 69 Regulation (EU) 472/2013. 70 Article 7(4) Regulation (EU) 472/2013. 71 Article 7(8) Regulation (EU) 472/2013. 72 See further Part VIII of this work. 73 For a more extensive overview of these developments, see Part VIII of this work. 74 With a notable exception concerning banking resolution which we will discuss later on. 75 See notably European Parliament and Council Directive 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC [2013] OJ L176/338; European Parliament and Council Directive 2014/59/EU of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU, and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council [2014] OJ L173/190; European Parliament and Council Regulation (EU) 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 [2013] OJ L176/1; European Parliament and Council Directive 2014/49/EU of 16 April 2014 on deposit guarantee schemes [2014] OJ L173/149.

EMU in Flux 519 the elaboration of several supervisory authorities in the financial market area, featuring three new European authorities for the supervision of financial activities; the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).76 Moreover, the European Systemic Risk Board (ESRB) was set up, its objective being to ‘contribute to the prevention or mitigation of systemic risks to financial stability in the Union’.77 In setting out these changes in the legislative landscape the Commission played a key role, 18.38 both in the elaboration of the way ahead, as well as in putting forward the concrete legislative proposals on the table which would put the changes into effect. At the same time, notably the former element saw strong involvement and commitment by the European Council, arguably due to the fundamental nature of the discussion, the need for speedy decision- making and the large interests at stake. For instance, in October 2008, then Commission President Barroso had already set up a high level Group chaired by De Larossiere, whose recommendations in February 200978 kick-started the new regulatory agenda with stronger supervision and effective crisis management procedures, first being embraced by the Commission in a strategic communication,79 and discussed and subsequently confirmed by the Spring and June 2009 European Councils. The concrete follow up provided for an impressive amount of legislative initiatives from the Commission, including revisions of almost all existing directives in the financial services sector, often in the form of regulations.80 The role of the European Commission in setting the overall regulatory framework is further strengthened by the frequent use of delegated and implementing acts as means of specifying and implementing the general principles in the legislation.81 Specific example in this regard concerns regulatory technical standards, where the supervisory authorities mentioned above have the power to develop draft regulatory and supervisory standards and practices, but it is in the end the Commission that endorses them.82 Arguably, the fact that the legislators have chosen to give the Commission the final say in the elaboration of these standards and not the supervisory agencies themselves is exemplary for the tension that arises in this new setup related to the so-called ‘Meroni doctrine’, which limits the possibilities for delegation of tasks by the EU institutions to tasks that are clearly defined and subject to review by the delegating authority.83 76 European Parliament and Council Regulation (EU) 1093/ 2010 of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/78/EC [2010] OJ L331/12; European Parliament and Council Regulation 1094/2010 of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/ 2009/ EC and repealing Commission Decision 2009/ 79/ EC [2010] OJ L331/48; European Parliament and Council Regulation (EU) 1095/2010 of 15 December 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/77/EC [2010] OJ L331/84. 77 Article 3 European Parliament and Council Regulation (EU) 1092/2010 of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board [2010] OJ L331/1. 78 Jacques De Larosière and others, ‘Report of the High Level Group on Financial Supervision in the EU’ (Brussels, 25 February 2009). 79 Commission, ‘Communication on European Financial Supervision’ COM (2009) 252 final. 80 For a detailed overview of measures taken Asen Lefterov, ‘The Single Rulebook: legal issues and relevance in the SSM context’ (October 2015) ECB Legal Working Paper Series No 15. 81 See eg Title IX of Directive 2013/36/EU. 82 See eg Chapter 2 of Regulation (EU) 1093/2010. 83 Case 9/56 Meroni & Co, Industrie Metallurgiche, SpA v ECSC High Authority [1957-58] ECR 133; Case 10/ 56 Meroni & Co, Industrie Metallurgiche, società in accomandita semplice v ECSC High Authority [1957-58] ECR

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520 THE EUROPEAN COMMISSION 18.40

In the application of this framework the Commission’s role is limited, since it is the national supervisory agencies together with the EU supervisory authorities EBA, ESMA, EIOPA, and the ESRB (also known as the European System of Financial Supervision) that take centre stage. It should be noted however that the Commission does have a seat in the respective boards of the supervisory authorities, although often in an observer capacity. As such, for instance, the Commission participates in the meetings of the management board of the EBA, which ensures that the authority carriers out its mission and performs the tasks assigned to it, but it does not have the right to vote and is not allowed to be present in the discussion of individual financial institutions.84 The Commission has also used its powers for periodically evaluating the functioning of said agencies and, where it considers this necessary, to propose changes to the supervisory setup.85

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As mentioned earlier, the further development of the Banking Union builds on the general EU system of the single rulebook and financial supervision to include a Single Supervisory Mechanism and Single Resolution Mechanism for euro area Member States and those non- euro area Member States hat choose to participate. In the elaboration of both the SSM and SRM the Commission again played a strong role in interplay with the European Council. Taking place in the heat of the sovereign debt crisis in 2012, the political push towards a single supervisory mechanism eventually lead to Commission proposals establishing a SSM on 12 September 201286 which were subsequently adopted by the Council on 15 October 2013.87 The Commission proposals for an SSM were accompanied by a Communication on a roadmap for completing the banking union over the coming years, including the introduction of a Single Resolution Mechanism88 and accompanying Single Resolution Fund. A Commission proposal for setting up such a Single Resolution Mechanism was published in July 201389 and entered into force in January 2015,90 with the Single Resolution Fund being laid down in an accompanying intergovernmental treaty entering into force in January 2016.91 157. For a more detailed discussion on the application and evolvement of the Meroni doctrine also in relation to the area of financial market regulation and supervision, see Jacques Pelckmans and Marta Simoncini, ‘Mellowing Meroni, how ESMA can help build the Single Market’ (CEPS Commentary, 18 February 2014) accessed 3 February 2020. 84 Article 45 Regulation (EU) 1093/2010. The Commission does have the right to vote in the establishment of the budget. 85 See specifically Commission, ‘Report on the operation of the European Supervisory Authorities (ESAs) and the European System of Financial Supervision (ESFS)’ COM (2014) 509 final; Commission, ‘Reinforcing integrated supervision to strengthen Capital Markets Union and financial integration in a changing environment’ COM (2017) 542 final. 86 See Commission, ‘Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions’ COM (2012) 511 final. 87 Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63. 88 Commission, ‘A Roadmap towards a Banking Union’ COM (2012) 510 final. 89 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) 1093/ 2010 of the European Parliament and of the Council’ COM (2013) 520 final. 90 European Parliament and Council Regulation (EU) 806/2014 of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) 1093/2010 [2014] OJ L225/1. 91 Intergovernmental Agreement on the transfer and mutualisation of contributions to the single resolution fund (22 May 2014).

EMU in Flux 521 Although the Commission did have a strong role in instigating these policy developments, the highly political nature of these further steps towards a Banking Union made for intense discussions notably within the Council as to the exact nature of the Single Supervisory and Resolutionary mechanisms. Relating this to the role and action of the Commission, the Single Supervisory Mechanism proved the least contentious of the two, mainly because of the fact that very early on in the process it had already been decided to give the European Central Bank the key role of single supervisor. The Commission set out its proposal to that effect based on the legal base of Article 127(6) TFEU, which is precisely meant to confer specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions and other financial institutions. Consequentially, the role of the Commission in the SSM is relatively small. Notable exceptions are the explicit reference to the need for the ECB to take decisions based on the standards adopted by the Commission in the context of the Single Rulebook,92 the fact that the Commission may participate as an observer in the meetings of the Single Supervisory board (upon invitation),93 and the fact that it is up to the Commission to publish every three years a review report on the application of the Regulation evaluating the functioning of the system and proposing amendments where appropriate.94

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The Single Resolution Mechanism on the other hand proved more contentious, with the Commission proposal already being challenged on the nature of the legal instrument chosen for its elaboration. The Commission proposal for the Single Resolution Mechanism was wholly based on Article 114 TFEU, which allows for the adoption of measures for the approximation of national provisions aiming at the establishment and the functioning of the Internal Market. The necessary use of this generic legal base95 left significant room for interpretation as to the extent of the measures that were actually deemed to be legally possible, leading to intense discussions notably within the Council. With Germany as its main advocate, the possibility for the establishment of a Single Resolution Mechanism within the context of the EU treaties was first challenged in general, with the critique in subsequent discussions focussing on certain elements related to the functioning of the Single Resolution Fund, namely the transfer of the contributions collected by the national resolution authorities to the Fund and the mutualization of the financial resources available in the national compartments.96 To avoid future legal challenges, the necessity to lay down these elements in an Intergovernmental Agreement between the participating Member States was ultimately accepted by the legislators.

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The implementation and application of the framework of the Single Supervisory Mechanism and the Single Resolution Mechanism also proved contentious in some elements, also specifically looking at the role of the European Commission. This was most notably the case in the area of the Single Resolution Mechanism and the procedure for resolution of failing

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92 Article 4(3) Regulation (EU) 1024/2013. 93 Article 25(11) Regulation (EU) 1024/2013. 94 Article 32 Regulation (EU) 1024/2013. 95 The use of this general legal base differentiates the SRM clearly from the SSM, which had the advantage of being able to use the specific legal base of Article 127(6) TFEU. 96 For more detailed discussion on the legal arguments pro and con this reasoning as well as the development of the discussion over time, see Federico Fabbrini, ‘On banks, courts and international law: The intergovernmental agreement on the Single Resolution Fund in context’ (2014) 21 Maastricht Journal of European and Comparative Law 444–63.

522 THE EUROPEAN COMMISSION financial entities (eg banks). Based on the same legal argument related to the ‘Meroni doctrine’ mentioned earlier in the context of the single rulebook, the original Commission proposal gave a strong central role to the European Commission as an EU institution to instigate and manage the resolution procedure. As such, the proposal gave the Commission the power to initiate the resolution of a bank, either based on a recommendation by the newly to be instituted Resolution Board97 or on its own initiative. In the case where it would be the Commission that initiates a resolution procedure, it would also be the Commission that would decide on the framework of the resolution tools to be applied in each case and on the use of the Single Resolution Fund. In all cases it would subsequently fall to the Resolution Board to adopt, through a decision addressed to the national resolution authorities, a resolution scheme setting out the resolution tools, actions, and funding measures, and instructing the relevant national resolution authorities to execute the resolution measures.98 18.45

In the legislative deliberations that lead to the eventual adoption of the final regulation the strong role of the Commission in this context came under heavy scrutiny notably in the Council. The text adopted constitutes a significantly watered-down version of the Commission power in this procedure in favour of the Member States and national resolution authorities in the Resolution board. Notably, in the final version of the text it is the Resolution board that initiates and decides on the adoption of a resolution scheme. The Commission remains entitled to a so called ‘power of objection’ in that, within twenty- four hours from the transmission of the resolution scheme by the Board, it needs to either endorse the resolution scheme, or object to it with regard to the discretionary aspects of the resolution scheme. And the resolution scheme may enter into force only if no objection has been expressed by the Commission within a period of twenty-four hours after its transmission by the Board. Were the Commission wants to instigate a modification of the resolution scheme the Council needs to approve the Commission approval within twenty- four hours from the transmission of the resolution scheme by the resolution board. Even though the Commission therefore to some extent remains part of the decision-making process the very tight timeframes associated make clear that these powers are meant to be used sparsely.99

IV. Conclusion and Outlook 18.46

This chapter has shown that the role of the European Commission in the context of Economic and Monetary Union has evolved significantly over the past years in all its various elements. In responding to the economic and financial crisis and the weaknesses this revealed in the original way that EMU was set up, the Commission has taken a central role, both in the push towards further completing EMU’s institutional architectures as well as in its application and enforcement. 97 The Board is composed of the Executive Director, the Deputy Executive Director, the representatives appointed by the Commission and the ECB, and the members appointed by each participating Member States, representing the national resolution authorities. 98 Article 16 COM (2013) 520 final. 99 Article 18 Regulation (EU) 806/2014.

Conclusion and Outlook 523 The Commission has been able to exercise its original role of policy setter in various degrees and in complex interplay with the Member States in the (European) Council, with the relation between the two differing dependent on the political pressure to act and the legal possibilities perceived under the EU treaties. As such, the Commission´s role has been relatively pronounced in the areas of economic and budgetary coordination and (to somewhat of a lesser extent) the financial market, with the area of emergency assistance especially in the early days falling more in the realm of the Member States. Moreover, the Commission’s role in application and enforcement of the various strands of EMU policy has generally increased. Especially in the area of economic and budgetary coordination this role in application and enforcement has been strengthened to such an extent that the Commission has a large degree of autonomy in deciding how and what to pursue in these areas. In the area of emergency assistance this role is significant but at the same time limited due to the setup of the ESM and the strong role of the Member States notably in those issues related to the financing of the emergency programmes. And in the area of financial markets the Commission’s role is relatively least pronounced also due to the key roles played by the ECB and the European Supervisory Authorities as well as the Member States, again notably where the issue of financing is concerned.

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Looking ahead, even though the peak of political pressure related to the financial, economic and sovereign debt crises that fuelled the major developments described in this chapter has largely passed there are still a number of elements of the EMU framework under serious political consideration, which also strongly relate to the position of the European Commission. Interestingly, it is also the European Commission, again in its role of policy setter, that is to a large extent driving this debate on further development of EMU, also in the context of a wider political debate on the future of the EU. Notably in its recent ‘reflection paper on the Deepening of Economic and Monetary Union’, the Commission argues that EMU as it stands falls short on a number of different fronts and that further action is needed.100 These proposals concern all three areas of policy dealt with in this chapter and often squarely concern the role of the Commission. In this regard, a number of elements deserve specific mentioning, also since they squarely relate to some of the tensions and limitations that the Commission has encountered in its functioning up to now.

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The first proposal is the possible creation of a European Minister of Economy and Finance. The European Commission in December 2017 published a Communication setting out how a future European Minister of Economy and Finance could play a role in the governance architecture of the Economic and Monetary Union.101 Such a Minister in the eyes of the Commission would combine the functions of the vice-president of the European Commission and chair of the euro group and would be the key player in pursuing budgetary and economic coordination as well as the use of euro area budgetary instruments.102 The establishment of such a minister is also linked to the idea of the setup of a separate euro area budget line within the EU budget providing ie for structural reform assistance to the

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100 Commission, ‘Reflection paper on the deepening of the economic and monetary union’ COM (2017) 291 final. 101 Commission, ‘Communication—A European Minister of Economy and Finance’ COM (2017) 823 final. 102 See speech by European Commission President Jean-Claude Juncker, ‘State of the Union Address 2017’ (SPEECH/17/3165, 13 September 2017).

524 THE EUROPEAN COMMISSION Member States. As such, the establishment of such an EU Minister would be a step further on the path of autonomy for the European Commission in the area of application and enforcement of the rules in the area of budgetary and economic coordination which has already taken place in the past years. Also, it would explicitly provide for financial means for such an entity, something which up to now is largely left in the realm of the Member States. In this regard, the Commission argues that such a Minister would notably help to create new synergies and improve the overall coherence and effectiveness of EU economic policy- making, would increase transparency of EU policy-making and accountability towards the European Parliament could help to promote better the general interest of the Union both internally and at global level. Whether such a strengthened role of the Commission will come into effect remains largely unclear. In general, the large degree of discretion the Commission currently has in the application of the framework of economic and budgetary coordination and the decisions the Commission has made are not without critics. Some important actors, such as Germany, have already criticised the European Commission’s use of its current discretionary powers in this area in an overly political and not ‘strict enough’ manner, going so far as to even promote increasing the position of separate ‘independent’ entities such as the European Fiscal Board or the ESM at the Commission’s expense.103 The pendulum on the Commissions role here could therefore swing both ways, the outcome of which is hard to predict. 18.50

Second proposal which links to key aspects of the role of the European Commission is the call to transfer the European Stability Mechanism into a European Monetary Fund, moving it fully into the Union legislative framework. A general wish to amend the intergovernmental status of the ESM was already apparent at its setup, when the European Council decided on a parallel process of Treaty revision to confirm the possibility of creating such an instrument by changing Article 136 TFEU.104 The transformation of the ESM into an EMF and integration in the EU framework could affect the role of the Commission in a number of ways. Notably, as some argue,105 such a move could coincide with the abolishment of the unanimity requirement in the granting of financial assistance in favour of some form of qualified majority voting. This would decrease the position of the Member States in favour of the entities preparing the decision-making process, notably the Commission. However, such a proposal up to now has seen strong resistance amongst Member States. Second, the move towards an ESM could see the Commission’s role in the application of the framework further strengthened by removing the other two ‘troika’ Members, the IMF and the ECB from this process.106 Here too however, opinions differ widely as to the optimal 103 See eg Wolfgang Schäuble, ‘Paving the way towards a Stability Union’ (Non-Paper presented to the ECOFIN meeting, Luxembourg, October 2017) accessed 3 February  2020. 104 The European Council Decision 2011/199/EU of 25 March 2011 amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro [2011] OJ L91/1 introduced a new para 3 into Article 136 TFEU, ‘The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality’. The Treaty amendment entered into force on 1 May 2013. 105 See eg André Sapir and Dirk Schoenmaker, ‘We need a European Monetary Fund, but how should it work?’ (Bruegel Blog, 29 May 2017) accessed 3 February 2020. 106 See also van Duin and Amtenbrink, ‘New dynamics in the decision-making in the wake of euro-crisis’ (n 24).

Conclusion and Outlook 525 setup. The Commission in December 2017 published a proposal for a Council regulation to create a European Monetary Fund anchored in the EU’s legal framework and building on the structure of the European Stability Mechanism.107 The proposal to some extent incorporates these two elements, moving away from unanimity eg in the decision to provide stability support and eg removing the role of the IMF in the application of the framework, and discussion are ongoing. In general, therefore, it can be considered a safe bet that the European Commission’s role in the EMU setup, as well as EMU in general will continue to evolve. The actual outcome of this process however still very much remains to be seen.

107 Commission, ‘Proposal for a Council regulation on the establishment of the European Monetary Fund’ COM (2017) 827.

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19

EUROPEAN MONETARY UNION AND THE COURTS Daniel Sarmiento and Moritz Hartmann*

I. Introduction II. The Court of Justice, National Courts, and EMU

19.1

19.4 A. The evolution of EMU: from conception to consolidation in the midst of crisis 19.4 B. EU Courts and EMU: cooperative adjudication with a constitutional backdrop 19.14 III. National Courts and EMU 19.116 A. Portugal 19.119

B. Greece C. Slovenia D. Estonia

IV. Fundamental Rights Protection and EMU

A. EMU, fundamental rights and the scope of application of the Charter B. Judicial protection of fundamental rights in the context of EMU

V. Conclusion

19.129 19.139 19.145 19.153 19.156 19.165 19.183

I. Introduction 19.1

European Monetary Union (EMU) is one of the cornerstones of the post-Maastricht European project. Inasmuch as the Maastricht Treaty adopted a binding horizon for the creation of a unitary currency comprising the vast majority of the Member States, the Treaty provided for the blueprint, as of 1992, to initiate, in the area of monetary policy, the still lasting process of the European project’s political integration. As a result, the first pillars of a European economic policy followed, creating an edifice under the name of EMU that is still in the making, but has nevertheless developed, at this point, into a crucial pillar of the European Union’s (EU) constitutional charter.

19.2

Accordingly, the past and future of EMU has been shaped, to a large extent, before national and European courts. This notwithstanding, the relation between EMU and the courts has not been an easy one. Economic and monetary policies entail complex and technical assessments, as well as political choices, that sit uncomfortably with the standard approach of judicial review.1 However, EMU plays a key role in the constitutional arrangements enshrined in the Treaties, and the interpretation of its basic rules and principles is inevitably a role for the courts. Also, the impact that policies under EMU may have on the living standards and, as a result, on the legal interests of natural and legal persons requires at times a scrutiny by * All opinions expressed herein are personal to the authors. 1 Koen Lenaerts and Moritz Hartmann, ‘Der europäische Rechtsprechungsverbund in der Wirtschafts-und Währungsunion’ (2017) 72 JuristenZeitung 321. Daniel Sarmiento and Moritz Hartmann, 19 European Monetary Union and the Courts In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0023

The Court of Justice, National Courts, and EMU 527 courts of law. The technical and political contours of EMU cannot act as a shield that safeguards this area of policy from judicial review. The Court of Justice of the European Union (hereafter ‘the Court of Justice’, or ‘the Court’) has not shied away from its duty to interpret the Treaty’s provisions on EMU. National courts have also participated actively in the adjudication of cases concerning EMU when implemented in Member States. The proliferation of judicial decisions has contributed to the development of a case law on EMU of a significant value and relevance. This case law has not only provided insights as to the scope of EMU’s rules, but it has also shed light on the institutional and constitutional balance that EMU requires of all the institutions and Member States involved, particularly at times of the financial crisis.2 The judicial development of EMU is now a fundamental part of Europe’s monetary and economic project. The evolution and the contours of such development are the subject of this chapter.

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II. The Court of Justice, National Courts, and EMU A. The evolution of EMU: from conception to consolidation in the midst of crisis EMU is the result of the Maastricht Treaty adopted in the midst of a major overhaul of European integration after the fall of the Berlin wall and the realignment of the West in the late 1980s. The creation of a single currency and a coordinated economic policy was the sign of a significant step forward in European integration, albeit with the exit of two Member States (Denmark and the United Kingdom). EMU covered two areas of policy intimately intertwined which are typically implemented in Member States with a considerable degree of synchronicity: monetary policy acts upon inflation and it can serve as a valuable tool in times of economic distress, whilst economic policy operates by means of fiscal instruments that fall upon tax payers and, as a result, promote social and economic cohesion.3 Monetary and economic policies operate as two sides of the same coin, particularly in times of economic crisis.

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Historians have described the high political stakes involved in the creation of EMU, in particular the euro.4 By creating an exclusive EU competence on monetary policy, Member States underwent one of the major transfers of sovereignty in the history of European integration. This was a significant step for all the Member States involved, but particularly for those whose central banks were key economic actors in domestic and international economics. That was the case of the German Bundesbank and, to a lesser extent, the Banque de

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2 Kaarlo Tuori and Klaus Tuori, The Eurozone Crisis: A Constitutional Analysis (CUP 2014) (hereafter Tuori and Tuori, The Eurozone Crisis); Alicia Hinarejos, The Euro Area Crisis in Constitutional Perspective (OUP 2015) (hereafter Hinarejos, The Euro Area Crisis); Jürgen Habermas, ‘The Crisis of the European Union in the Light of a Constitutionalization of International Law’ (2012) 23 European Journal of International Law 335; Peter M Huber, ‘The Rescue of the Euro and its Constitutionality’ in Wolf-Georg Ringe and Peter M Huber (eds), Legal Challenges in the Global Financial Crisis (Hart Publishing 2014) 9. 3 See, for this particular distinction, Case C- 370/ 12 Thomas Pringle v Government of Ireland [2012] ECLI:EU:C:2012:756 (hereafter Pringle); Tuori and Tuori, The Eurozone Crisis (n 2) 119–80. 4 Harold James, Making the European Monetary Union (Harvard UP 2012); Emmanuel Mourlon-Druol, A Europe made of Money: The Emergence of the European Monetary System (Cornell UP 2012).

528 EUROPEAN MONETARY UNION AND THE COURTS France.5 The euro also involved geopolitical balances, mostly as a result of the transformative end of the Cold War and the prospect of German reunification. An agreement between France and Germany finally triggered a consensus among the Member States, by which Germany would reunify and become the EU’s largest and dominant country, in exchange for the creation of a single currency and the sacrifice of the all-mighty German Deutsche Mark. And although Germany might have lost its national currency, it managed to impose a vision and design of the euro and its newly created central bank closely resembling that of the Deutsche Mark and the Bundesbank. 19.6

These developments were not taking place in a vacuum. The Maastricht Treaty took one step further the enlargement of competences in new areas of policy, but it also extended qualified majority in the Council in most fields of EU action. European citizenship was created as a symbolic link between the individual and the EU introducing major additions to the legal status of nationals of Member States. The first steps towards the creation of a Foreign and Security Policy, as well as an Area of Justice and Home Affairs, confirmed the EU’s intention to enter highly sensitive areas of policy, with a significant impact on national sovereignty and individual freedoms. Even the creation of the EU, as an institutional structure gathering the three pillars of European policy, was a sign of the ambition that awaited Europe’s future. With the benefit of hindsight, it is clear that in the late 1990s the transformation of Europe, as famously coined by Joseph H H Weiler,6 was on its way towards the construction of a constitutional edifice that would have a considerable impact on the law and on the way in which such law would be eventually interpreted and applied by courts.

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The first signs that confirmed the changes in EU law can be found in the Court of Justice’s references to the emergence of a ‘constitutional charter’. Most famously developed in the Les Verts judgment, when interpreting the rules of standing of EU Institutions and political players in direct actions before EU courts, the Court of Justice relied on the Treaties, understood as a ‘constitutional charter’, to extend the rights of access of political parties in the European Parliament.7 This step was shortly followed by decisions relying on the status of European citizenship, in order to take non-discrimination rules one step further and apply them to the sensitive area of social services and entitlements.8 The Court of Justice’s case law on fundamental rights has also dramatically expanded, adding to the long list of case law- made rights new incorporations such as human dignity, freedom of information, the right to life or the right to assemble, among others.9 The emergence of the European Parliament as a key institutional player with democratic credentials fuelled the legitimacy of European legislation. The EU was on the road to become the closest thing to a European State, with its own Constitution and its own legitimacy.10

5 Andrew Moravcsik, The Choice for Europe: Social Purpose and State Power from Messina to Maastricht (Cornell UP 1998). 6 Joseph H H Weiler, ‘The Transformation of Europe’ (1991) 100 Yale Law Journal 2403. 7 Case C-294/83 Les Verts v European Parliament [1986] ECR I-1339, para 23 (hereafter Les Verts v European Parliament). 8 See, in particular, the judgment in Case C-85/96 María Martínez Sala v Freistaat Bayern [1998] ECR I-2691. 9 See, for example, with regard to human dignity Case C-377/98 Netherlands v Commission and Council [2001] ECR I-7079; Case C-36/02 Omega Spielhallen-und Automatenaufstellungs GmbH v Oberbürgermeisterin der Bundesstadt Bonn [2004] ECR I-9609. 10 See, in this context, Fritz W Scharpf, Governing in Europe: Effective and Democratic? (OUP 1999).

The Court of Justice, National Courts, and EMU 529 Against this background, EMU was the most obvious sign of institutional, legal and economic integration in post-Maastricht Europe. In order to create the single currency, a European Central Bank was established in 1999, following the preliminary works of the European Monetary Institute, which paved the way to the European Central Bank’s (ECB) foundation. The newly established central bank did not replace national central banks, but instead it sat at the apex of a European System of Central Banks (ESCB), in which the national institutions played a collegiate role, together with the ECB, in determining European monetary policy. This institutional framework was based on several principles, duly enshrined in the Treaties, in which central bank independence, the objective of price stability and the prohibition of monetary financing stand out. As a result, the euro was engineered from its very inception as a currency mainly devoted to fight inflation, orchestrated from highly-specialized bodies (central banks) independent from government and the legislature. Politics and monetary policy were to stand apart and thus avoid the toxic legacy of past central bank intervention in the assistance of governments in distress through inflationary monetary policy. The ghost of Weimar and mass inflation in pre-war Germany still had a crucial influence in the design of the euro, the ECB, and the ESCB.

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However, monetary policy was subject to strict constitutional constraints by way of prohibitions and objectives explicitly defined in the Treaties. The ESCB was intended to have a main objective, namely the pursuit of price stability, together with an accessory goal of supporting economic policy. Nevertheless, the constitutional priority of price stability over economic policy was, and still is, unquestionable. In addition, the ESCB is precluded from entering into any decision that may breach the prohibition of financial assistance among Member States or of monetary finance of Member States. These prohibitions have been enshrined in the Treaties and are subject to interpretation by the Court of Justice.

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The bold powers under monetary policy are in contrast with the powers that Member States still hold in the area of economic policy. Whilst monetary policy is an exclusive competence of the Union, economic policy sits in a middle ground between shared competence and coordination competence. Fiscal harmonization is reduced to a minimum and under strict conditions, including unanimity vote in the Council. The paradigm of economic policy under the EU are the Treaty rules on excessive government deficits, whereby Member States are bound to reference values explicitly enunciated in Protocol No 12. As a result, pursuant to Article 1 of this protocol, Member States are constrained by a maximum of 3 per cent of planned or actual government deficit to gross domestic product at market prices, and of 60 per cent for the ratio of government debt to gross domestic product (GDP) at market prices.

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The Treaties also include a complex institutional design applicable to EMU, whereby the ECB, as an independent central bank, is granted wide powers but is also bound to legal constraints. The powers are also balanced by means of direct or indirect control by other institutions, such as the Court of Justice, the Court of Auditors, and the European Parliament. Moreover, the Union legislature is subject to specific rules for the case of Eurozone Member States, which resulted into the creation of a special formation of the Council under the name of the Eurogroup. The legislative powers of the Council and the European Parliament are also constrained by the ECB’s exclusive normative powers, but such powers are consequently reviewable by the Court of Justice in case any of the said provisions are deemed ultra vires.

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530 EUROPEAN MONETARY UNION AND THE COURTS 19.12

The legal framework came under intense reforms in the course of the economic crisis that erupted in 2008. The Union and its Member States were drawn to introduce urgent measures of a constitutional caliber that transformed the status quo of EMU, as designed in 1992. These reforms were enacted by way of secondary law, international agreements and non-conventional monetary policy.11 The fields of law affected by the reforms were of monetary, financial, and fiscal policy nature, and altogether paved the way for a new and more comprehensive EMU with the ability to overcome future crisis and to oversee the proper functioning of the EU’s internal market as a whole. However, the tools employed for the fashioning of this upgraded EMU were modeled on the basis of political convenience, in a context with rising populist movements, high unemployment and discreet Member State appetite for major constitutional reform. The result was a brittle new legal framework in which the ECB strained the limits of its mandate, the Member States entered into inter se agreements in order to avoid national vetoes, and the Commission launched financial assistance programmes on the very verge of the limits imposed by the Treaties.12

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It is therefore not surprising that many of the measures enacted in the course of the crisis were challenged on legal grounds before both national and European courts. Litigation became a secondary source of legal reform that continued the legislative process and other rule-making routes. In the course of the years since 2008, national and European courts have ruled on the compatibility of most of the reforms of EMU and contributed to flesh out their current legal status. In the case of the Court of Justice, litigation took place through its ordinary remedies enshrined in the Treaties. The new framework did not amend pre- existing remedies nor did it create new ones, it simply relied on the traditional courses of action before European courts. However, as it will be portrayed in the following section, EMU has provided EU courts with new and controversial procedural and substantive issues. In some cases, such issues are solely relevant to the field of EMU and, therefore, it could be argued that the current remedies include specificities that are applicable only to EMU.

B. EU Courts and EMU: cooperative adjudication with a constitutional backdrop 19.14

With a few singular exceptions, the rules on EMU provide no specific provisions on remedies before EU courts. The general remedial rules on access and jurisdiction apply to cases concerning monetary policy, resolution and prudential supervision, and national courts hold the same powers in these areas as they do when dealing with other domains of EU policy. The exceptions can be found in specific cases, as it happens in the case of Article 271(d) of the Treaty on the Functioning of the European Union (TFEU) (infringement actions), or in Article 14.2 of the Statute of the European System of Central Banks and of the European Central Bank (ESCB Statute) (direct actions on the removal from office of a governor of a national central bank). However, the quantitative core of litigation in the domain 11 Georgios Maris and Pantelis Sklias, ‘Intergovernmentalism and the New Framework of EMU Governance’ in Federico Fabbrini (ed), What Form of Government for the Eurozone (Hart Publishing 2015) 57; Bruno de Witte, ‘Using International Law in the Euro Crisis: Causes and Consequences’ (2013) Arena Working Paper No 4. 12 Paul Craig, ‘The Financial Crisis, the EU Institutional Order and Constitutional Responsibility’ in Federico Fabbrini (ed), What Form of Government for the Eurozone (Hart Publishing 2015) 17.

The Court of Justice, National Courts, and EMU 531 of EMU takes place under the ordinary remedies provided in the Treaties. Therefore, EMU is a field of law whose case law has developed through direct actions (mostly actions of annulment) and indirect actions (mostly preliminary references). But it is fair to say that the specificities of EMU have given EU Courts the chance to develop certain subjects in ways that partly depart from previous case law, or in terms that require a singular attention, as a result of the peculiarities of EMU as an exclusive competence of the EU.

1. Direct actions: specificities of EMU a) EMU and institutional litigation The field of EMU has not been the subject of abundant litigation among institutions or with Member States, but the few times in which such cases have been brought to the Court of Justice, the stakes were high. EMU institutional litigation is technical but it tends to convey relevant questions of principle that can transcend the field and raise other principled questions. The stance of institutions and Member States might deviate from their traditional positions in other fields of EU policy. Overall, EMU institutional litigation tends to have its own identity and, therefore, deserves specific attention. The first major case in which the Court of Justice ruled in the field of EMU was Commission v ECB,13 an action of annulment in which the Commission disagreed with the ECB’s decision to exclude OLAF’s supervisory tasks over the bank’s own budget and own financial resources, on the grounds of its independence. The Court of Justice noted the fact that the ECB has legal personality, its own resources and budget, its own decision-making bodies and enjoys privileges and immunities as being necessary for the performance of its tasks. The judgment also highlighted the fact that only the Court of Justice, on application by the Governing Council or the Executive Board, may retire a member of the ECB’s Executive Board, on the conditions laid down in Article 14.2 ESCB Statute. However, ‘recognition that the ECB has such independence does not have the consequence of separating it entirely from the European [Union] and exempting it from every rule of [Union] law’.14 As a result, the Court of Justice stated clearly that, as a question of principle:

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there are no grounds which prima facie preclude the Community legislature from adopting, by virtue of the powers conferred on it by the EC Treaty and under the conditions laid down therein, legislative measures capable of applying to the ECB.15

Therefore, the fact that a legislative act provides for OLAF’s investigative powers and it empowers the office to review the ECB’s action, is not per se in breach of the ECB’s independence. Shortly after, in Commission v Council, the Court of Justice ruled on the Council’s decision to hold the excessive deficit procedure de facto in abeyance, as a result of failing to adopt a decision recommended by the Commission pursuant to Article 126 TFEU.16 The decision was enacted in the benefit of France and Germany, but the Commission brought the Council before the Court of Justice, in the understanding that the procedure could not be

13

Case C-11/00 Commission v ECB [2003] ECR I-7147. Ibid, para 135. 15 Ibid, para 136. 16 Case C-27/04 Commission v Council [2004] ECR I-6649. 14

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532 EUROPEAN MONETARY UNION AND THE COURTS stayed. According to the Court, in so far as the Council’s conclusions make holding the procedure in abeyance conditional upon compliance by the Member State concerned with its commitments, ‘they restrict the Council’s power to give notice under Article 126 TFEU on the basis of the Commission’s earlier recommendation, so long as the commitments are considered to be complied with’.17 In so doing, the Council’s assessment will no longer have as its frame of reference the content of the recommendations already made under Article 126 TFEU to the Member State concerned, but unilateral commitments of that Member State. This outcome transforms the excessive deficit procedure into a voluntary commitment which can be unilaterally conditioned by the affected Member State. 19.18

More recently, budgetary stability procedures have been brought before the Court of Justice, particularly in the case of sanctions imposed on Member States for manipulation of statistical data. In Spain v Council,18 the Court of Justice had the opportunity to rule, for the first time, on the interpretation of Regulation 1173/201119 in the case of a penalty imposed on a Member State for breach of its provisions. Among several questions raised by the case, the Court of Justice ruled that Implementing Decisions of the Council can be enacted on a legal basis different to Article 291(2) TFEU, thus granting exclusive jurisdiction to the Court of Justice and not to the General Court. Moreover, the Court of Justice confirmed that Member States enjoy certain fundamental rights, particularly procedural-administrative fundamental rights under Article 41 of the Charter, which establishes the fundamental right to good administration. Although the action was rejected on its merits, the Member State was able to raise arguments of both procedure and substance, thus providing Member States a course of full judicial review in the field of EMU.

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Direct actions also include sui generis remedies, as is the case of Article 14(2) ESCB Statute, which grants a governor of a national central bank, or the Governing Council, the right to bring an action against a Member State for breach of the conditions for removal from office. This sui generis remedy was put into action for the first time in 2018 in the case of Rimšēvičs and ECB v Latvia,20 two actions brought by both applicants with standing to sue, as a result of Latvian authority’s decision to provisionally suspend the governor of the Latvian central bank on the grounds of criminal charges brought against him by the local anti-corruption office. Due to the lack of any evidence provided to the ECB and to the Court, Latvia was declared to be in breach of Article 14(2) ESCB Statute. However, the Court considered the specificities of the remedy and concluded, in contradiction with Advocate General Kokott, that the remedy is an action of annulment that empowers the Court to annul the contested national act. Thus, in contrast with the Court’s powers in an infringement action, which are limited to a declaration of conformity with EU law, Article 14(2) ESCB Statute provides for a direct remedy against a Member State that empowers the Court to annul Member State acts. This interpretation and effects, which have no precedent in the history of EU law, are good proof of the far-reaching scope of EMU and how the need to enforce key provisions, 17 Ibid, para 88. 18 Case C-521/15 Spain v Council [2017] ECLI:EU:C:2017:982. 19 European Parliament and Council Regulation (EU) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1. 20 Joined Cases C-202/18 and C-235/18 Ilmārs Rimšēvičs and ECB v Republic of Latvia [2019] ECLI:EU:C:2019:139.

The Court of Justice, National Courts, and EMU 533 such as the principle of independence of central banks, require novel legal instruments that promote European integration and the interaction between legal orders. b) EMU and actio popularis: the Von Storch case The impact of EMU policies is to be considered in terms of individuals concerned and the interests at stake. EMU comprises measures of a macro-and microeconomic scope with significant impact on the market and the economy. From fiscal to monetary policy, the decisions enacted in the context of EMU can have the ability of overheating or depressing the economy of the entire Eurozone, and consequently enriching or impoverishing broad segments of the population. As a result, the ability of private individuals, on their own capacity or organized through legal entities, to challenge EMU policy in courts faces the difficulty of proof of a direct interest.

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From its early days, the case law of the Court of Justice has rejected an actio popularis under EU law before EU courts. The Treaties provide that only EU institutions and Member States are privileged to sue without need of proof of a direct interest, and the Court has interpreted this restriction strictly. The ability of private individuals to bring an action before EU courts is limited only to addressees of individual acts or applicants that are directly and individually concerned. The Lisbon Treaty enlarged the scope of situations empowering private applicants to bring an action against ‘regulatory acts’, but nevertheless requiring proof of a direct concern and the absence of further implementing acts. When the most salient EMU policy measures were taken in the context of the economic crisis, individuals who considered that their interests were adversely affected brought actions before EU courts. Their interests were only indirectly linked to the policy measures undertaken, and thus their actions were, in principle, not admissible under the Treaties. It remained to be seen whether the Court would be willing to adjust its case law to facilitate access to EU courts of these applicants. In case the Court decided to move forward in that direction, it would entail the quasi creation of an actio popularis in EU law.

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The answer was provided in the Von Storch case, an action of annulment brought by numerous German citizens against the so-called Outright Monetary Transactions Programme (OMT Programme) of the ECB.21 This programme was issued by press release on 6 September 2012 to initiate the purchase on secondary markets of government bonds issued by states of the euro area. The future purchases were to be conditional upon the states concerned being subject to a financial support programme of the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM). The Programme paved the way for future interventions of the institution in secondary bond markets, with the aim of precluding excessive interest rate payments on sovereign bonds of Member States subject to a financial assistance programme. To date, the OMT Programme has never been formally enacted because the mere announcement of the ECB’s intention, back in September 2012, restored the confidence in the single currency in the sense that sovereign bonds of the Eurozone Member States returned to normal. A group of German citizens considered that the OMT Programme introduced a covert measure of monetary financing of Member States that risked bankrupting the ECB, with the consequent impact on taxpayers. As a

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21

Case T-492/12 Von Storch and Others v ECB [2013] ECLI:EU:T:2013:702 (hereafter Von Storch and Others).

534 EUROPEAN MONETARY UNION AND THE COURTS result, they brought an action against the OMT Programme in the course of an action of annulment before the General Court. 19.23

The judgment of the General Court, upheld on appeal by the Court of Justice,22 ruled that the applicants had no direct concern under the terms of Article 263(4) TFEU. As long as the OMT Programme, as announced by means of the press release of 6 September 2012, required further measures of implementation, the measure was of no direct concern on private applicants. Of course that did not exclude the possibility of launching proceedings against the enforcement measures of the OMT Programme that would eventually lead to the judicial review of the OMT Programme. In fact, that was exactly the case in the proceedings that led to the seminal Gauweiler case, the very first preliminary reference made by the Bundesverfassungsgericht (Federal Constitutional Court of Germany, hereafter BVerfG) that concerned the validity of the OMT Programme, but as a result of an action of protection of fundamental rights lodged against the omissions of the German Federal Government.23

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As a result, in Von Storch, the Court confirmed that an actio popularis remains precluded under EU law, including in the area of EMU, where policy measures have broad and significantly intense effects on private individuals. As long as such policy measures must be implemented at EU and national level, it is against such implementing measures that the challenges must be brought. However, once the challenge is brought before the EU courts, the review will be broad and cover any issues of legality that may be adequately raised by the parties. Thus, although an actio popularis is not within the remedial tools of parties in proceedings before EU courts, as long as a national court is willing to enlarge the standing of private parties and refer the applicants’ concerns to the Court of Justice by way of a preliminary reference, the EU judicial system facilitates, in remedial terms, something very close to an actio popularis. In fact, Mr. von Storch managed to hold the ECB accountable by way of the reference made by the German Constitutional Court in the Gauweiler case.

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c) EMU infringements and remedies under international agreements Infringement actions are another means of direct actions that allow a plaintiff to bring procedures against a defendant Member State. Although the structure of the procedure in an infringement action is similar to an action of annulment, the former responds to the logic of international litigation, in which two sovereign states hold a dispute as to the compliance of an international obligation. In the specific case of infringement actions, the European Commission holds a strategic role, as the predominant plaintiff in most actions before the Court of Justice. As is well known, the enforcement of a judgment of the Court of Justice in infringement proceedings entitles the plaintiff to bring new procedures against the failing Member States, pursuant to Article 260 TFEU, with the possibility of requesting the imposition of penalty payments and/or lump sums. In the field of EMU, Article 126(10) TFEU precludes the Commission or Member States from launching infringement procedures for breach of the rules governing the Stability and Growth Pact. However, a similar remedy has been instituted under Article 273 TFEU, by 22 Case C-64/14 P Von Storch and Others v ECB [2015] ECLI:EU:C:2015:300. 23 Case C-62/14 Gauweiler and Others v Deutscher Bundestag [2015] ECLI:EU:C:2015:400 (hereafter Gauweiler and Others).

The Court of Justice, National Courts, and EMU 535 way of an international agreement: The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), also known as the ‘Fiscal Compact’. Member States bound by the Fiscal Compact (with the exception of the Czech Republic and the United Kingdom) have to transpose into their national legal orders its provisions. In particular, national budgets have to be in balance or surplus under the TSCG’s definition. This Treaty defines a balanced budget as a general budget deficit not exceeding 3.0 per cent of the GDP, and a structural deficit not exceeding a country-specific Medium-Term budgetary Objective (MTO) which at most can be set to 0.5 per cent of GDP for states with a debt-to-GDP ratio exceeding 60 per cent—or at most 1.0 per cent of GDP for states with debt levels within the 60 per cent limit. The country-specific MTOs are recalculated every third year and might be set at stricter levels compared to what the Treaty allows at most. The TSCG also contains a direct copy of the ‘debt brake’ criteria outlined in the Stability and Growth Pact, which defines the rate at which debt levels above the limit of 60 per cent of GDP shall decrease.

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According to Article 8(1) of the Fiscal Compact, Member States signatories of the agreement can bring another Member State before the Court of Justice in case of breach of Article 3(2) of the Agreement, which provides the balanced budget rule. The decision to bring the case before the Court requires a prior report of the European Commission, in which it is stated that a Member State has failed to comply with the balanced budget rule. From that point onwards, any Member State can bring the case before the Court of Justice, in terms which are equivalent to those in Article 259 TFEU: A Member State can bring a case before the Court of Justice so that it rules on the compliance by a Member State with EU law. In this case, the peculiarity is that the legal basis is not Article 259 TFEU, but Article 273 TFEU, which allows Member States to settle a dispute by granting jurisdiction to the Court of Justice under a ‘special agreement’ between the parties.

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To reinforce the idea that the remedy is materially an infringement action, rather than a remedy under a ‘special agreement’ between Member States, Article 8(2) of the Fiscal Compact empowers the European Commission to enforce the judgment of the Court of Justice by means of the enforcement mechanisms provided for by infringement actions under Article 260 TFEU. However, Article 8(2) introduces a special lump sum and penalty payment system, according to which the Court of Justice ‘may impose on it a lump sum or a penalty payment appropriate in the circumstances and that shall not exceed 0.1 per cent of its gross domestic product’. These arrangements create a sui generis infringement provided by international law, on the grounds of Article 273 TFEU but blending the main features of Articles 259 and 260 TFEU. A reasonable interpretation of the Fiscal Compact should lead the Court to accept the applicability of its case law on infringement actions to Article 8(2) of the Fiscal Compact, but it is still unclear to what extent this would be the case.

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d) ESCB infringements under Article 271(d) TFEU As a means to ensure the independence of central banks within the EU, Article 271(d) TFEU provides for a specific means of enforcement when a central bank incurs in a conduct that could be deemed to be in breach of EU law. The provision states that ‘if the Court finds that a national central bank has failed to fulfil an obligation under the Treaties, that bank shall be required to take the necessary measures to comply with the judgment of the Court’.

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536 EUROPEAN MONETARY UNION AND THE COURTS 19.31

Article 271(d) TFEU reproduces the language and structure of an infringement procedure under Article 258 TFEU. Therefore, the rules governing such actions are the ones applicable to infringement procedures launched by the European Commission against a Member State. Article 271(d) TFEU makes an explicit reference to the applicability of Article 258 TFEU and therefore the pre-litigation stages apply (letter of formal notice and reasoned opinion) as well as the conditions to bring an action on the grounds of Article 258 TFEU as provided in the Statute and the case law of the Court of Justice.

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Although Article 271(d) TFEU refers only to ‘the fulfilment by national central banks of obligations under the Treaties and the Statute of the ESCB and of the ECB’, it must be understood that such reference includes any breach of EU law, inasmuch as a breach of secondary law addressed to a national central bank entails a breach of the Treaty rules imposing the compulsory nature of secondary law acts. Although the scope of Article 271(d) TFEU is broad as to the nature of the breached rule, it is more restrictive when it comes to determine the subject-matter. It is true that at the present time the ECB holds powers in the field of prudential supervision of credit institutions, as a result of an attribution of powers on the grounds of Article 126(7) TFEU. However, Article 271(d) TFEU addresses the specific circumstance of a breach of EU law by a national central bank, not by a prudential supervisor. It would be incoherent to allow the ECB to launch infringement actions in prudential supervision matters, but only against states in which their central banks have assumed tasks in prudential supervision. Therefore, it is reasonable to argue that Article 271(d) TFEU empowers the ECB in cases related to monetary policy only.

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Despite the similarities between Article 271(d) TFEU and ordinary infringements under Article 258 TFEU, ESCB infringements have specificities that should be taken into account.

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First, the defendant under Article 271(d) TFEU proceedings is not the Member State, but the national central bank. Only the breaches attributable to a national central bank can be brought before the Court by the ECB. If the breach can be attributed to several public authorities, including government authorities, the ECB can only bring an action against the specific conduct of the national central bank. It is up to the European Commission to address any other breaches of EU law by other authorities of the Member States, even if such breaches have an impact on the activities or decisions of the respective national central bank.

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Also, in case that the Court rules and declares the breach of EU law by a national central bank, the enforcement mechanisms are not included under the powers granted to the ECB under Article 271(d) TFEU. In such a case, it is for the European Commission to enforce the Court’s decision on the grounds of Article 260 TFEU.

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e) The Single Supervisory Mechanism and the review of ECB acts implementing national law The creation of a Banking Union, including a Single Supervisory Mechanism (SSM), has granted the ECB far-reaching new powers in a field as sensitive and deeply regulated as banking supervision. Regulation 1024/201324 provides that the ECB is the competent prudential supervisory body for ‘significant credit institutions’ within the Eurozone, and national supervising authorities remain competent to supervise ‘less-significant credit 24 Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63.

The Court of Justice, National Courts, and EMU 537 institutions’, although with the possibility for the ECB to undergo specific supervision in case it is considered necessary. The supervision undergone by both ECB and national supervisors is based on a common interpretation of EU law—mostly Regulation 575/201325 and Directive 2013/36 (CRD IV)26—as well as a broad array of implementing and delegated acts of the Commission and the Council, as proposed by the European Banking Authority (EBA). This full regulatory framework has been categorised as the ‘Single Rulebook’ and it provides a common rules-based system for all credit institutions in the EU, and particularly in the Eurozone, to operate in the single market under common supervision headed by the ECB.27 The judicial review of ECB acts is not always a simple task, due to the complex structure in which the SSM has been designed. As a rule, the ECB takes decisions on the grounds of EU law that can be challenged before the Administrative Board of Review, whose jurisdiction is voluntary for the applicant, and, eventually, before the Court of Justice. The remedies available for applicants are the general remedial tools under the Treaties, mostly the action of annulment and the action for damages.

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However, there are cases in which the ECB will exercise its powers under very specific circumstances provided in Article 4.2 Regulation 1024/2013. In certain cases, the ECB can issue decisions in which it implements national law. This national law will be limited to those provisions that enforce EU rules, mostly Directives. However, inasmuch as EU rules grant options and discretion to Member States, the national rules applied by the ECB can be discretional provisions in which a Member State does not implement a non-discretional EU provision. In these circumstances, the ECB implements national law, as enacted by the Member State on the grounds of its own discretion, and maybe already interpreted by national courts.

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This specificity of the SSM has created a new typology of EU acts which are now subject to a new form of EU judicial review: EU imperative acts of an EU institution (the ECB) that enforce national law, reviewable by means of actions of annulment before EU courts. For the first time, EU courts will review EU acts on the grounds of national law in public law cases. Although EU courts deal with national law in procurement cases, this is only the case in the field of contractual private-law disputes. The interpretation and enforcement of national law in the review of public law action is a first, that will deserve due attention in the years to come.

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Also, the interaction between ECB decisions and national implementing decisions could raise some strains in the way in which the rules on jurisdiction of EU and national courts are articulated. This has been raised before the Court in the Berlusconi and Fininvest case,28 in which the Italian Consiglio di Stato questioned the Court on its jurisdiction to review decisions of the Italian central bank (with jurisdiction over prudential

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25 European Parliament and Council Regulation (EU) 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 [2013] OJ L176/1. 26 European Parliament and Council Directive 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/ EC and repealing Directives 2006/48/EC and 2006/49/EC [2013] OJ L176/338. 27 See David Howarth and Lucia Quaglia, The Political Economy of European Banking Union (OUP 2016) 180. 28 Case C-219/17 Berlusconi and Fininvest v Banca d’Italia [2018] ECLI:EU:C:2018:1023.

538 EUROPEAN MONETARY UNION AND THE COURTS supervision of Italian banks) which enforce orders of the ECB. According to the Court, in the case of ECB acts enacted after a proposal by a national supervisory authority, EU courts have an exclusive jurisdiction that precludes national courts from reviewing the national authority’s preparatory acts. In line with its traditional Foto-Frost case-law, the Court reinforced the jurisdiction of EU courts in order to avoid a separation of jurisdictions that would potentially undermine the unity of action of EU courts when reviewing supervisory acts.

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2. Indirect actions in the framework of EMU By contrast, the preliminary ruling procedure provides for an indirect remedy to contest the legality of norms of European Union law. Different to direct actions, Article 267(1) TFEU allows the national courts and tribunals of the Member States to refer to the Court of Justice questions relating to ‘the validity and interpretation of acts of the institutions, bodies, offices or agencies of the Union’. Thus, the conformity of European Union law with the Treaties is indirectly examined through the lens of the courts interpreting, for example, the implementing measure at national levels. As a result, the preliminary ruling procedure is understood to be a non-contentious procedure, given that the parties in the national proceedings do not dispose of any right of initiative.29 a) The indirect nature of the preliminary ruling procedure Therefore, the indirect nature of the preliminary ruling procedure forms an integral part of what the Court has characterized in the seminal Les Verts case of 1986 as ‘a complete system of legal remedies and procedures’.30 In Opinion 2/13, the Court held that this complete system of legal remedies and procedures: as thus conceived has as its keystone the preliminary ruling procedure provided for in Article 267 TFEU, which, by setting up a dialogue between one court and another, specifically between the Court of Justice and the courts and tribunals of the Member States, has the object of securing uniform interpretation of EU law . . . thereby serving to ensure its consistency, its full effect and its autonomy as well as, ultimately, the particular nature of the law established by the Treaties.31

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Hence, the indirect remedy of the preliminary ruling procedure is considered the procedural ‘vehicle through which the relationship between the national and EU legal systems has been fashioned’,32 and has therefore been an eminent promoter of the European Union’s motto ‘Unity in diversity’ ever since.

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Consequently, the indirect rationale of the preliminary ruling procedure has judicially defined the contours of the evolving area of the EMU alike.

29 Albertina Albors-Llorens, ‘Judicial Protection before the Court of Justice of the European Union’ in Catherine Barnard and Steve Peers (eds), European Union Law (2nd edn, OUP 2017) 293. 30 Les Verts v European Parliament (n 7) para 23. 31 Opinion 2/13 Accession of the European Union to the ECHR [2014] ECLI:EU:C:2014:2454, para 176; Case C- 42/17 M.A.S. and M.B. [2017] ECLI:EU:C:2017:936, paras 22–23 (hereafter M.A.S. and M.B.). 32 Paul Craig and Grainne de Búrca, EU Law: Text, Cases, Materials (6th edn, OUP 2015) 465.

The Court of Justice, National Courts, and EMU 539 b) Preliminary references of validity as actio popularis: Gauweiler In the case that an individual challenges the validity of an EU act without being directly and individually concerned, the preliminary ruling procedure under Article 267 TFEU allows an indirect contestation by dint of the national courts and tribunals of the Member States, whereas the person directly and individually concerned may institute proceedings under Article 263(4) TFEU.

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In a case, however, where the act entails national implementing measures at Member State levels, the person directly and individually concerned is required to challenge the conformity before the national courts.33 This allows individual complainants, under certain circumstances, to circumvent the requirements pursuant to Article 263 TFEU, which contributes, in some ways, to the deconstruction of the EU’s complete system of legal remedies and procedures.

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Lately, this critical observation of procedural ‘de-individualization’34 has been put forward, in the framework of EMU, mainly with reference to the BVerfG’s first referral for a preliminary ruling to the Court of Justice that led to the Gauweiler case.35

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This request had been made in the context of a series of national constitutional complaints and dispute resolution proceedings between constitutional bodies in the context of the ECB’s announcement to initiate the OMT Programme in September 2012.36

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First and foremost, the complainants and the applicant of the national proceedings argued that the German Federal Government and the Bundestag were obliged to work towards a repeal of the OMT Programme. Moreover, the plaintiffs claimed that the German Bundesbank would not have been allowed to take part if the decision was put into effect as it has not been covered by the ECB’s mandate pursuant to Articles 119 and 127 TFEU, and as it has violated the prohibition of monetary financing pursuant to Article 123 TFEU.

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Thus, the constitutional context of the BVerfG’s first request for a preliminary ruling to the Court of Justice was that of an ultra vires review, in which the BVerfG intends to examine:

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whether acts of European institutions and agencies are based on manifest transgressions of powers . . . or affect the area of constitutional identity, which cannot be transferred . . . which means that constitutional organs, authorities and courts are prohibited from taking part in putting them into effect.37

Accordingly, the BVerfG exposed in its order that: the core of identity of the constitution (Article 20(1) and (2), Article 79(3) of the Grundgesetz; Basic Law, hereinafter: GG) is that the budget legislature makes its decisions on revenue and expenditure free of heteronomy on the part of the bodies and of 33 Ibid, 534. 34 See Klaus Ferdinand Gärditz, ‘Beyond Symbolism: Towards a Constitutional Actio Popularis in EU Affairs? A Commentary on the OMT Decision of the Federal Constitutional Court’ (2014) 15 German Law Journal 183, 192 referring to ‘[t]‌he Slippery Slope of De-Individualization’ (hereafter Gärditz, ‘Beyond Symbolism’). 35 Gauweiler and Others (n 23). 36 Tuori and Tuori, The Eurozone Crisis (n 2) 104, 165; Stefania Baroncelli, ‘The Independence of the ECB after the Economic Crisis’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), The Constitutionalization of European Budgetary Constraints (Hart Publishing 2014) 133ff. 37 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 22.

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540 EUROPEAN MONETARY UNION AND THE COURTS other Member States of the European Union and remains permanently ‘the master of its decisions’ . . .38 19.54

Building on the complainants assessments that the OMT Decision can create liability and payment risks affecting the federal budget to such an extent that the overall budgetary responsibility of the German Bundestag can be impaired, the BVerfG’s starting point was the finding that the press release of the ECB at issue was unlawful under national constitutional law as it was considered to violate the core of the constitutional identity of the Grundgesetz.

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Part and parcel of this notion of constitutional identity is the election clause of Article 38(1) GG. Since its seminal Maastricht decision of 1993,39 the BVerfG has referred to the election clause in Article 38(1) GG as a substantive right allowing individuals to seize the BVerfG with a challenge of legislation transferring sovereign rights to the European Union.40 Moreover, the election clause guarantees the individual’s indirect participation in the exercise of the Bundestag’s budgetary powers originating from its overall budgetary responsibility.41 Furthermore, this judicial reasoning has been deployed in the BVerfG’s decisions on the Treaty Establishing the European Stability Mechanism (ESM Treaty),42 building on both its rulings on the Treaty of Lisbon43 as well as the Euro rescue package relating to the EFSF.44

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Based on the BVerfG’s interpretation of the election clause in Article 38(1) GG as a substantive right, in the national proceedings of the Gauweiler case the complainants argued that the ECB’s OMT decision can create liability and payment risks, which might affect the federal budget to such an extent that the overall budgetary responsibility of the German Bundestag, and thus its budgetary rights, can be impaired. Moreover, the decision also allegedly violated the principle of democracy enshrined in Article 20(1) and (2) GG, and impaired the constitutional identity of the Grundgesetz.45

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However, the OMT decision of the ECB was not of any direct and individual concern to the complainants, which is the reason why the actions have, inter alia, been directed against parliamentary and governmental inaction.

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Hence, Justices Lübbe-Wolff and Gerhardt considered the constitutional complaints and the application in the Organstreit proceedings to be inadmissible. In two different dissenting opinions to the order of referral for preliminary ruling, they reasoned that the motions have exceeded the limits of the BVerfG’s judicial competences under the principles of democracy, the separation of powers and the rule of law.

38 Ibid, para 28, quoting BVerfG, Judgment of the Second Senate of 18 March 2014—2 BvR 1390/12, para 164. 39 BVerfG, Judgment of the Second Senate of 12 October 1993—2 BvR 2134/92 and 2 BvR 2159/92. 40 Ibid, para 61; Justin Collings, Democracy’s Guardians: A History of the German Constitutional Court 1951– 2001 (OUP 2015) 295; Gärditz, ‘Beyond Symbolism’ (n 34) 189; Matthias Ruffert, ‘The EMU in the ECJ: A New Dimension of Dispute Resolution in the Process of European Integration’ in Luigi Daniele, Pierluigi Simone, and Roberto Cisotta (eds), Democracy in the EMU in the Aftermath of the Crisis (Springer 2017) 342. 41 Jan-Herman Reestman, ‘Legitimacy through Adjudication: The ESM Treaty and the Fiscal Compact before the National Courts’ in Thomas Beukers, Bruno de Witte, and Claire Kilpatrick (eds), Constitutional Change through Euro-Crisis Law (CUP 2017) 259 (hereafter Reestman, ‘Legitimacy through Adjudication’). 42 BVerfG, Judgment of the Second Senate of 18 March 2014—2 BvR 1390/12. 43 BVerfG, Judgment of the Second Senate of 30 June 2009—2 BvE 2/08. 44 BVerfG, Judgment of the Second Senate of 7 September 2011—2 BvR 987/10. 45 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 5.

The Court of Justice, National Courts, and EMU 541 The dissenting opinion of Justice Lübbe-Wolff mainly relied on the fact that actions directed against parliamentary and governmental inaction with respect to the ECB’s OMT decision stretch far beyond the powers of judicial adjudication whereas Justice Gerhardt, in his dissenting opinion, referred to the distinction that:

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must be drawn between cases in which a substantive fundamental right is affected, and constitutional complaints in which the complainant challenges a violation of the right to take part in the election of the Members of the German Bundestag under Article 38(1) GG, with the aim of preventing the erosion of the powers of Parliament, and thus the devaluation of the right to vote.46

In this regard, the dissenting opinions followed the reasoning of the General Court that had dismissed, in the 2013 Von Storch case cited before, direct actions against the contested announcement of the ECB’s OMT Programme as the rights of the plaintiffs were lacking any direct or individual concern pursuant to Article 263(4) TFEU.47

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Accordingly, the extension of the possibilities of the individual to initiate, via Article 38(1) GG an ultra vires review by the Constitutional Court implies, as Justice Gerhardt has pointed out in his dissenting opinion, that the BVerfG claims the competence to decide, without there being a connection to a substantive fundamental right of an individual, whether an institution of the European Union has manifestly and structurally ‘usurped’ powers not conferred upon it.48

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In so doing, one can conclude that the BVerfG’s constitutional understanding of the right to vote paved the way for constitutional complaints (Article 93(1)(4a) GG) being transformed into a vehicle of actio popularis, through which the unconstitutionality of a legal act or a legal provision can be asserted without individual rights being directly affected.49 Thus, individual complainants act as some sort of trustee of constitutional concerns, which are unlikely to being assigned to individual enforcement.50

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Likewise, preliminary references of validity such as the BVerfG’s Gauweiler order are to be considered an instrument of actio popularis of secondary order, at least in the particular setting of an ultra vires review. However, they reveal the considerable risk to undermine the EU’s complete system of legal remedies and procedures by weakening the formal requirements pursuant to Article 263(4) TFEU.

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46 See BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, dissenting opinion of Justice Gerhardt, para 4. 47 Von Storch and Others v ECB (n 21) para 38. 48 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, dissenting opinion of Justice Gerhardt, para 5. 49 Michael Hein and Stefan Ewert, ‘How do Types of Procedure Affect the Degree of Politicization of European Constitutional Courts? A Comparative Study of Germany, Bulgaria, and Portugal’ (2016) 9 European Journal of Legal Studies 62, 78, consider constitutional complaints without any of the applicant’s rights being affected ‘quasi- actio popularis’; Wolfgang Kahl, ‘Bewältigung der Staatsschuldenkrise unter Kontrolle des Bundesverfassungsgerichts’ (2013) 128 Deutsches Verwaltungsblatt 207; Matthias Wendel, ‘Exceeding judicial competence in the name of democracy: The German Federal Constitutional Court’s OMT Reference’ (2014) 10 European Constitutional Law Review 277; Jürgen Bast, ‘Don’t Act Beyond Your Powers: The Perils and Pitfalls of the German Constitutional Court’s Ultra Vires Review’ (2014) 15 German Law Journal 167, 169. 50 Heiko Sauer, ‘Doubtful it Stood . . . Competence and Power in European Monetary and Constitutional Law in the Aftermath of the CJEU’s OMT Judgment’ (2015) 16 German Law Journal 971, 990.

542 EUROPEAN MONETARY UNION AND THE COURTS 19.64

In a similar vein, Weiss and Others, the second referral for a preliminary ruling of the BVerfG, has challenged the ECB’s launching of a programme for the purchase of government bonds on secondary markets (Public Sector Purchase Programme; PSPP) that aimed at returning inflation rates to levels below, but close to, 2 per cent.51

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Consequently, a number of individuals brought constitutional actions before the BVerfG. The complainants considered that the decisions of the ECB in relation to the PSPP amount to an ultra vires act, mainly because they infringe the prohibition of monetary financing of states enshrined in Article 123 TFEU and the principle of conferral under Article 5(1) of the Treaty on European Union (TEU) in conjunction with Articles 119 and Article 127ff TFEU. They also argued that those decisions infringe the principle of democracy laid down by the GG and thereby undermine German constitutional identity.

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On these grounds, the BVerfG stayed the national proceedings and submitted questions to the Court of Justice concerning the validity of the PSPP programme, a request that revealed a more cooperative sense of judicial cooperation than the BVerfG’s referral in Gauweiler. On the substance, the BVerfG stated that if the PSPP programme would exceed the mandate of the ECB or infringe the prohibition of monetary financing, it must uphold those various actions. The same would apply if the rules on the sharing of losses arising under that programme would be considered to affecting the budgetary responsibility of the Bundestag.

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Building to a large extent on its judicial reasoning developed in the context of the Gauweiler case, in its judgment the Court of Justice found that the PSPP does not exceed the ECB’s mandate given that the programme falls within the area of monetary policy and observes the principle of proportionality. The Court of Justice observed that the ESCB’s overarching decision to encourage a return of inflation rates to levels below, but close to, 2 per cent over the medium term in order to achieve the objective of maintaining price stability was not vitiated by a manifest error of assessment.52

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In addition, the Court of Justice held that the PSPP fails to infringe the prohibition of monetary financing, mainly because the programme’s implementation is not to be considered equivalent to a purchase of bonds on the primary markets and does therefore not reduce the impetus of the Member States to follow a sound budgetary policy. In this respect, the Court of Justice recalled that the PSPP provides for safeguards intended to ensure that a private operator cannot be certain, when it purchases bonds issued by a Member State, that those bonds will actually be bought by the ESCB in the foreseeable future. Moreover, according to the Court of Justice, the prohibition of monetary financing does not preclude either the holding of bonds until maturity or the purchase of bonds at a negative yield to maturity.53

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It follows that Weiss is thus another example of how constitutional complaints under German constitutional law reviewing EU legal acts may alter the nature of the preliminary references of validity as actio popularis.

51

Case C-493/17 Weiss and others [2018] ECLI:EU:C:2018:1000 (hereafter Weiss and others). Weiss and others (n 51) paras 56 and 78. 53 Weiss and others (n 51) paras 146 and 153. 52

The Court of Justice, National Courts, and EMU 543 c) Preliminary references and the Charter of Fundamental Rights Due to the restrictions resulting from the standing requirements in direct actions and the rejection of actio popularis among EU remedies, issues of fundamental rights in the context of EMU have been mostly channelled by way of preliminary references made by national courts. Actions for damages have also acted as an appropriate remedy to raise such issues, but limited to pecuniary claims. Preliminary references allow national judges to raise a broader array of questions of interpretation of the Charter, as well as questions of interpretation of EU law in light of the Charter. In the field of EMU, in which the implementation is mostly left to Member States, the preliminary reference procedure acts as a key gateway for the interpretation of EU law. In this regard, the Charter has given the Court of Justice the opportunity to delimit the scope of application of EU law in Member States when implementing EMU law.

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As is known, Article 51 of the Charter provides the criteria according to which Member States are bound to the provisions of the Charter, a scenario that will take place when Member States ‘implement EU Law’. In the field of EMU, and particularly in the course of the enforcement of financial assistance programmes to Member States, the Court has faced on several occasions the question of how a Memorandum of Understanding (MoU) between a Member State and the European Commission, but under international arrangements, could be considered to be, when implemented by the Member State, a case of implementation of EU Law. The practical implications underlying this question are significant, inasmuch as the financial assistance programmes were designed as international arrangements precisely to avoid the legal limitations under EU law at the time of their enactment.

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The Court of Justice was reluctant to give an answer at first, and in the cases of Sindicato dos Bancários do Norte and Sindicato Nacional dos Profissionais de Seguros e Afins it refused to reply to the questions raised by several Portuguese courts, on the grounds that the references were inadmissible by reason of lack of information.54 However, the question was finally addressed in the Florescu case, although in the specific circumstances of the Romanian financial assistance programme, which was enacted under EU law and within the confines of Article 143 TFEU.55 In this case, the answer provided by the Court was blunt and it confirmed the applicability of Charter rights to the enforcement of an assistance programme in a Member State, when the said programme is designed and enacted by the EU.

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The question was still open regarding international assistance programmes with the support of the EU, as was the case of the Portuguese assistance programme, enacted by way of an international agreement, but enforced through a Council Decision directly applicable in Portugal.

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3. Damages actions By contrast, the crisis of the Eurozone has also been at the origin of cases before the European courts, which targeted compensation for alleged losses resulting, first, from the restructuring of the Member States’ financial sectors and, second, from the resolution of banks.

54 Case C-128/12 Sindicato dos Bancários do Norte [2013] ECLI:EU:C:2013:149; Case C-264/12 Sindicato Nacional dos Profissionais de Seguros e Afins [2014] ECLI:EU:C:2014:2036. 55 Case C-258/14 Florescu and others [2017] ECLI:EU:C:2017:448 (hereafter Florescu and others).

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544 EUROPEAN MONETARY UNION AND THE COURTS 19.75

a) Financial assistance programmes Damages actions pursuant to Articles 268 and 340 TFEU were brought before the EU’s General Court, at first instance, and the Court of Justice, on appeal, that combined actions for annulment, based on alleged violations of individual rights resulting from the implementation of temporary facilities for financial assistance or other stability support programmes that have been granted to Member States on the basis of the ‘semi-intergovernmental method’.56

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This notion of ‘semi-intergovernmentalism’ refers to EU measures that have been adopted within and outside the legal order set out in the Treaties.57

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Accordingly, those measures are instruments of public international law, and, therefore, neither the TSCG nor the ESM Treaty guarantee the level of judicial protection provided for by the European legal order.58 Pursuant to Article 273 TFEU, the Court of Justice exercises its jurisdiction ‘in any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties’.

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With regard to both the TSCG and the ESM Treaty, however, the Court has jurisdiction solely to adjudicate on disputes between Member States that are parties to the TSCG, on disputes between ESM members, and on disputes between the latter and the ESM.59

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Notwithstanding, both Treaties provide numerous cross-references to the body of European Union law, which renders the Treaties’ application as well as the application of European law to matters of EMU intrinsically interdependent. In the Pringle case, Advocate General Kokott set out, in this regard, that ‘disputes on the interpretation and application of the ESM Treaty are, within the meaning of Article 273 TFEU, related to the subject matter of the Treaties’.60

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This normative interdependence became relevant in the case of the Cypriot Government’s request for financial assistance to the Eurogroup,61 as result of the financial difficulties a number of banks established in Cyprus encountered in 2012. The Eurogroup indicated that the financial assistance requested would be provided by the ESM in the framework of a macroeconomic adjustment programme to be set out in the form of a Memorandum of Understanding. Later, this Memorandum was negotiated by the Commission together with the ECB and the IMF, on the one hand, and by the Cypriot authorities, on the other. In a statement of 25 March 2013, the Eurogroup indicated that the negotiations had resulted in a draft MoU on the restructuring of the Cyprus Popular Bank and the Bank of Cyprus. 56 Jean- Paul Keppenne, ‘Institutional Report’ in Ulla Neergaard, Catherine Jacqueson, and Jens Hartig Danielsen (eds), The Economic and Monetary Union: Constitutional and Institutional Aspects of the Economic Governance within the EU (Djøf Publishing 2014) 203. 57 Pierluigi Simone, ‘Respecting the Democratic Principle in ESM Activities related to the Context of the Economic and Financial Crisis’ in Luigi Daniele, Pierluigi Simone, and Roberto Cisotta (eds), Democracy in the EMU in the Aftermath of the Crisis (Springer 2017) 199. 58 Referring to Article 51(1) of the Charter of Fundamental Rights of the European Union, the Court ruled that ‘[i]‌t must be observed that the Member States are not implementing Union law . . . when they establish a stability mechanism such as the ESM where . . . the EU and FEU Treaties do not confer any specific competence on the Union to establish such a mechanism’, see Pringle (n 3) para 180. 59 Koen Lenaerts, ‘EMU and the EU’s Constitutional Framework’ (2014) 39 European Law Review 757. 60 Case C- 370/12 Pringle [2012] ECLI:EU:C:2012:675, Opinion of AG Kokott, para 187. 61 Uwe Puetter, ‘Governing informally: The role of the Eurogroup in EMU and the stability and growth pact’ (2004) 11 Journal of European Public Policy 854.

The Court of Justice, National Courts, and EMU 545 i) Ledra Advertising In the Ledra Advertising case,62 the question raised was whether individuals were able to bring actions against the European Commission before the EU courts on the grounds that the Commission had signed the MoU on behalf of the ESM. Depositors of two Cypriot banks that experienced financial difficulties in the course of 2012, namely a company established in Cyprus and Cypriot citizens, who suffered losses resulting from the subsequent restructuring of those banks, sought the MoU’s annulment and the compensation of damages. Mainly, the plaintiffs argued that the MoU has led to the violation of their respective rights to property as guaranteed in Article 17 of the Charter.

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The General Court, at first instance, however, declared the application for annulment inadmissible, ruling that neither the ESM nor the Republic of Cyprus is among the institutions, bodies, offices or agencies of the European Union (Article 263 TFEU) whose acts the General Court has jurisdiction to examine.63 Accordingly, the General Court dismissed the claims for compensation too, referring to the fact that they were based on the illegality of certain provisions of the MoU.64

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On appeal, the Court of Justice confirmed the interpretation of the General Court that the MoU cannot be considered an act of the institutions, bodies, offices or agencies of the European Union, and, therefore, not be contested on the basis of Article 263(4) TFEU.65

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However, the Court of Justice observed that:

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whilst the Member States do not implement EU law in the context of the ESM Treaty, so that the Charter is not addressed to them in that context . . . the Charter is addressed to the EU institutions, including . . . when they act outside the EU legal framework.66

Consequently, the Court held that the Commission, by taking into account ‘its role of guardian of the Treaties’ is bound, under Article 17(1) TEU to ensure that such MoU are consistent with European Union law, particularly with the fundamental rights guaranteed by the Charter. On these grounds, the Court further examined the conditions establishing the non- 19.85 contractual liability of the European Union, namely the unlawfulness of the conduct alleged against the EU institution, the fact of damage and the existence of a causal link between the conduct of the institution and the damage complained of.67 As to the first condition, the Court of Justice ruled that the Commission cannot be considered, by having permitted the adoption of the MoU, to have contributed to a serious breach of the appellants’ right to property enshrined in Article 17(1) of the Charter.

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Therefore, it found that the Commission complied with Article 52(1) of the Charter insofar as the MoU adopted ‘corresponds to an objective of general interest pursued by the

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62 Case T-289/13 Ledra Advertising v Commission and ECB [2014] ECLI:EU:T:2014:981 (hereafter Ledra Advertising); Case T-291/13 Eleftheriou and Papachristofi v Commission and ECB [2014] ECLI:EU:T:2014:978; Case T-293/13 Theophilou v Commission and ECB [2014] ECLI:EU:T:2014:979. 63 Ledra Advertising (n 62) para 56. 64 Ibid, para 47. 65 Joined Cases C- 8/ 15 P to C- 10/ 15 P Ledra Advertising and others v Commission and ECB [2016] ECLI:EU:C:2016:701 (hereafter Ledra Advertising and others). 66 Ibid, para 67. 67 Ibid, para 64.

546 EUROPEAN MONETARY UNION AND THE COURTS European Union, namely the objective of ensuring the stability of the banking system of the euro area as a whole’.68 In view of those objectives, and having regard that financial services play a central role in the economy of the European Union, the Court concluded that the measures adopted on the grounds of the MoU ‘do not constitute a disproportionate and intolerable interference impairing the very substance of the appellants’ right to property’.69 19.88

For this reason, the Court of Justice, first, set aside the order of the General Court and, second, dismissed the actions for compensation of damages brought by the Cypriot banks’ depositors.

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ii) Mallis and Malli By contrast, in joined cases Mallis and Malli and Others v Commission and ECB,70 the Court of Justice held, on appeal, that the Eurogroup statement of March 2013, indicating the conclusion of the MoU signed by the Commission on behalf of the ESM, was not to be regarded as a joint decision of the Commission and the ECB.

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The Court observed that the duties conferred on the Commission and ECB within the ESM Treaty do not entail the exercise of any power to make decisions of their own, particularly as the activities pursued by those two EU institutions within the ESM Treaty commit the ESM alone. Moreover, the fact that the Commission and the ECB participate in the meetings of the Eurogroup does not alter the nature of the latter’s statements, so that the Eurogroup statement of March 2013 cannot be regarded as the binding expression of a decision- making power of those two institutions.71

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Therefore, the Court concluded that the adoption, by the Cypriot authorities, of the legal framework necessary for the restructuring of the banks cannot be considered as having been imposed by the Commission and the ECB’s joint decision that was given concrete expression in the Eurogroup statement of March 2013.72 Accordingly, the Court dismissed the appeals and upheld the General Court’s orders of 16 October 2014.73

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iii) Accorinti and Others v ECB In the same vein, in the Accorinti and Others v ECB case, the General Court dismissed the applications of Mr Accorinti and more than 200 other investors seeking compensation for damages allegedly caused by an agreement concluded mid-February 2012 between the ECB and national central banks of the Member States, one the one side, and Greece on the other.74

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Faced with the financial crisis and the overarching risk of Greek default, the agreement intended to govern the exchange of Greek debt instruments held by the ECB and national central banks for new securities whose nominal value, interest rate and interest payment and repayment dates were identical to the original securities.

68 Ibid, para 71. 69 Ibid, para 74. 70 Joined Cases C-105/15 to C-109/15 Mallis and others v Commission and ECB [2016] ECLI:EU:C:2016:702 (hereafter Mallis and others). 71 Ibid, paras 53 and 57. 72 Ibid, para 60. 73 Case T-327/13 Mallis and others v Commission and ECB [2014] ECLI:EU:T:2014:909; Case T-328/13 Tameio Pronoias Prosopikou Trapezis Kyprou v Commission and ECB [2014] ECLI:EU:T:2014:906; Case T-329/13 Chatzithoma v Commission and ECB [2014] ECLI:EU:T:2014:908; Case T-330/13 Chatziioannou v Commission and ECB [2014] ECLI:EU:T:2014:904; Case T-331/13 Nikolaou v Commission and ECB [2014] ECLI:EU:T:2014:905. 74 Case T-79/13 Accorinti and others v ECB [2015] ECLI:EU:T:2015:756 (hereafter Accorinti and others v ECB).

The Court of Justice, National Courts, and EMU 547 Subsequently, resulting from a voluntary exchange agreed between the Greek authorities and the private sector, and a ‘haircut’ of 53.5 per cent of the securities held by the private creditors, on the basis of a national law in late February 2012, Greece exchanged all such securities, which let the nominal value of the respective securities fall by 53.5 per cent compared with the nominal value of the original securities.

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Additionally, by decision of early March 2012,75 the ECB decided to make use of Greek debt instruments which did not fulfil the Eurosystem’s minimum requirements for credit quality thresholds conditional on the provision by Greece to national central banks of a collateral enhancement in the form of a buy-back scheme.76

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In its judgment, the General Court held that the investors cannot rely on the principle of the protection of legitimate expectations or on the principle of legal certainty in a field of investments such as that of monetary policy, which is inherently defined by economic adjustments, notably in a European crisis of public debts.77

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Therefore, the General Court concluded that the investors could not have excluded the risk of a restructuring of the Greek public debt. Moreover, it also considered that the ECB was exclusively guided by public interest objectives, such as, in particular, the objective of safeguarding price stability and the objective relating to the sound management of monetary policy. By contrast, the General Court reminded that the private investors acted on their own behalf and in their exclusively private interest to obtain the maximum return on their investments.78

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Consequently, it found that:

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the damage alleged by the applicants does not exceed the limits of the economic risks inherent in commercial activities in the financial sector, in particular in operations involving negotiable bonds issued by a State . . . Therefore, . . . they had to be aware of those hazards and risks of a considerable loss in the value of the bonds which they purchased.79

What implications can be drawn from those actions? On a general account, the decisions of both the General Court and the Court of Justice reveal the importance of the EU’s non-contractual liability for upholding the right to good administration within the European legal order as well as the rule of law enshrined in Article 2 TEU.80

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Moreover, the decisions confirm that, even though the normative conditions governing the Union’s non-contractual liability are high-ranked, remedying breaches of European law committed by the EU’s institutions, bodies and agencies is anything but a zero sum game. Essentially, the prospect of judicial review and the Court’s recognition of the principle of

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75 ECB Decision 2012/153/EU of 5 March 2012 on the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic in the context of the Hellenic Republic’s debt exchange offer [2012] OJ L77/19. 76 The applicants already brought an action for annulment before the General Court against the ECB’s decision of 5 March 2012, which was declared inadmissible, Accorinti and others v ECB (n 74). 77 Accorinti and others v ECB (n 74) para 83. 78 Accorinti and others v ECB (n 74) para 91. 79 Accorinti and others v ECB (n 74) para 121. 80 Kathleen Gutman, ‘The non-contractual liability of the European Union: principle, practice and promise’ in Paula Giliker (ed), Research Handbook on EU Tort Law (Edward Elgar Publishing 2017) 47.

548 EUROPEAN MONETARY UNION AND THE COURTS liability are important vehicles for the diligent application of EU provisions, and, therefore, can be considered to being inherent to the EU’s commitment to the rule of law pursuant to Article 2 TEU. 19.101

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This is particular true in the field of EMU. The (semi-)intergovernmental management of the financial crisis has increased the European institutions contributions to agreements or legal provisions enacted outside the European Union’s legal order.81 Thus, where an institution has contributed to the violation of a provision of EU law that is to be considered a particular rule of law intended to confer rights on individuals, its contribution to the given semi-governmental mechanism may give rise to compensation for the loss or harm suffered on the basis of the EU’s non-contractual liability. b) Recent case law on bank resolution i) Kotnik By contrast, the Kotnik and Others case covers important aspects of the EU banking union’s new regime of bank resolution, mainly with regard to the burden-sharing principle: In 2013, the Bank of Slovenia observed that five Slovenian banks showed capital shortfalls in the sense that those banks did not have sufficient assets to satisfy their creditors and to cover the value of deposits. Shortly thereafter, it adopted a decision putting in place exceptional measures to ensure the recapitalization of the first two banks, the rescue of the third, and the liquidation of the last two banks.

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Before Christmas 2013, the European Commission authorized the granting of state aid to the five banks concerned. The measures at issue, which were adopted on the basis of the national Slovenian law on the banking sector, included writing off not only equity capital, but also subordinated debt, whose holder, in the event of the insolvency or winding up of the issuing entity, are paid after the holders of ordinary debentures, but before equity shareholders.

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As a result, investors, who experienced considerable losses in the aftermath of the banks’ resolution, brought applications before the Slovenian Constitutional Court in order to review the constitutionality of the Slovenian law on the banking sector.

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The Constitutional Court held the national proceedings and asked the Court of Justice to give a preliminary ruling on the validity and interpretation of the 2013 Banking Communication’s bail-in-measures.82 The 2013 Communication intended to foster the burden-sharing principle, requiring that banks with capital shortfalls obtain shareholders and subordinated debt-holders’ contribution before resorting to public recapitalizations or asset protection measures. Its purpose was thus a more efficient restructuring of banks, putting the burden of bank rescue on shareholders and subordinated creditors while minimizing the burden on tax payers.83

81 Federico Fabbrini, ‘The Euro-Crisis and the Courts: Judicial Review and the Political Process in Comparative Perspective’ (2014) 32 Berkeley Journal of International Law 64, 65 (hereafter Fabbrini, ‘The Euro-Crisis and the Courts’). 82 Commission, ‘Communication on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (‘Banking Communication’)’ [2013] OJ C216/1. See further Chapter 39 of this work. 83 Stefano Lucchini and others, ‘State Aid and the Banking System in the Financial Crisis: From Bail-out to Bail- in’ (2017) 8 Journal of European Competition Law & Practice 90.

The Court of Justice, National Courts, and EMU 549 In its judgment, the Court of Justice observed, first, that subordinated creditors are not in a position to rely on the principle of protection of legitimate expectations solely based on the fact that, in the first phases of the international financial crisis, those creditors were not called upon to contribute to the rescue of credit institutions foreseen by the Communication’s burden-sharing. According to the Court, such a circumstance cannot be considered as a precise, unconditional and consistent assurance for the future.84 Further, since shareholders are liable for the debts of a bank up to the amount of its share capital, the fact that the Banking Communication requires that those shareholders should contribute to the absorption of the losses suffered by that bank to the same extent as if there were no state aid, cannot be regarded as adversely affecting their right to property.85

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On these grounds, the Court ruled, second, that the Communication’s intention to ensure the stability of the financial system while avoiding excessive public spending and minimising distortions of competition constitutes an objective of public interest which may justify certain restrictions of this very right to property.86 In addition, it pointed out that the Communication implements ‘the “no creditor worse off principle”, whereby subordinated creditors should not receive less, in economic terms, than what their instrument would have been worth if no state aid were to be granted’.87 Accordingly, the Court of Justice recalled that the burden-sharing measures cannot cause any detriment to the right to property of subordinated creditors that those creditors would not have suffered within insolvency proceedings that followed such aid not being granted.88

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As a result, the Court’s Grand Chamber found that the bail-in-measures are proportionate insofar as the creditors are to contribute to reducing the capital shortfall, one the one hand, only after losses are first absorbed by equity and, on the other, only ‘if there are no other possibilities’ available to overcome any capital shortfall in the bank concerned or where that bank no longer meets the minimum regulatory capital requirements. Moreover, the Court of Justice stated that a Member State is not compelled to impose on banks in distress, prior to the granting of any state aid, an obligation to convert subordinated debt into equity or to effect a write-down of the principal of that debt, or an obligation to ensure that those debts are fully contributing to the absorption of losses.

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Two observations follow from the Kotnik and Others case: The first observation refers to the Court’s interpretation that a Commission’s communication, based on its soft law character, is not capable of imposing independent obligations on the Member States.89 Rather, in this context, the communication was designed to ensure that state aid granted to the banks in the framework of the financial crisis was compatible with the internal market. Second, the Court’s judgment confirmed that bail-in requirements for hybrid capital and subordinated

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84 Case C-526/14 Kotnik and others [2016] ECLI:EU:C:2016:570, para 66 (hereafter Kotnik and others). 85 Kotnik and others (n 84) para 74. 86 Kotnik and others (n 84) para 88. The Court’s decision was built on the interpretation provided by Advocate General Wahl who claimed that ‘the right to property is not absolute but must be viewed in relation to its function in society’ and that, ‘[c]‌onsequently, the exercise of the right to property may be restricted, provided that those restrictions in fact correspond to objectives of public interest pursued by the Union and do not constitute, in relation to the aim pursued, a disproportionate and intolerable interference, impairing the very substance of the right so guaranteed’: see Case C-526/14 Kotnik and others [2016] ECLI:EU:C:2016:102, Opinion of AG Wahl, para 87. 87 Kotnik and others (n 84) para 77. 88 Kotnik and others (n 84) para 78. 89 Kotnik and others (n 84) para 44.

550 EUROPEAN MONETARY UNION AND THE COURTS debt, in case of bank resolution, are in general compatible under European Union law, even in cases where the burden-sharing-principle has not been foreseen by prior legislation.90 19.110

ii) The Chrysostomides v Council and Bourdouvali v Council cases In the cases Chrysostomides v Council as well as Bourdouvali v Council cases,91 the General Court was required to decide upon actions for non-contractual liability, brought by several depositors of the aforementioned Cypriot banks subject to the Lerda Advertising case, in order to be compensated for losses of their deposits, share or bonds they claim to have suffered as a result of the restructuring of those banks in line with the ESM’s financial assistance programme. The applicants put forward that they were deprived not only of their right to property, but that the adopted measures infringed the principle of legitimate expectations and the principle of equal treatment.

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In its judgment, building on the rationale developed by the Court of Justice in Ledra Advertising,92 the General Court held that the measures were not to be considered to constitute disproportionate and intolerable interferences contrary to the right to property, mainly because less restrictive alternatives would not have been able to pursue the objectives, namely the stability of the Cypriot financial system and the euro-zone in its entirety.

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Regarding the infringement of the principle of protection of legitimate expectations, the General Court noted that the information provided by EU authorities during the early phases of the international financial crisis could not engender a legitimate expectation on the part of the applicants that the grant of financial assistance to the Republic of Cyprus would not be subject to the respective measures adopted.

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Moreover, the General Court examined the alleged infringement of the principle of equal treatment that was mainly based on the different treatment of depositors of the banks concerned. Reiterating that the principle of equal treatment, a general principle of EU law enshrined in the Charter, requires that comparable situations are not treated differently and that different situations are not treated the same, unless such treatment is objectively justified, the General Court ruled that the variety of depositors, shareholders and deposits held indicated that the case concerned different situations which were not comparable, so that no unlawful discrimination was to be found.

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Lastly, the applicants were putting forward that their deposits faced discrimination on the basis of nationality vis-à-vis depositors in the banks’ Greek branches, referring to the fact that the financial assistance facility was conditional on the adoption of a bail-in measure affecting deposits in the banks concerned in Cyprus, while it was unconditional with respect to deposits in the branches of those banks in Greece. Conceding that those situations were comparable and that there has been a difference in treatment, the General Court held nonetheless that the difference in treatment pursued a reasonable objective aiming to prevent any effect of contagion from the Cypriot banking system to the Greek financial system. 90 Ana Vlahek and Matija Damjan, ‘European Commission’s Banking Communication: Question of Validity in the Slovenian Banking Bail-in Puzzle’ (2016) 15 European State Aid Law Quarterly 458, 466. 91 Case T-680/13 K Chrysostomides & Co and others v Council and others [2018] ECLI:EU:T:2018:486; Case T- 786/14 Bourdouvali and others v Council and others [2018] ECLI:EU:T:2018:487. 92 Ledra Advertising and others (n 65).

National Courts and EMU 551 Given that the applicants have thus not succeeded in demonstrating an infringement of the right to property, of the principle of protection of legitimate expectations, or of the principle of equal treatment, which means that the first condition for establishing the EU’s non-contractual liability has not been satisfied, the General Court rejected the claims for compensation.

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III. National Courts and EMU It follows from the case law analysed above that the semi-governmental management of the Eurozone crisis was sought to affect the division of competences between the EU and its Member States, notably at the intersection of economic, monetary and fiscal policy.93

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Given that most of the intergovernmental measures required some further implementation at Member State levels, numerous provisions of both national and European origin have been subject to constitutional adjudication in the Member States. Whereas some national constitutional courts have imposed severe constraints or limits for the constitutionality of the respective measures, other courts held the national proceedings of constitutional review and requested the Court of Justice in Luxembourg for a preliminary ruling.

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This subchapter aims at examining, from a comparative perspective, the constitutional conditions posed by national courts shaping both the past and future of integration in EMU. Some of those judgments target the judicial protection of social rights, others the principle of conferral and the division of competences within the European Union.94 This analysis might therefore be particularly useful to assess the nature of the national legal orders representing a source of legitimacy for EMU’s future development.

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A. Portugal Based on the severe financial constraints experienced, the case of Portugal reveals an example of strict conditionality originating from the country’s financial assistance programmes. Therefore, the Republic’s political margin of discretion was depending, to a large extent, on the successful enforcement of the precise recovery conditions.95

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The transposition of the detailed obligations of the Economic Adjustment Programme, negotiated between Portugal, the Commission, the ECB and the IMF, and legally established in the MoU of early 2011 on Specific Economic Policy Conditionality and the Technical Loan Agreement,96 has therefore been challenged before the Portuguese Constitutional Court.

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93 Päivi Leino-Sandberg and Janne Salminen, ‘A Multi-Level Playing Field for Economic Policy-Making: Does EU Economic Governance Have Impact?’ in Thomas Beukers, Bruno de Witte, and Claire Kilpatrick (eds), Constitutional Change through Euro-Crisis Law (CUP 2017) 71 (hereafter Leino-Sandberg and Salminen, ‘A Multi- Level Playing Field’). 94 Hinarejos, The Euro Area Crisis (n 2) 144; Anastasia Poulou, Soziale Grundrechte und europäische Finanzhilfe (Mohr Siebeck 2017). 95 Leino-Sandberg and Salminen, ‘A Multi-Level Playing Field’ (n 93) 97. 96 Portugal’s financial assistance programmes consist of European and international law, whereas the EU law part is composed of the rescue package provided by the EFSM and the implementing Council decisions: Council Implementing Decision 2011/344/EU of 30 May 2011 on granting Union financial assistance to Portugal [2011] OJ L159/88; Council Implementing Decision 2013/323 to amend Implementing Decision 2011/344/EU on granting

552 EUROPEAN MONETARY UNION AND THE COURTS 19.121

Despite the fact that Portugal has a hybrid system of constitutional review of legislation, partly centralized in the hands of the Constitutional Court and partly decentralized to ordinary judges, all the relevant judgments on Euro-crisis legislation or the legality of austerity measures have been issued by the Portuguese Constitutional Court.97 Inasmuch as the Tribunal Constitucional assumed original jurisdiction in these matters, its role in the further process of implementation became even more significant. This evolution, in which the constitutional court of a given Member State was mandated with a semi-legislatory role,98 setting limits on the political decision-making process or sanctioning violations of the constitutional limits, was characteristic of the EU financial crisis.99

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Since 2011, the Portuguese Constitutional Court was asked, on an annual basis, to examine the legality of austerity measures through the prism of Portugal’s annual budget.100 In this respect, the Portuguese Constitutional Court’s judgment 413/2014 of May 2014 is of particular interest in the sense that, first and foremost, the decision triggered a triangular interaction between the Portuguese government, the Constitutional Court and the Troika.

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Upon request from two opposition groups of Members of Parliament, Portugal’s Constitutional Court reviewed the constitutionality of several provisions of the 2014 State Budget Law. One of the provisions introduced new pay cuts, adopted by the Government to substitute the previous provisions which have previously been declared unconstitutional.101 First and foremost, based on its prior case law, the Constitutional Court held that the pay cuts for public sector workers pursuant to Article 33 of the Budget Act for 2014 violated the principle of equality. It found the degree of sacrifice demanded, mostly for public sector workers with base monthly pay of between 675 and 1,500 euro, to be excessive.102

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In this regard, it was understood that the Tribunal Constitucional found that the country’s financial situation ‘cannot serve as grounds for dispensing the legislator from being subject to the fundamental rights and key structural principles of the state based on the rule of law’.103 Furthermore, the Court declared the reduction of survivors’ pensions (Article 117 of the Budget Act) to be in violation of the principle of equality, and the contributions paid by unemployed people from their unemployment subsidies (Article 115 of the Budget Act) to be disproportionate. Union fiscal assistance to Portugal [2013] OJ L175/47; Council Implementing Decision 2014/234/EU amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal [2011] OJ L125/75, the international law part refers to the Financial Facility Assistance Agreement between Portugal and the EFSF, and the different MoU. See also Cristina Fasone, ‘Constitutional Courts Facing the Euro Crisis: Italy, Portugal and Spain in a Comparative Perspective’ (2014) EUI Working Paper MWP 2014/25 (hereafter Fasone, ‘Constitutional Courts’). 97 Ibid, 3. 98 See Allan R Brewer-Carías, Constitutional Courts as Positive Legislators: A Comparative Study (CUP 2013). 99 Ibid, 98. 100 Provisions imposing public sector workers’ pay cuts have been repeatedly challenged before the Constitutional Court, leading to the following judgments: Ruling 396/2011 (State Budget 2011), 353/2012 (State Budget 2012), 187/2013 (State Budget 2013), 413/2014 (State Budget 2014), and 574/2014 (Pay cuts 2014–18). 101 Mariana Canotilho, Teresa Violante, and Rui Lanceiro, ‘Austerity measures under judicial scrutiny: The Portuguese constitutional case-law’ (2015) 11 European Constitutional Law Review 155, 166. 102 Portuguese Constitutional Court, Acórdão No 413/2014. 103 Claire Kilpatrick, ‘Constitutions, Social Rights and Sovereign Debt States in Europe: A Challenging New Area if Constitutional Inquiry’ in Thomas Beukers, Bruno de Witte, and Claire Kilpatrick (eds), Constitutional Change through Euro-Crisis Law (CUP 2017) 297 (hereafter Kilpatrick, ‘Constitutions, Social Rights and Sovereign Debt States in Europe’).

National Courts and EMU 553 However, the Constitutional Court has restricted the effects of its judgment that it only produced effects from the date of the ruling onwards, which has been interpreted as a means of the Court to determine the scope of its rulings, and to protect, in this case, the level of public salaries for the remaining period of execution of the 2014 budget.104

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As a result from the Court’s ruling, as a press statement of the Troika set out, the Portuguese government decided ‘not to seek an extension of the [loan assistance] programme and to allow its expiration . . . without receiving the associated final tranche’, arguing that it has to await another ruling before identifying ‘the measures needed to fill the fiscal gap created by the Constitutional Court rulings’.105

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This statement of the Troika revealed the inter-institutional repercussions that derived 19.127 from the Constitutional Court’s rulings in Portugal. Likewise, the respective Council Implementing Decisions granting Union financial assistance to Portugal are explicitly referring to the judgments of the Constitutional Court. Council Implementing Decision 2014/ 234/EU, for example, proposes new measures underpinning Portugal’s 2015 consolidation strategy ‘while also respecting progressivity principles, in line with the Constitutional Court ruling on the convergence of the public-sector employees’ pension system (CGA) to the general pension system’.106 Built on the premise that the Constitution’s commitments, in the context of the financial crisis and beyond, seek the proportionate distribution of public burdens, the Portuguese Constitutional Court’s standard of review has been a major source determining the limits of EMU’s future development in the national legal order of Portugal.107 This, however, does not mean that striking down parts of the annual Budget Acts has been the result of non-contentious deliberations of the Court, based on the guarantees provided for by the fundamental principles. By contrast, the Portuguese Constitutional Court’s strict reliance on constitutional principles has not prevented the court from being accused of judicial activism challenging its judicial legitimacy.108

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B. Greece In Greece, matters of constitutionality of the numerous financial assistance measures have arisen before the Council of State, mainly due to the extraordinary legislative circumstances of their respective parliamentary adoption.109 104 Fasone, ‘Constitutional Courts’ (n 96) 12. 105 Commission, ‘Statement by the European Commission, the European Central Bank and the International Monetary Fund on Portugal’ (Statement 14/191, Brussels, 12 June 2014). 106 Council Implementing Decision 2014/234/EU of 23 April 2014 amending Implementing Decision 2011/ 344/EU on granting Union financial assistance to Portugal [2014] OJ L125/75; see also Council Implementing Decision 2013/323/EU of 21 June 2013 amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal [2013] OJ L175/47, para 9. 107 Kilpatrick, ‘Constitutions, Social Rights and Sovereign Debt States in Europe’ (n 103) 296. 108 Fasone, ‘Constitutional Courts’ (n 96) 30. 109 In Greece, the review of constitutionality is exercised by the totality of Greek courts in pending cases before them, as provided for in Articles 93(4) and 87(2), of the Constitution. Consequently, the Greek legal order does not provide for a general possibility to challenge, in abstracto, legal provisions for being contrary to the Constitution. Alternatively, the Greek case law raising issues of unconstitutionality originates from all jurisdictions of civil and administrative nature, but is concentrated in the Supreme Administrative and Judiciary Courts (Council of State), given the jurisdiction of its plenary session to decide on direct actions for annulment of administrative acts, see

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554 EUROPEAN MONETARY UNION AND THE COURTS 19.130

Given the far-reaching deterioration of the domestic macroeconomic and financial environment of Greece,110 most of the legislative measures transposing the strict requirements, conditions and obligations set out by the Memoranda of Understanding and loan agreements into national laws have been adopted in the framework of an emergency procedure. Pursuant to Article 76(4) and (5) of the Greek Constitution, the legislative procedures for bills designated as ‘very urgent’ are subject to abbreviated deadlines for parliamentary debate and ballots.111

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Moreover, throughout the sovereign debt crisis, the executive branch of government made extensively use of so-called ‘administrative acts of legislative content’, based on Article 44(1) of the Constitution of Greece.

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As a result, legislative procedures and constitutional politics in Greece were more and more detached from the core of parliamentary deliberation required by the Constitution, and replaced by executive activism and administrative acts of legislative content.112 This development has been mirrored in Greece’s approach of constitutional review. Different to Portugal, the Greek court(s) primarily relied on the extraordinary circumstances of the crisis legislation, requiring a different interpretation of the emergency spillovers from the political to the judicial arena. In view of Greece’s fiscal and economic reality, this meant that the legislator was accorded a specific normative discretion to the detriment of fundamental rights.

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This standard of (constitutional) review in times of crisis can be observed, for example, in the Council of State’s Decision 668/2012.113 In this ruling, the Council of State was to review the national Greek statute 3845/2010,114 whose legislative adoption has been described as ‘a historical moment, which would determine the future of the state’.115 The law transposed, under the heading ‘Measures for the implementation of the support mechanism for the Greek economy by the Eurozone Member States and the International Monetary Fund’, a number of policies contained in the economic adjustment programme.

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Moreover, it included, as an annex, the draft version of the first MoU116 concluded between Greece and the Troika, whose conditions shaped, to a large extent, the subsequent Council decision117 on the substantive socio- economic changes imposed on

Afroditi-Ioanna Marketou and Michail Dekastros, ‘Constitutional Change Through Euro Crisis Law: Greece’ (2014) accessed 5 February  2020. 110 IMF, ‘Greece: An Update of IMF Staff ’s Preliminary Public Debt Sustainability Analysis’ (Country Report 15/ 186, 2015). 111 For example, the first and second MoU of Greece have respectively been debated and voted in only one day. 112 Afroditi-Ioanna Marketou, ‘Economic Emergency and the Loss of Faith in the Greek Constitution: How Does a Constitution Function when it is Dying?’ (2015) 4 Cambridge Journal of International and Comparative Law 303 (hereafter Marketou, ‘Economic Emergency’). See, more generally, William E Scheuerman, ‘The Economic State of Emergency’ (2000) 21 Cardozo Law Review 1869. 113 Greek Council of State, Judgement of 20 February 2012, No 668/2012. 114 Law 3845—Measures for the application of the support mechanism for the Greek economy by Euro area Member States and the International Monetary Fund (6 May 2010). 115 Marketou, ‘Economic Emergency’ (n 112) 293. 116 Greece: Memorandum of Understanding on Specific Economic Policy Conditionality of 3 May 2010. 117 Council Decision 2010/320/EU of 10 May 2010 addressed to Greece with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit [2010] OJ L145/6; Council Decision 2010/486/EU of 7 September 2010 amending Decision 2010/320/EU addressed to Greece with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit [2010] OJ L241/12.

National Courts and EMU 555 Greece.118 Notwithstanding its unprecedented historical outreach, the economic emergency restricted the parliamentary deliberation to a minimum. However, the MoU signed by Greece detailed the conditionality attached to the financial assistance facility, and listed the financial assistance instrument chosen.119 Ruling upon the constitutionality of Statute 3845/2010, first, the Council of State reiterated the situation of economic emergency, in which the legislative procedure took place. Second, it labelled the MoU as a mere declaratory political programme, without any legally binding effect on national levels, in order ‘to “sever” a possible link to EU law’.120 Third, the Council of State reasoned that the implementing measures, namely pay cuts of public employees and pensioners, tax increases and exceptional levies were justified, first and foremost, by Greece’s state of fiscal emergency and the imposed consolidation of public finances, considered a common interest of the members of the Eurozone.

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On these grounds, the Council of State vindicated the restriction of fundamental rights, arguing that the common interest of the Eurozone’s fiscal consolidation trumps the protection of fundamental rights.121 This consideration, however, revealed a major revirement of the Council’s pre-crisis case law, in which common fiscal interests have constantly been rejected as a legitimate reason to restrict individual rights.122

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Based on this purely national perspective of the Greek Council of State, the European Court of Human Rights, in its Koufaki judgment of May 2013, considered the national measures adopted in Law 3845/2010 to reflect the public interest to remedy the then acute budgetary constraints and to consolidate the state’s finances on a lasting basis.123 Thus, the Strasbourg court found that the pay cuts have not imposed an excessive burden on the applicants, and considered the cuts to be proportionate.124

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Moreover, the EU’s General Court was requested to assess the legality of Council Decisions 210/320/EU and 210/486/EU under the Treaties too, by means of an action for annulment brought by a Greek civil servants trade union and two civil servants. However, it ruled that the decisions were not of direct concern to the plaintiffs, and declared the actions as being inadmissible.125

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C. Slovenia In the same vein, the Slovenian Constitutional Court, reviewing the constitutionality of the Parliament’s act on Guarantees of the Republic of Slovenia for the Purpose of Maintaining 118 Xenophon Contiades and Ioannis A Tassopoulos, ‘The Impact of the Financial Crisis on the Greek Constitution’ in Xenophon Contiades (ed), Constitutions in the Global Financial Crisis: A Comparative Analysis (Ashgate Publishing 2013) 195. 119 Fabbrini, ‘The Euro-Crisis and the Courts’ (n 81) 73. 120 Hinarejos, The Euro Area Crisis (n 2) 146. 121 Marketou, ‘Economic Emergency’ (n 112) 306. 122 For example, see Greek Council of State (Plenary Session) No 1663/2009. 123 Koufaki and Adedy v Greece App nos 57665/12 and 57657/12 (ECtHR, 7 May 2013) ECLI:ECHR:2013:0507 DEC005766512, paras 41 and 44. 124 Ibid, para 46. 125 Case T-541/10 ADEDY and others v Council [2012] ECLI:EU:T:2012:626, para 88 (hereafter ADEDY and others).

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556 EUROPEAN MONETARY UNION AND THE COURTS Financial Stability in the euro area,126 found that the provisions regulating the Slovenian equity participation in the EFSF and the assuming of guarantees for its liabilities were not violating the Constitution.127 19.140

Upon request by a group of deputies of the National Assembly, the Constitutional Court held that the contested act was consistent with the constitutional provisions invoked. Most importantly, the applicants’ referral to the alleged violation of the state’s fiscal sovereignty and the Parliament’s budgetary prerogative has been rejected.128

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Referring to the applicants’ rationale that the parliamentary act providing for guarantees has been, first, unclear and imprecise with regard to the guarantees being granted in the future, and, second, uncertain in the context of the imprecisely determined liabilities, the Constitutional Court stated, on a general account, that: political actors need to be given broad enough discretion in their decisions’, taking into account ‘that long-term economic impacts and their consequences on the stability of money cannot be evaluated based on a single intervention, they must be monitored on an ongoing basis and continually verified.

Accordingly, it concluded that ‘constitutional review of such issues is by necessity reserved’.129 19.142

As a result, the Slovenian Constitutional Court’s judicial restraint led, in essence, to the conclusion that Article 149 of the Constitution,130 regulating the legal form and power with regard to the adoption of a decision on state borrowings and state guarantees for loans, does not determine ‘substantive (material) conditions or limitations to which state borrowings and guarantees might be bound’.131

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However, the Court specified that the constitutional requirement of Article 149 of the Constitution: was to be understood as a requirement that (future) obligations were to be precise or at least determinable. It is not the implementing instruments (for example, a guarantee agreement) that must make the liability incumbent upon the state clear and predictable, but the act by which the state assumes the guarantee.132

On these grounds, the Constitutional Court found that the act under review met the criteria of legislative precision and determinability for the future, inasmuch as it determined the purpose for which the guarantee is being granted, the amount of the guarantee, the duration of the guarantee, the debtor and the types of transactions for which the guarantee is being granted.133 126 Act on Guarantees of the Republic of Slovenia for the Purpose of Maintaining Financial Stability in the Euro Area (Official Gazette RS, No 59/10). 127 Constitutional Court of Slovenia, Case U-I-178/10 [2011] ECLI:SI:USRS:2011:U.I.178.10. 128 Reestman, ‘Legitimacy through Adjudication’ (n 41) 254. 129 Constitutional Court of Slovenia, Case U-I-178/10-18 [2011] ECLI:SI:USRS:2011:U.I.178.10, para 9. 130 Article 149 of the Constitution of the Republic of Slovenia reads as follows: ‘State borrowings and guarantees by the state for loans are only permitted on the basis of law.’ 131 Constitutional Court of Slovenia, Case U-I-178/10-18 [2011] ECLI:SI:USRS:2011:U.I.178.10, para 25. 132 Ibid. 133 Ibid, para 28; Urska Petrovcic, ‘Constitutional Change Through Euro Crisis Law: Slovenia’ (2015).

National Courts and EMU 557 In this regard, the judgment was of twofold importance: first, it set out a substantive marker not only for national legislation implementing or transposing measures of European crisis management. Second, the arguments deployed by the court in its judgment paved the way for other national (constitutional) courts to follow a similar understanding of constitutional adjudication.134

19.144

D. Estonia In Estonia, the Supreme Court (Riigikohus)135 was asked by the Estonian Chancellor of Justice (Õiguskantsler), an independent public official whose duty is to ensure compliance with the Constitution, to rule on the legality of the ESM Treaty under the Estonian constitution.136

19.145

Article 4(4) ESM Treaty provides for a derogation from the unanimity principle within the Board of Governors, by means of ‘an emergency voting procedure . . . where the Commission and the ECB both conclude that a failure to urgently adopt a decision to grant or implement financial assistance . . . would threaten the economic and financial sustainability of the euro area’.

19.146

This derogation was understood to be in opposition ‘with the principles of parliamentary democracy and reservation by the parliament, and the budgetary powers of the Riigikogu’,137 the Parliament of Estonia. First and foremost, the alleged unconstitutionality of the ESM Treaty’s provisions was considered to stem from the fact that the emergency voting procedure, pursuant to Article 4(4) of the ESM Treaty enables the ESM to approve financial assistance by a qualified majority of 85 per cent of the votes cast, which means, in turn, that Estonia may not veto the approval of an assistance programme.138

19.147

In its judgment, the Full Court of the Riigikohus observed with a majority of ten of the nineteen sitting judges that the ESM Treaty’s emergency voting procedure, preserving the representative of Estonia to fully review whether and how financial assistance is granted under Article 4(4) impaired the constitutionally protected financial sovereignty of the Republic, and thus the fundament of a democratic state subject to the rule of law and parliamentary reservation.139

19.148

However, the Supreme Court, reconfirming that Article 4(4) ESM Treaty was not interfering with the constitution’s fundamental rights but its democratic principles, went on to assess the proportionality of the interference.140

19.149

134 Reestman, ‘Legitimacy through Adjudication’ (n 41) 255. 135 The Riigikohus, Estonia’s highest court, has jurisdiction both to review court judgments by way of cassation proceedings and to hear petitions for constitutional review. 136 Riigikohus, Constitutional Judgment in Case 3-4-1-6-12. 137 Ibid, para 9. 138 Carri Ginter, ‘Constitutionality of the European Stability Mechanism in Estonia: Applying Proportionality to Sovereignty’ (2013) 9 European Constitutional Law Review 335, 349; Federico Fabbrini, Economic Governance in Europe: Comparative Paradoxes, Constitutional Challenges (OUP 2016) 69. 139 Riigikohus (Supreme Court of Estonia) 12 July 2012, 3-4-1-6-12, paras 134 and 153. 140 Ibid, para 170.

558 EUROPEAN MONETARY UNION AND THE COURTS 19.150

Performing its proportionality test, the Supreme Court found, first, that the legitimate objective of Article 4(4) ESM Treaty is to guarantee the efficiency of the ESM also in case the states are unable to make a unanimous decision to eliminate a threat to the economic and financial sustainability of the euro area. In this regard, the emergency voting procedure was considered to be an appropriate and necessary measure to achieve the ESM Treaty’s objective. Second, the Supreme Court set out that the state’s fiscal sovereignty requires a contextualization by Estonia’s interest to further advance the cooperation with various international organizations and other states, given that the economic and financial sustainability of the euro area is contained in the constitutional values of Estonia.141 Seen through the lens of national sovereignty, one can conclude that the Supreme Court endorsed the position presented in the national proceedings that ‘membership of the EU and in international organisations has become a natural part of sovereignty in this day and age’.142

19.151

Accordingly, the Supreme Court ruled that a threat to the economic and financial sustainability of the euro area within the meaning of Article 4(4) ESM Treaty would also be a threat to the economic and financial sustainability of Estonia.143 Against this backdrop, it went even further and reasoned that economic and financial stability is necessary in order for Estonia to be able to fulfil its obligations arising from the Constitution.

19.152

Thus, the Supreme Court held that the protection of constitutional rights and freedoms, by means of safeguarding the stability of the Eurozone, justified the infringement of the constitutional principles of fiscal sovereignty and parliamentary reservation, and deemed the contested provision, namely Article 4(4) ESM Treaty, compatible with the constitution.144 Moreover, it set out that the constitutional obligation to guarantee and protect the fundamental rights and freedoms requires Estonia to ensure a stable economic and financial environment and a sustainable budgetary policy.145

IV. Fundamental Rights Protection and EMU 19.153

Whereas the judicial obligation to protect the Constitution’s fundamental rights, by means of sustainable budgetary policies and a stable economic and financial environment is limited to the Estonian constitutional order, the entry into force of the Charter of Fundamental Rights of the EU as a binding legal instrument of European Union law and the parallel evolution of the European financial crisis have considerably favoured the autonomous development of fundamental rights protection within the European legal order throughout the last decade.146

141 Ibid, paras 163 and 201. 142 Ibid, para 130. 143 Ibid, para 165. 144 Ibid, para 208. 145 Ibid, para 199. 146 Sara Iglesias Sánchez, ‘The Court and the Charter: The impact of the entry into force of the Lisbon Treaty on the ECJ’s approach to fundamental rights’ (2012) 49 Common Market Law Review 1565; Anastasia Poulou, ‘Financial Assistance Conditionality and Human Rights Protection: What is the Role of the EU Charter of Fundamental Rights’ (2017) 54 Common Market Law Review 992 (hereafter Poulou, ‘Financial Assistance’).

Fundamental Rights Protection and EMU 559 In the framework of EMU, the status quo of fundamental rights protection derives, to a large extent, from the above-cited case law of the Court of Justice in matters of both the institutional mechanisms of EMU as well as European financial assistance programmes, the intergovernmental response to the crisis of the Eurozone.

19.154

In this respect, this chapter aims at outlining the normative criteria that determine, first, whether the Charter is applicable in the intergovernmental context of the law responding to the European financial crisis, and, second, to what extent European institutions, Member States and other intergovernmental decision-making bodies are bound by the guarantees provided for by the Charter.

19.155

A. EMU, fundamental rights and the scope of application of the Charter In the aftermath of the seminal Åkerberg Fransson judgment, in which the Court of Justice famously held that ‘[t]‌he applicability of European Union law entails [the] applicability of the fundamental rights guaranteed by the Charter’,147 the Charter has been labelled the shadow of the substance of EU law.148

19.156

Two implications follow from this metaphor. First, the scope of EU law determines the respective scope of the Charter, or, put differently, the application of the Charter is preconditioned on the existence of an applied norm of EU law.149 Second, the individual and substantive scope of application of the rights, freedoms and principles conferred in the Charter are to be determined in accordance with Article 51(1) of the Charter.

19.157

Regarding the first dimension, it was understood that the Court of Justice set out in Åkerberg Fransson that ‘in order to determine whether a national measure falls within the scope of EU law, one must determine whether, by adopting such a national measure, a Member State is fulfilling an obligation imposed by that law’,150 herewith referring to both primary and secondary EU law, including the principles of effectiveness and loyal cooperation.

19.158

By contrast, with regard to the individual scope, Article 51(1) of the Charter addresses, on the one side, European institutions, bodies, offices and agencies, and, on the other side, the Member States. As to the substantive scope of the Charter, Article 51(1) restricts the applicability of the Charter to the Member States ‘only when they are implementing Union law’.151

19.159

Within the intergovernmental matrix of EMU, in which the legal accountabilities of both European institutions and the Member States are often far from being clear-cut, the normative requirements set out in Article 51(1) of the Charter require further interpretation. This interpretation is relevant, for example, with respect to actions taken under the umbrella of

19.160

147 Case C-617/10 Åkerberg Fransson [2013] ECLI:EU:C:2013:105, para 21 (hereafter Åkerberg Fransson). 148 Koen Lenaerts and José Gutiérrez-Fons, ‘The Place of the Charter in the EU Constitutional Edifice’ in Steve Peers and others (eds), The EU Charter of Fundamental Rights: A Commentary (Hart Publishing 2014) 1568 (hereafter Lenaerts and Gutiérrez-Fons, ‘The Place of the Charter’). 149 Clemens Ladenburger, ‘Protection of Fundamental Rights post-Lisbon –The interaction between the Charter of Fundamental Rights, the European Convention of Human Rights and National Constitutions’ (2012) FIDE Institutional Report 16. 150 Ibid. 151 Daniel Sarmiento, ‘Who’s afraid of the Charter? The Court of Justice, national courts and the new framework of fundamental rights protection in Europe’ (2013) 50 Common Market Law Review 1272.

560 EUROPEAN MONETARY UNION AND THE COURTS the ESM Treaty, the implementation of the Fiscal Compact or Memoranda of Understanding on Specific Economic Policy Conditionality, which are signed by the Commission and the respective Member State subject to the financial assistance programme in question.152 19.161

Accordingly, the determination of the criteria of application of the Charter raises issues of the distribution of powers between the EU institutions and the Members States, as well as the conflicts of jurisdiction between the Court of Justice and the competent national courts and tribunals.153 Thus, the scope of application of the Charter is considered the keystone which guarantees that the principle of conferral will be observed.154

19.162

Moreover, the applicability of the Charter, in EMU and beyond, is required to find a balance between the autonomy of the Member States and the obligation to guarantee the individual rights of the Charter.

19.163

This balance is even more relevant with regard to the premise of strict conditionality imposed on recipient Member States in the framework of financial assistance programmes. Given that the strict conditionality relies, inter alia, upon legislative reforms of transversal character in the Member States’ economies, for example in their healthcare and pension systems, or in the education and labour sectors, the violation of labour and trade unions rights and the rights to property, social security and assistance is likely to occur.155

19.164

Determining the scope of application of EU law to assess the applicability of the Charter in a particular case is therefore directly governing the individual’s regime of access to justice within the EU’s complete system of legal remedies and procedures as developed in the Les Verts case.

B. Judicial protection of fundamental rights in the context of EMU 19.165

19.166

It follows that the level of judicial protection of fundamental rights in the context of EMU depends on the nature of the act or action in question. Its assessment refers to which European institution and which act is falling under the scope of applicability of the Charter.

1. Judicial review of EU acts and non-EU acts by EU Institutions Within the Eurozone’s multi-level system of actors and instruments responding to the financial crisis, the question of whether an involved authority is bound by the Charter is of pivotal importance for determining the legal remedies at hand.

19.167

Lately, the case law of the Court of Justice, reviewing the EU’s crisis management and the alleged interferences with the fundamental rights guaranteed by the Charter, has provided relevant criteria to assess the applicability of the Charter in a given situation.

19.168

First, as to the Eurogroup, ‘a forum for discussion, at ministerial level, between representatives of the Member States whose currency is the euro, and not a decision-making body’,156 152 Ibid, 1273. 153 Ibid, 1274. 154 Lenaerts and Gutiérrez-Fons, ‘The Place of the Charter’ (n 148) 1561. 155 Anastasia Poulou, ‘Austerity and European Social Rights: How Can Courts Protect Europe’s Lost Generation’ (2014) 15 German Law Journal 1145 (hereafter Poulou, ‘Austerity and European Social Rights’). 156 Mallis and others (n 70) para 47.

Fundamental Rights Protection and EMU 561 the Court of Justice held in the Mallis and Others v Commission and ECB case that its statements in the framework of the Cypriot restructuring of the banking sector, containing specific conditions of the financial assistance programme, could not be imputed to the European institutions.157 Accordingly, the informal character of the Eurogroup results in the Court’s interpretation that it ‘cannot be equated with a configuration of the Council or be classified as a body, office or agency of the European Union within the meaning of Article 263 TFEU’.158 As a consequence, the Eurogroup’s guidelines on specific conditionalities of a recipient countries’ financial assistance programme are outreaching the scope of Article 51(1) of the Charter. Second, as regards the applicability of the Charter to the Commission and the ECB being part of the so-called Troika (including the IMF), the Court ruled in the Ledra Advertising and Others v Commission and ECB case159 that the Memoranda of Understanding cannot be regarded as an act within the meaning and contested on the basis of Article 263(4) TFEU. This interpretation, however, would have been in opposition, for example, with Article 13(3) ESM Treaty, stating any MoU negotiated shall be consistent ‘with the measures of economic policy coordination provided for in the TFEU, in particular with any act of European Union law’.

19.169

Notwithstanding the intergovernmental character of the agreements concluded, the Court observed that the institutions’ commitments to the Charter, mainly with regard to the relevant provisions of the ESM Treaty, do not cease to be relied upon.160 Therefore, the Court held that ‘the Charter is addressed to the EU institutions, including . . . when they act outside the EU legal framework’.161 It follows from the Court’s judgment that independently of the legal classification of the MoU, or other types of acts that derive from a European authority, the rights conferred in the Charter are applicable.162

19.170

For the Commission, the Court’s judgment means that it is required ‘to refrain from signing a memorandum of understanding whose consistency with EU law it doubts’.163 This positive obligation to guarantee that the law is observed argues, to a different extent though, in line with the rationale of the Estonian Supreme Court touched upon above. Reviewing the compatibility of Article 4(4) ESM Treaty with the Estonian constitution, the Riigikohus set out that the constitutional obligation to guarantee and protect the fundamental rights and freedoms requires Estonia to positively ensure a stable economic and financial environment and a sustainable budgetary policy.164

19.171

Third, by contrast, legal acts approved by the Council of the European Union as conditionalities of a financial assistance programme set out in Council Decisions, fall under the scope of the Charter, given their unilateral and binding nature of secondary law in the meaning of Article 288 TFEU.165 The annulment of a Council decision allegedly violating

19.172

157 Ibid. 158

Ibid, para 61. Ledra Advertising and others (n 65). 160 Poulou, ‘Financial Assistance’ (n 146) 1009. 161 Ledra Advertising and others (n 65) para 67. 162 Poulou, ‘Austerity and European Social Rights’ (n 155) 1159. 163 Ledra Advertising and others (n 65) para 59. 164 Ibid, para 199. 165 Poulou, ‘Financial Assistance’ (n 146) 1012. 159

562 EUROPEAN MONETARY UNION AND THE COURTS rights conferred by the Charter requires the Council’s decision, however, to be of direct and individual concern to the applicants in the sense of Article 263(4) TFEU. The applicants argued that, should their action be declared inadmissible, they would be deprived of the right to effective judicial protection. 19.173

19.174

In this regard, the General Court pointed out that the EU’s complete system of legal remedies and procedures is based on the rationale that where natural or legal persons cannot directly challenge EU acts of general application, the invalidity of such acts have to be pleaded before the national courts.166 In its judgment, it therefore observed that the decisions were not of direct concern to the plaintiffs, and declared the actions as being inadmissible.

2. Judicial review of joint actions by the EU and Member States In the context of EMU, the detailed transposition of financial assistance conditionalities into the national legal and economic order is subject to the discretion of the respective Member State. The applicability of the Charter to national legislation transposing EU acts is, therefore, contingent upon the notion of ‘implementing Union law’ pursuant to Article 51(1) of the Charter.

19.175

In this regard, however, one may ask whether this notion refers to the ‘the mere fact that a national measure falls within a field in which the European Union has powers may not lead to the applicability of the Charter’.167

19.176

In order to clarify the meaning of the notion ‘implementing Union law’, the explanations to Article 51(1) of the Charter, set out that: [a]‌s regards the Member States, it follows unambiguously from the case law of the Court of Justice that the requirement to respect fundamental rights defined in the context of the Union is only binding on the Member States when they act in the scope of Union law.168

19.177

However, in the framework of the intergovernmental management of the crisis, the scope of Article 51(1) has remained ambiguous.

19.178

Whereas the Court of Justice observed in the Pringle case that ‘Member States are not implementing Union law, within the meaning of Article 51(1) of the Charter, when they establish a stability mechanism such as the ESM’,169 it referred solely to the mere conclusion and ratification of the Treaty, leaving aside the subsequent ‘interpretation or application of the ESM Treaty . . . likely also to concern the interpretation or application of provisions of European Union law’.170 Accordingly, the Court observed that the specific ‘conditions to be attached to the grant of such support to a Member State are, at least in part, determined by European Union law’.171

19.179

Enriching, in this regard is the rationale deployed by the Court of Justice in the above-cited Florescu case, where it held, first, that even if an MoU leaves some discretion in deciding 166 ADEDY and others (n 125) para 89. 167 Thomas von Danwitz and Katharina Paraschas, ‘A Fresh Start for the Charter: Fundamental Questions on the Application of the European Charter of Fundamental Rights’ (2012) 35 Fordham International Law Journal 1403. 168 Explanations relating to the Charter of Fundamental Rights [2007] OJ C303/17/32. 169 Pringle (n 3) para 180. 170 Ibid, para 174. 171 Ibid.

Conclusion 563 what measures are to follow its negotiation, it must be regarded as implementing that law, within the meaning of Article 51(1) of the Charter, where a Member State adopts measures in the exercise of the discretion conferred upon it by an act of EU law.172 Moreover, the Court of Justice grounded this interpretation with reference to the sufficiently detailed and precise provisions of the MoU and the objectives set out in a Council Decision.173 This interpretation relies upon the Court’s judgments in Melloni and Åkerberg Fransson, in which the Court held, in relation to Article 53 of the Charter, that:

19.180

where an EU legal act calls for national implementing measures, national authorities and courts remain free to apply national standards of protection of fundamental rights, provided that the level of protection provided for by the Charter, as interpreted by the Court, and the primacy, unity and effectiveness of EU law are not thereby compromised.174

Thus, in the framework of financial assistance conditionality, Member States are bound by the Charter of Fundamental Rights even beyond the implementation of detailed and precise conditions of the loan agreement, notably in cases where the Member States enjoys discretion regarding the national measures to be adopted. The Court’s judicial reasoning in Florescu, however, implicates that in the event of detailed and precise conditionality, Member States are solely required to comply with the level of fundamental rights protection guaranteed by the Charter. By contrast, in cases where the legislative margin of the Member States is understood to be greater, ‘a dual commitment to fundamental rights come into play: in addition to the rights enshrined in the Charter, national fundamental rights may apply as well’.175

19.181

This duality of fundamental rights protection has been, in principle, confirmed in the M.A.S. and M.B. judgment, in which the Court of Justice held that in the absence of harmonized European legislation, national courts and tribunals of the Member States are not obliged to remedy a national situation of law incompatible with EU law in cases where this obligation would conflict with a requirement forming part of the constitutional traditions common to the respective Member State.176

19.182

V. Conclusion EMU has proved to be a fertile ground for the development of EU law and its remedial system. The financial crisis provoked the enactment of ground-breaking reforms and policy action that eventually triggered novel forms of litigation. National Constitutional Courts channelled popular discontent through preliminary references, whilst investors having suffered heavy losses launched direct actions on very disparate grounds and through diverse courses of actions. The creation of an EU banking resolution system introduced significant litigation directly before Union courts, whereas the centralized prudential supervision in the hands of the ECB has turned these courts into the reviewers of banking supervisory

172

Florescu and others (n 55) para 48.

173 Ibid. 174

Case C-399/11 Melloni [2013] ECLI:EU:C:2013:107, para 60; Åkerberg Fransson (n 147) para 29. Poulou, ‘Financial Assistance’ (n 146) 1022. 176 M.A.S. and M.B. (n 31) paras 44, 53, and 61. 175

19.183

564 EUROPEAN MONETARY UNION AND THE COURTS tasks. The EU judicial system had probably never witnessed such a rapid and intensive amount of change in a single area of policy. 19.184

This pace in change has not stopped the Court of Justice from taking decisive action, at the same time that it has kept the coherence of the overall system of remedies. However, EMU has inevitably led to changes which will be more deeply perceived in the long term. The ground-breaking judgment in Rimšēvičs and ECB/Latvia will have lasting effects in future Treaty reforms, and the precedent of an annulment of a national act has been set at last. Moreover, the Court of Justice’s recent ECB v Trasta Komercbanka judgment is an important development in the field of standing by private parties in actions of annulment that might have repercussions on fields of EU law other than banking supervision.177 In addition, the Iccrea Banca case concerning the question of jurisdiction and standing in the context of the Single Resolution Fund is also likely to have ramifications of principled nature in European Union law more generally.178 Beyond that, the standard of scrutiny used by the General Court has tilted towards a more intensive degree of review, a trend that appears to be confirmed in the recent judgments rendered in the Banque Postale cases.179 In those cases, the General Court ruled in an enlarged formation that the ECB had erred in law when exercising its discretion, in terms that eluded any reference to the complex economic assessment that is traditional in its case law. Time will tell if this is a growing trend that will lead to a more demanding degree of control over ECB action, but for the time being it entails a significant departure from standard practice.

19.185

The Court of Justice has also striven to keep a balance between its jurisdiction and fundamental rights protection, particularly when ruling in cases which concerned national implementing measures in the context of financial assistance programmes. Whilst this balance has resulted in a rather far-reaching extension of the Court’s jurisdiction and has allowed EU law to provide fundamental rights protection in all areas of exposure to EU intervention in the course of the financial crisis, it follows that the very level of protection might, in the long term, require some further refining in the Court’s case law.

177 Joined Cases C-663/17 P, C-665/17 P, and C-669/17 P ECB and others v Trasta Komercbanka and others [2019] ECLI:EU:C:2019:923. 178 Case C-414/18 Iccrea Banca [2019] ECLI:EU:C:2019:1036. 179 Case T-733/16 Banque Postale v ECB [2018] ECLI:EU:T:2018:477; Case T-745/16 BPCE v ECB [2018] ECLI:EU:T:2018:476; Case T-751/16 Confédération nationale du Crédit mutuel v ECB [2018] ECLI:EU:T:2018:475; Case T-757/16 Société générale v ECB [2018] ECLI:EU:T:2018:473; Case T-758/16 Crédit agricole v ECB [2018] ECLI:EU:T:2018:472; Case T-768/16 BNP Paribas v ECB [2018] ECLI:EU:T:2018:471.

20

THE INSTITUTIONAL DESIGN OF FINANCIAL SUPERVISION AND FINANCIAL STABILITY Jennifer Payne

I. Introduction II. The Development of These Legal Entities

A. The development of the ESAs B. The development of EFSF/ESM C. Consequences of these choices of institutional model

20.1 20.6 20.8 20.13 20.20

III. The Role of the ESAs

A. The ESAs’ rule-making powers B. The ESAs’ supervisory powers C. Comments

IV. The Role of the EFSF and ESM

A. The operation of the EFSF and ESM B. Comments

V. Conclusion

20.29 20.31 20.37 20.46 20.49 20.49 20.56 20.60

I. Introduction Since the inception of the European project, the creation of a single financial market has been a core policy goal. The ambition of the project subsequently expanded to include both economic and monetary union (EMU), a plan which came to fruition with the establishment of a single currency for euro area countries at the turn of the century. EMU has been said to be a ‘cornerstone of the European Union’,1 and may be regarded as a political as much as an economic endeavour.

20.1

Institutional design for the EMU has evolved over time. Monetary union was supported from an early stage by the creation of the European Central Bank (ECB),2 which has the task of defining and implementing monetary policy for the euro area, but no single European Union (EU) organization was put in charge of economic policy. Budgetary and fiscal policies remain subject to coordination and final responsibility lies with Member State governments.3 The need for greater EU-level oversight of certain key issues has been increasingly

20.2

1 Report by the President of the European Council, Herman Van Rompuy, ‘Towards a Genuine Economic and Monetary Union’ (EUCO 120/12, 26 June 2012) 2. 2 The role of the ECB is dealt with in Chapter 14. 3 See Thomas Beukers, ‘The Eurozone crisis and the autonomy of Member States in Economic Union: Changes and Challenges’ in Panos Koutrakos and Jukka Snell (eds), Research Handbook on the Law of the EU’s Internal Market (Edward Elgar Publishing 2017).

Jennifer Payne, 20 The Institutional Design of Financial Supervision and Financial Stability In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0024

566 Financial Supervision and Financial Stability recognized, however, particularly in the wake of the 2008 financial crisis and the sovereign debt crisis which followed it. 20.3

This chapter will examine a number of EU-level legal entities, established post-crisis, that play key roles in this regard, namely the three European Supervisory Authorities (ESAs), established in 2010, and the European Financial Stability Fund (EFSF) and European Stability Mechanism (ESM), established in 2010 and 2012 respectively. The creation of these bodies reflects two different strands of reaction to the crisis. The first is a recognized need to bolster and strengthen EU-level integration and oversight of the financial markets. It is clear that the EMU is supported by a strong and harmonized European financial market. A single capital market is vital in a monetary union: conducting one and the same monetary policy in an area with varying financial practices and structures is dangerous, as the first fifteen years of the euro area’s history vividly demonstrated.4 The second is a requirement for financial stability mechanisms to address the difficulties of the worst-hit countries, not only to provide emergency assistance, but also to avert contagion and to enhance the confidence of financial markets in the euro area’s ability to deal with a crisis.

20.4

There are some important similarities between these five bodies, not least the fact that they were all established with separate legal personality. Crucially, the creation of these bodies marked a new phase in the European project, representing, albeit in different ways, a need for closer cooperation and integration between Member States, and indeed a recognition that some inroads into the sovereignty of Member States can be justified, particularly in emergency scenarios. That said, there are also some key differences. The first three bodies can be distinguished from the latter two in a number of significant ways. First, the ESAs, namely the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA), have oversight over the EU as a whole. By contrast, the EFSF and ESM operate only within the euro area. Second, the ESAs have, between them, a broad remit regarding the financial oversight of the EU markets. They are part of the European System of Financial Supervision, a multi-layered system of national supervisory authorities and EU bodies, the main objective of which is preserving financial stability and guaranteeing sufficient protection for the customers of financial services. It is based on the Single Rulebook, a single set of harmonized prudential rules which institutions throughout the EU must respect. By contrast, the EFSF and ESM were established with a much narrower and more limited remit, namely to provide an emergency lending facility to euro area Member States requesting financial support.5 Third, and most significant for the purpose of this contribution, is the fact that the ESAs are supranational EU agencies6 (although the term ‘agency’ is not used in their founding regulations) whereas the EFSF and ESM are intergovernmental bodies. This institutional distinction has important consequences for the nature and remit of the powers of the various entities.

4 For discussion, see eg Paul Mercier and Francesco Papadia, The Concrete Euro: Implementing Monetary Policy in the Euro Area (OUP 2011). 5 The role of the ESM is in the process of being broadened, as discussed in Section IV.B. 6 See Edoardo Chiti, ‘An Important Part of the EU’s Institutional Machinery: Features, Problems and Perspectives of European Agencies’ (2009) 46 Common Market Law Review 1395.

The Development of These Legal Entities 567 The choice of institutional structure for these five bodies is in part a factor of the way in which these entities arose, and in Section II the development of these five entities is examined, and some of the consequences of the institutional models adopted are considered. These choices also impact on the role and function of these organizations. In Sections III and IV the role of the ESAs and of the EFSF and ESM are discussed, and some of the challenges facing these bodies are analysed. In each case the institutional model creates challenges for the ability of these bodies to fulfil their functions effectively.

20.5

II. The Development of These Legal Entities The institutional differences between the ESAs on the one hand and EFSF/ESM on the other are due in part to the way in which these institutions arose. In both cases the 2008 financial crisis prompted their development, but the routes to their coming into existence were quite distinct.

20.6

Prior to the 2008 financial crisis, the supervisory model for the EU financial markets was very different to that which exists today. Until 2001, the focus of EU securities and markets regulation was largely on constructing an integrated marketplace though a harmonized regulatory framework. The focus was on passporting, which supported the principle of home Member State control, although host Member State intervention was also possible. There was relatively little focus on supervisory cooperation or sanctioning and enforcement requirements for national competent authorities (NCAs).7 One exception to this was the establishment of the European System of Central Banks (ESCB) and the ECB under the 1992 Maastricht Treaty, which conferred on the ECB its financial stability mandate. One of the actions of the ECB was to bring together the EU’s central banks and supervisors to discuss issues relating to financial stability. An increased focus on supervisory issues, and a growing recognition of the need for greater supervisory cooperation and harmonization of supervisory powers, led to the establishment of three bodies in 2001: the Committee of European Securities Regulators (CESR), the Committee of European Banking Supervisors (CEBS), and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS).8 These committees, often referred to as the three Level 3 Committees (3L3) were the precursors of the ESAs and with their introduction a centralized institutional structure for supervision of the EU financial system was born. No equivalent nascent EFSF/ESM style organizations were introduced in this period: it was only with the sovereign debt crisis in 2010 that the need for an EU-level fund to bail out euro area Member States in the event of financial difficulty came to the fore.

20.7

7 See Niamh Moloney, EU Securities and Financial Markets Regulation (3rd edn, OUP 2014) Ch I (hereafter Moloney, EU Securities and Financial Markets Regulation). 8 Commission Decision 2001/527/EC of 6 June 2001 establishing the Committee of European Securities Regulators [2001] OJ L191/43; Commission Decision of 2004/5/EC of 5 November 2003 establishing the Committee of European Banking Supervisors [2004] OJ L3/28; Commission Decision 2004/6/EC of 5 November 2003 establishing the Committee of European Insurance and Occupational Pensions Supervisors [2004] OJ L3/ 30. These decisions were repealed and replaced in 2009 by Commission Decision 2009/77/EC of 23 January 2009 establishing the Committee of European Securities Regulators [2009] OJ L25/18; Commission Decision 2009/ 78/EC of 23 January 2009 establishing the Committee of European Banking Supervisors [2009] OJ L25/23; Commission Decision 2009/79/EC of 23 January 2009 establishing the Committee of European Insurance and Occupational Pensions Supervisors [2009] OJ L25/28.

568 Financial Supervision and Financial Stability

A. The development of the ESAs 20.8

The focus of CESR, CEBS, and CEIOPS was on supervisory convergence. Their approach was broadly pragmatic, encouraging NCAs to adopt a European ‘supervisory mindset’ rather than creating a new supervisory model or taking direct supervisory powers for themselves.9 During this period, although there was discussion of the development of a ‘European SEC’ model of supervision,10 there was little appetite for such a body, in part due to the comparatively stable financial and institutional environment. The financial crisis exposed the flaws in the system, however. In particular, NCAs diverged considerably in terms of the ways in which they were organized, their levels of experience and resources, the types of supervisory powers and priorities they held and the supervisory style they employed.11 The consequent lack of supervisory convergence in this period was a serious threat to the management of pan-EU risks to the financial markets. Although these issues were recognized to exist pre-crisis,12 the changes introduced to tackle these concerns were comparatively minor and did not involve major institutional change.13 The system was not equipped to deal with financial stability risks or crisis conditions.14

20.9

Although CESR, CEBS, and CEIOPS attempted to deal with crisis management and coordination, with CEBS in particular taking on more operational roles, it was soon accepted that the institutional structure was unsatisfactory.15 Although the impetus for reform came from the failures relating to the EU banking sector in late 2008, this soon extended to the financial system more generally. The structure of the proposed changes built on the existing model. There was little appetite for significantly enhancing the powers of the ECB, or introducing a consolidated European Financial Authority. Instead, the idea was to utilize the existing 3L3 model, with the addition of a European Systemic Risk Board (ESRB) to provide macroprudential oversight.16 The existing three committee model offered a good platform from which to launch the new institutional regime. One downside of this approach, however, was that it embedded a siloed structure to financial regulation into the supervisory architecture, and a fragmented model of this kind raises its own challenges, particularly in a financial market that does not recognize or respect silos.17 Some attempts have 9 See eg CESR, ‘Preliminary Progress Report: Which Supervisory Tools for the EU Securities market? An analytical paper by CESR’ (Ref: 04-333f, October 2004). 10 Ibid, 17; Commission, ‘Review of the Lamfalussy process—Strengthening supervisory convergence’ COM (2007) 727 final. 11 For discussion, see Eilís Ferran, ‘Understanding the Shape of the New Institutional Architecture of EU Financial Market Supervision’ in Eddy Wymeersch, Klaus J Hopt, and Guido Ferrarini (eds), Rethinking Financial Regulation and Supervision in Times of Crisis (OUP 2012). 12 See eg CESR, ‘An Evaluation of Equivalence of Supervisory Powers in the EU under the Market Abuse and Prospectus Directive. A Report to the Financial Services Committee’ (Ref: 07-334, June 2007); IMF, ‘Euro Area Policies’ (Country Report No 7/260, 2007) 18–21. 13 See Council, ‘2836th Council Meeting—Employment, Social Policy, Health and Consumer Affairs’ (ECOFIN Press Release No 15698/07, 4 December 2007) 13–21. 14 See Niamh Moloney, ‘EU Financial Market Regulation after the Financial Crisis: “More Europe” or More Risks?’ (2010) 47 Common Market Law Review 1317 (hereafter Moloney, ‘EU Financial Market Regulation after the Financial Crisis’). 15 See eg Jacques De Larosière and others, ‘Report of the High Level Group on Financial Supervision in the EU’ (Brussels, 25 February 2009) which highlighted, inter alia, poor supervisory coordination, diverging supervisory practices, and an absence of crisis decision-making powers; Commission, ‘European Financial Supervision’ COM (2009) 252 final. 16 See Commission, ‘European Financial Supervision’ COM (2009) 252 final. 17 For discussion, see Niamh Moloney, ‘The European Securities and Markets Authority and Institutional Design for the EU Financial Market—A Tale of Two Competences: Part (1) Rule-Making’ (2011) 12 European

The Development of These Legal Entities 569 been made to tackle these concerns via the operational structure of the ESAs. The fact that representatives of the ESAs sit on each other’s Board of Supervisors as non-voting members is one way in which this is addressed. Another is the development of a Joint Committee of the ESAs, which provides a forum in which the ESAs can cooperate and is intended to ensure cross-sectoral consistency.18 Although there have been some successes in inter-ESA cooperation,19 this remains an ongoing issue. This was one of the issues discussed in the Commission’s proposals for the reform of the ESAs in 2017.20 When the ESAs were established, it was accepted that NCAs would remain at the core of the system, however it was also acknowledged that the powers of the new ESAs would need to include the ability to investigate breaches of EU law by NCAs, to adopt emergency decisions in specific crisis situations, to address decisions to NCAs and financial market participants in some situations, and to have supervisory powers over certain pan-European entities, such as ratings agencies and trade repositories.21

20.10

The basis for the ESAs is Article 114 TFEU. This competence does not confer an unlimited power to regulate the internal market, but is intended to improve conditions for the establishment and functioning of the internal market, supporting ‘approximating’ measures, which remove obstacles to free movement or distortions to competition.22 This Article was used to support the construction of EU bodies prior to the introduction of the ESAs.23 Some doubts were raised, however, as to whether Article 114 could be relied upon to support the extensive rulemaking and supervisory powers granted to the ESAs.24 Nevertheless, the

20.11

Business Organization Law Review 41, 82–83 (hereafter Moloney, ‘The European Securities and Markets Authority (Part (1))’). 18 Article 54 European Parliament and Council Regulation (EU) 1093/2010 of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/78/EC [2010] OJ L331/12; European Parliament and Council Regulation (EU) 1094/2010 of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/ 79/EC [2010] OJ L331/48; European Parliament and Council Regulation (EU) 1095/2010 of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/77/EC [2010] OJ L331/84 (hereafter together ‘ESA Founding Regulations’). These have subsequently been revised: European Parliament and Council Regulation (EU) 2019/2175 of 18 December 2019 amending Regulation (EU) 1093/2010 establishing a European Supervisory Authority . . . [2019] OJ L334/1. The references to the ESA Founding Regulations in this chapter are therefore to these Regulations as amended. 19 See eg EBA/ESMA Principles for benchmark-setting processes in the EU (ESMA/2013/659, 6 June 2013). 20 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 1093/2010 establishing a European Supervisory Authority (European Banking Authority); Regulation (EU) 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority); Regulation (EU) 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority); Regulation (EU) 345/2013 on European venture capital funds; Regulation (EU) 346/2013 on European social entrepreneurship funds; Regulation (EU) 600/2014 on markets in financial instruments; Regulation (EU) 2015/760 on European long-term investment funds; Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; and Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market’ COM (2017) 536 final. 21 COM (2009) 252 final. 22 For discussion, see Case C-66/04 United Kingdom v European Parliament and Council [2005] ECR I-10533. 23 Case C-217/04 United Kingdom v European Parliament and Council [2006] ECR I-3771. 24 For discussion, see eg Elaine Fahey, ‘Does the Emperor Have Financial Crisis Clothes? Reflections on the Legal Basis of the European Banking Authority’ (2011) 74 The Modern Law Review 581 (hereafter Fahey, ‘Does the Emperor Have Financial Crisis Clothes?’); Niamh Moloney, ‘The European Securities and Markets Authority and Institutional Design for the EU Financial Market—A Tale of Two Competences: Part (2) Rules in Action’ (2011)

570 Financial Supervision and Financial Stability 2014 judgment of the Court of Justice in United Kingdom v Parliament and Council,25 which involved a challenge by the UK to the powers granted to ESMA under the Short Selling Regulation,26 endorsed Article 114 as the basis of ESMA’s powers. In contrast to the opinion of the Advocate General, the Court of Justice ruled that Article 114 could support measures that empowered ESMA to take individual decisions.27 This was an important legal recognition of the EU’s approach of instituting agencies for highly technical matters, and as a result of this decision the Treaty competences for the securities and markets regime seem relatively secure. 20.12

The establishment of the ESAs was by no means straightforward. In particular, Member States were concerned about any transfer of powers to the new ESAs that would have fiscal consequences. Such concerns were focused, in particular, on the costs of ongoing bank rescue efforts. There were also differences of opinion and approach between the Commission, the European Parliament and the Council as to the appropriate shape and powers of the new ESAs.28 After difficult negotiations, an agreement was finally reached in September 2010, and a raft of legislation was implemented to give effect to these new bodies.29 Both the ESRB and the ESAs started operation in January 2011. The difficulties inherent in shaping the powers of the ESAs have not gone away; negotiations regarding the reform of the ESAs, proposed by the European Commission in 2017 on which political agreement was finally reached in 2019, exposed conflicts between the EU institutions on the one hand and Member States on the other and between the EU institutions inter se regarding these issues.30

B. The development of EFSF/ESM 20.13

In 2010, the same year that the ESAs and the ESRB were established, the EFSF was created. The genesis of this body was quite distinct from that of the ESAs and the ESRB, however. Unlike the latter bodies, which built on a pre-existing network of committees and were the 12 European Business Organization Law Review 177, 219–20 (hereafter Moloney, ‘The European Securities and Markets Authority (Part (2))’). 25 Case C-270/12 United Kingdom v European Parliament and Council [2014] ECLI:EU:C:2014:18. 26 European Parliament and Council Regulation (EU) 236/2012 of 14 March 2012 on short selling and certain aspects of credit default swaps [2012] OJ L86/1. 27 For discussion, see Elizabeth Howell, ‘The European Court of Justice: Selling Us Short’ (2014) 11 European Company and Financial Law Review 454. 28 For discussion of the ESAs’ supervisory role, see Section III.B. 29 ESA Founding Regulations; Council Regulation (EU) 1096/2010 of 17 November 2010 conferring specific tasks upon the European Central Bank concerning the functioning of the European Systemic Risk Board [2010] OJ L331/162; ‘Omnibus’ European Parliament and Council Directive 2010/78/EU of 24 November 2010 amending Directives 98/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC, 2003/71/EC, 2004/39/EC, 2004/109/EC, 2005/60/ EC, 2006/48/EC, 2006/49/EC and 2009/65/EC in respect of the powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority) [2010] OJ L331/120, amending existing financial services legislation to ensure that the new authorities can work effectively. 30 Unsurprisingly, many Member States wanted to water down the European Commission’s proposals for expanding the ESAs’ powers (see COM (2017) 536 final) and the political agreement finally reached reflects this reality. Further, it is notable that it took eighteen months to conclude negotiations and the European Parliament alone submitted 1,300 amendments to the Commission’s text.

The Development of These Legal Entities 571 result of a twenty-month period of consultation and negotiation, the EFSF was an entirely new EU-level creation, established as a response to the EU sovereign debt crisis in spring 2010. Managing a sovereign debt crisis was not within the remit of the EMU, but nevertheless the severity of the Greek crisis in 2010, and the threat that a Greek default posed to the euro area as a whole, given the integrated nature of European banking, prompted action. The EU and the International Monetary Fund (IMF) promised funding to Greece, but this was generally regarded as an insufficient response to the crisis, and failed to calm the markets or reduce fears of contagion. Faced with the worsening situation, the possibility of a European fund, to grant emergency liquidity aid to euro area members, was floated. The creation of the EFSF in May 2010 occurred very hurriedly, taking even some seasoned EU analysts by surprise.31 Various options for the form of the EFSF were put forward, but many were felt to contain difficulties.32 For example, one suggestion, for a European Monetary Fund, was thought to require a Treaty change which was unpalatable to euro area Member States at that time.33 The EFSF was ultimately an intergovernmental special purpose vehicle that could raise money by issuing bonds backed by Member State guarantees. This was in contrast to the organizational model adopted for the European Financial Stabilisation Mechanism (EFSM), established alongside the EFSF, which is administered by the Council and the Commission, with the ECB in a consulting role.34

20.14

The capital of the EFSM is relatively small, 60 billion euro, and this mechanism has played only a minor role compared to that of the EFSF, and now the ESM, which were intended to bear the main burden of financial assistance. The EFSF was established to manage funds including 440 billion euro of guarantees by euro area countries.35 It was only ever intended to be of short duration, with a tenure until June 2013.36 Accordingly, the ESM was established in September 2012, as a permanent firewall for the euro area, to provide financial assistance programmes for Member States of the euro area in financial difficulty. The permanence of the ESM was felt necessary to provide clarity and security to the financial markets in the long-term, and to demonstrate ongoing support for the euro area.

20.15

Some of the perceived deficiencies in the EFSF were addressed when the ESM was introduced. In particular, the lending ceiling of the EFSF was regarded as being too low. It was sized to provide emergency financial support only to smaller countries such as Greece, Ireland and Portugal, and simply did not have the funds required to provide support to larger countries in difficulties, or to stabilize the markets more generally. Accordingly, in

20.16

31 Ledina Gocaj and Sophie Meunier, ‘Time will tell: The EFSF, the ESM and the Euro Crisis’ (2013) 35 Journal of Financial Integration 239 (hereafter Gocaj and Meunier, ‘Time will tell’). 32 For example, a Commission-backed stabilization fund was said by some to be against EU law (Tony Barber, ‘The euro: dinner on the edge of the abyss’ Financial Times (London, 10 October 2010)). 33 Daniel Gros and Thomas Mayer, ‘How to deal with the threat of sovereign default in Europe: towards a Euro(pean) monetary fund’ (2010) 45 Intereconomics—Review of European Economic Policy 64; Gocaj and Meunier, ‘Time will tell’ (n 31). 34 The EFSM was established on 11 May 2010 through Council Regulation (EU) 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism [2010] OJ L118/1, issued under the emergency provision of Article 122(2) TFEU. It is financed through the EU budget and bonds it issues itself; hence, no direct Member State financial liability is involved. 35 See Council, ‘Extraordinary Council meeting, Economic and Financial Affairs’ (Press Release 9596/10, 9–10 May 2010). 36 Although the EFSF does not provide any further financial assistance (this task being performed by the ESM), since the EFSF has provided financial assistance to Ireland, Portugal and Greece, the Facility will exist until its last obligation has been fully repaid.

572 Financial Supervision and Financial Stability 2011, euro area leaders agreed to enlarge the capital guarantee from 440 billion euro to 780 billion euro. In addition, it was felt that the rates charged were too high. The high interest rates were deliberate and intended to be punitive, in order to discourage bad behaviour, but it was recognized they could also have the effect of discouraging countries from seeking necessary aid. These were therefore reduced. 20.17

Another significant difference between the EFSF and the ESM was that while the EFSF was introduced without a Treaty change, and indeed at the time of its introduction a Treaty amendment was felt to be unpalatable, the introduction of the ESM was accompanied by a Treaty amendment to Article 136 TFEU, in order to provide legitimacy to this body. Accordingly, Article 136(3) provides: The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.

20.18

Subsequently, a separate euro area-only treaty was signed that created the ESM itself.37 The ability of the euro area Member States to conclude and ratify an agreement such as the ESM treaty was considered by the Court of Justice in Pringle.38 According to the Court, the amendment of Article 136 was merely confirmatory of a power already possessed by the Member States to enter into the ESM treaty. The Court confirmed that the ESM Treaty was compatible with Article 125 TFEU, which prohibits EU states from being liable for or assuming commitments for other EU states.

20.19

At this point, path dependency and the rapidity of the process of establishing the ESM meant that the earlier alternatives to the intergovernmental model went largely unexplored and the ESM followed the institutional model of the EFSF: ‘the sunk political costs of creating the EFSF significantly constrained the actions of Member States and other European actors’.39 As a consequence, the ESM is not a supranational body but is, again, an intergovernmental organization. Like the EFSF, it is a special purpose vehicle located in Luxembourg, although the two bodies are distinct, for example regarding their governance structures.

C. Consequences of these choices of institutional model 20.20

The processes of developing the ESAs, on the one hand, and the EFSF and ESM, on the other, were quite distinct, and this affected the institutional models adopted. The ESAs are supranational organizations whereas the EFSF and ESM are intergovernmental institutions. 37 Treaty establishing the European Stability Mechanism (ESM) (D/12/3, Brussels, February 2012) (hereafter ESM Treaty). This Treaty was found to be compatible with the EU Treaties by the European Court of Justice (ECJ) in Case C-370/12 Thomas Pringle v Government of Ireland and Others [2012] ECLI:EU:C:2012:756 (hereafter Pringle). The ESM Treaty is an agreement concluded under public international law, in contrast to the EFSF Framework Agreement, which appears to have a more hybrid character, with both private law and public international law aspects, see Kaarlo Tuori, ‘The European Financial Crisis—Constitutional Aspects and Implications’ (2012) EUI Working Papers LAW 2012/28, 30–31 (hereafter Tuori, ‘The European Financial Crisis’). 38 Pringle (n 37). For discussion, see Bruno de Witte and Thomas Beukers, ‘The Court of Justice approves the creation of the European Stability Mechanism outside the EU legal order: Pringle’ (2013) 50 Common Market Law Review 805 (hereafter de Witte and Beukers, ‘Pringle’). 39 Gocaj and Meunier, ‘Time will tell’ (n 31) 248.

The Development of These Legal Entities 573 This has a number of consequences for these bodies. The first relates to their relationship with the EU legislative bodies, particularly the Commission, and national authorities. This issue is explored in this section. A further important consequence relates to the scope and nature of the powers provided to these bodies and their ability to fulfil their roles effectively. This issue will be discussed further in Sections III and IV. One consequence for the ESAs of their institutional model is the need to deal with the difficulties associated with the Meroni ruling,40 which provides that discretionary powers implying a wide margin for discretion cannot be delegated by an EU institution.41 Only the delegation of clearly defined, executive powers is permitted under the Treaty, so as not to disrupt the institutional balance of powers. The Meroni ruling has shaped the structure and powers of EU agencies, and although the ESAs are not technically designated as agencies, being rather ‘Union bod[ies] with legal personality’,42 nevertheless the Meroni restrictions were very influential in their structural design as well as the extent and nature of their powers. It is notable that in the 2017 review of the ESAs the Commission refers to them as ‘independent EU agencies’.43 By contrast, the EFSF and ESM are not agencies in this sense. As intergovernmental bodies, they are free of these particular concerns.

20.21

One difficulty regarding the impact of Meroni on the ESAs relates to the breadth and the potential ambiguity of some of their powers. Under Meroni, discretionary decisions which require difficult choices in reconciling various objectives laid down in the Treaty cannot be delegated, particularly where they amount to the execution of actual economic policy. The powers provided to the ESAs potentially fall into this category. Meroni may therefore result in decisions of the ESAs being open to subsequent challenge, threatening their legal certainty. An example of just such a challenge arose in UK v Parliament and Council.44 The UK challenged powers granted to ESMA under the Short Selling Regulation that allow ESMA to intervene, under certain conditions, through legally binding acts in the financial markets of Member States if there is a ‘threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system in the Union’.45 The UK asserted that ESMA was thereby vested with powers that it could not have according to EU constitutional law, in part because this delegation of power was contrary to Meroni. The Court held that the relevant article in the Short Selling Regulation did not confer any autonomous power on ESMA that went beyond the bounds of the regulatory framework established by the ESMA Regulation,46 and that the exercise of those powers was circumscribed by various conditions and criteria, which limit ESMA’s discretion. The Court was satisfied that ESMA’s discretion to act was sufficiently confined by the general legal framework establishing it, as well as more substantive norms including those laid down in

20.22

40 Case 9-56 Meroni & Co, Industrie Metallurgiche, SpA v ECSC High Authority [1957-58] ECR 133. 41 A further argument, based on the Romano decision, is that agencies cannot adopt normative measures. In large part, the concern here is that there is a risk of lack of judicial supervision by the Court, but this argument seems to have lost force since the Lisbon Treaty explicitly permits judicial review of acts of agencies and other bodies. 42 Article 5(1) ESA Founding Regulations. 43 Commission, ‘Public Consultation on the Operations of the European Supervisory Authorities’ (Brussels, 21 March 2017) 4 (hereafter Commission, ‘Public Consultation on the Operations of the European Supervisory Authorities’). 44 Case C-270/12 United Kingdom v European Parliament and Council [2014] ECLI:EU:C:2014:18. 45 Article 28 Regulation (EU) 236/2012. 46 Regulation (EU) 1095/2010.

574 Financial Supervision and Financial Stability delegated acts adopted by the Commission. The Court’s decision was that the system was compatible with the Meroni judgment. This decision focused on a narrow point relating to ESMA’s powers under the Short Selling Regulation. A broad reading of the decision, however, suggests a relatively limited role for the Meroni constraint in this context, and supports the further conferral of direct powers of intervention on the ESAs. 20.23

There are some important benefits to the ESAs from the institutional model adopted, the most significant of which is their independence from both the Commission and the national authorities. The governance structure of the ESAs emphasizes the fact that they are formally independent, although it also presents some challenges to that independence. There is a heavy emphasis on independence in the ESAs’ founding charters. The ESAs are provided with an independence guarantee,47 as are their Boards of Supervisors and Management Boards.48 Each ESA has a full time, independent Chairperson,49 who represents the ESA and is not a representative of the Member States or a Commission appointee, and a full time independent Executive Director.50 In each ESA the main decision-making body is the Board of Supervisors.51 In each case it is composed of the heads of the national public authorities competent for the supervision of the relevant financial institutions in each Member State. In relation to ESMA, for example, it is the heads of the authorities in each Member State responsible for the supervision of financial markets that sit on this body.52 Also on the Board of Supervisors, but non-voting, are the ESA Chairperson, representatives of the Commission, of the ESRB, and of the other ESAs. The ESA’s Executive Director can also attend.53 Operational management is provided in each case by the ESA’s Management Board.54

20.24

Independence is undoubtedly a crucial aspect of the ESAs’ role and operation within the EU financial system, but there are challenges to that independence from a number of directions. The constitution of the voting members of the Board of Supervisors, comprising the heads of the relevant national supervisory authorities, has the potential to bring national interests into the decision-making process.55 Next, although the Board of Supervisors of each ESA appoints both the Chairperson and the Executive Director, the Parliament has the opportunity to intervene in this process since it must confirm the appointment of both the 47 Article 1(6) ESA Founding Regulations. 48 Articles 42, 46, 49, and 52 ESA Founding Regulations. 49 Articles 6(3) and 48–49 ESA Founding Regulations. 50 Articles 6(4) and 51–53 ESA Founding Regulations. 51 Articles 6(1) and 40–44 ESA Founding Regulations. For the most part, the Board operates under a simple majority vote, with each Board member having one vote, although qualified majority voting applies in some circumstances, see Article 44 ESA Founding Regulations. 52 Where Member States have more than one such authority, see Article 40(4) ESA Founding Regulations. 53 Article 40 ESA Founding Regulations. 54 Article 6(2) ESA Founding Regulations. This committee comprises the ESA Chairperson and six Board of Supervisors’ members, elected by and from the voting members of the Board of Supervisors; a representative of the Commission, and the Executive Director of the ESA are non-voting members. This committee operates on a simple majority basis. See Articles 45–47 ESA Founding Regulations. The European Commission proposed significant changes to the governance structure of the ESAs, including the replacement of the Management Board with an Executive Board, which would have contained a number of full time members (three for EBA and EIOPA and five for ESMA) who would also sit on the Board of Supervisors, as non-voting members (see COM (2017) 536 final). However, the Member States succeeded in almost completely blocking any significant reforms of the way the ESAs are managed and run. 55 The proposal of the Commission to introduce a number of full time members into the decision-making process was intended to counteract this to a certain extent (see COM (2017) 536 final) but this proposal was dropped during the negotiation process.

The Development of These Legal Entities 575 Chairperson and the Executive Director.56 Perhaps most problematic, in terms of the ESAs’ independence, is the potential role of the Commission, which sits as a non-voting member of the Board of Supervisors and the Management Board, and plays a central role in the adoption of the ESAs’ budgets.57 Despite the independence guarantee embedded into the institutional design of the ESAs, they depend on the Commission, and on the other EU legislative bodies, in some key respects. The ESAs also depend to an extent on the NCAs, both because of the composition of the ESAs’ Boards of Supervisors, but also because the ESAs’ comparatively small budgets and other constraints mean that much still remains with the NCAs. The ESAs have therefore needed to ensure that they maintain a balance between these potentially conflicting influences, while retaining their independence. Their formal and, to a large extent, operational independence from these competing pressures is central to the ability of the ESAs to provide effective financial oversight of the EU financial markets, and to operate both their rulemaking and supervisory functions impartially and for the benefit of the EU as a whole. The difficulty of the ESAs’ balancing act between these different competing interests is clearly acknowledged in the Commission’s 2017 proposed reforms, but it remains to be seen whether the agreed changes will improve the situation.

20.25

By way of contrast, both the EFSF and the ESM have been deliberately structured so that, 20.26 while the influence of the Commission is kept at a distance, the participating Member States are in control. In the EFSF, the participating Member States sit on the board and the Commission and the ECB act only as observers.58 Similarly, in the ESM, the Member States are shareholders and also have control of the decision-making process. The main decision- making body is the Board of Governors, to which each euro area Member State appoints a governor and alternate.59 The board therefore consists of Ministers of Finance of the Member States, although the European Commissioner for Economic and Monetary Affairs and the President of the ECB participate as observers.60 Where the Board of Governors makes decisions on significant issues, such as the granting of financial assistance, the terms and conditions of financial assistance, or the lending capacity of the Stability Mechanism, these must occur by mutual agreement.61 The EFSF and ESM undoubtedly have important links to EU institutions, not least because the major tasks of preparing and implementing their decisions are entrusted to supranational institutions, principally the Commission and the ECB. Nevertheless, it is clear that 56 Articles 48(2) and 51(2) ESA Founding Regulations. 57 Articles 62–64 ESA Founding Regulations. 58 Further assurance of Member State control is provided by the fact that the EFSF is supported by the German Debt Management Office, which provides front office support, and the European Investment Bank, a bank owned by the Member States, which provides back office support. 59 Article 5(1) and (2) ESM Treaty. The ESM also has a Board of Directors and is led by a managing director appointed for a five-year term, see Articles 4(1) and 7(2) ESM Treaty. 60 Article 5(3) ESM Treaty. Other individuals, such as representatives of the IMF, can attend as observers on an ad hoc basis, see Article 5(4) and (5) ESM Treaty. 61 Article 5(6) ESM Treaty. On other matters, the Board of Governors makes decisions by qualified majority, if no specifications on the voting are made: Article 5(7) ESM Treaty. In addition, the ESM Treaty provides for an emergency procedure where decisions can be made by a qualified majority of 85 per cent of the votes cast; under such a majority only the three largest Euro states—Germany, France, and Italy—retain their veto power. According to Article 4(4) ESM Treaty, the emergency procedure ‘shall be used where the Commission and the ECB both conclude that a failure to adopt a decision to grant or implement financial assistance would threaten the economic and financial stability of the euro-area’.

20.27

576 Financial Supervision and Financial Stability the euro area Member States have very significant control over the operation of both bodies. Indeed, it has been said that ‘the creation of the EFSF locked in intergovernmentalism as the modus operandi for dealing with the sovereign debt crisis—and future crises’.62 Path dependence and the short time frame involved in setting up the ESM meant that it followed the same approach. This has implications for the role and operation of the EFSF and ESM, and the ability of these bodies to perform their assigned roles. 20.28

The roles assigned to the ESAs and to the EFSF and the ESM are discussed in the next sections, and the effect of the institutional models chosen for these bodies is analysed.

III. The Role of the ESAs 20.29

In contrast to the EFSF and ESM, the ESAs have a broad remit across the whole of the EU financial markets. They are part of a network of financial supervision, which comprises, inter alia, the NCAs and the ESRB. The ESAs have a microprudential role, but also have supervisory powers with respect to systemic risk, whereas the ESRB63 is the primary location for macroprudential oversight of the EU financial system.64 Despite the introduction of these bodies, the supervision of the EU financial market remains predominantly at the level of the NCAs. Although the title of these bodies is the ‘European Supervisory Authorities’, the level of day-to day supervision they have over market actors is relatively minimal; that which exists is held only by ESMA, and only over a limited number of actors.65 Accordingly, the business of supervision remains primarily a local function.66 That said, the role of the ESAs is significant. They have quasi-rulemaking powers, a range of supervisory powers, most of them focused on convergence activities, and the ability to direct decisions to NCAs and financial market participants in exceptional situations.67 62 Gocaj and Meunier, ‘Time will tell’ (n 31) 251. 63 The ESRB does not have separate legal personality and it does not have legally binding powers. Instead, it is designed as a reputational body, intended to influence policymakers and supervisors through its moral authority. See Eilís Ferran and Kern Alexander, ‘Can Soft Law Bodies be Effective? The Special Case of the European Systemic Risk Board’ (2011) 37 European Law Review 751. The ESRB’s credibility is supported by the quality and expertise of its constituent members, a ‘comply or explain’ obligation and similar provisions, and the transparency of its work. 64 The early signs of cooperation between the ESAs and the ESRB have been positive (see eg a joint study by ESMA and ESRB in 2012 of the CDS market to understand likely contagion channels, ESRB Annual Report 2012) but how this cooperation will develop over time, and in the face of a crisis to test the system, remains to be seen. 65 Discussed in Section III.B. See eg Pierre Schammo, ‘EU Day-to-Day Supervision or Intervention-based Supervision: Which Way Forward for the European System of Financial Supervision?’ (2012) 33 Oxford Journal of Legal Studies 211. 66 The EU supervisory framework has increasingly focused on this issue however, with legislative measures commonly identifying the supervisory powers which NCAs must hold (see eg Article 46 European Parliament and Council Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) 1060/2009 and (EU) 1095/2010 [2011] OJ L174/1); measures prescribing the nature of the penalties to be available to NCAs to deal with particular offences (see eg European Parliament and Council Directive 2014/57/EU of 16 April 2014 on criminal sanctions for market abuse prescribing that criminal penalties be available to deal with market abuse (market abuse directive) [2014] OJ L173/179); and even measures detailing how NCAs should determine the appropriate sanction and the level of sanction to be ordered (see Article 31 Regulation (EU) 596/2014 of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/ 124/EC, 2003/125/EC and 2004/72/EC [2014] OJ L173/1). 67 The 2019 ESA reforms create additional powers for the EBA to tackle money laundering, see Article 1(7) Regulation (EU) 2019/2175, inserting a new Article 9a into Regulation (EU) 1093/2010.

The Role of the ESAs 577 In the period since their establishment the ESAs have come to occupy a significant role in the EU financial markets. Their institutional model does cause some difficulties for the ESAs. The need to accommodate the Meroni doctrine, and to find a balance between the influence of the Commission and that of the national authorities is fraught with potential tensions and conflicts. Only by finding a way through these difficulties will the ESAs be able to perform their role effectively and well.

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A. The ESAs’ rule-making powers The establishment of the ESAs is regarded as a significant shift in terms of EU financial regulation for a number of reasons, not least their wide-ranging powers as compared to the earlier agencies. One aspect of this is the considerable quasi-rulemaking powers that the ESAs can utilize, thereby contributing to the development of the single rule book in Europe.68 In particular, the ESAs can draft technical standards, which may be either regulatory or implementing technical standards,69 which are endorsed into binding law by the Commission, as well as being able to adopt soft-law measures in the form of guidelines and recommendations.70 The ESAs also have a range of other soft-law measures that arise from Article 29 of the ESAs Founding Regulations, which permit an ESA to ‘develop new practical instruments and convergence tools to promote common supervisory approaches and practices’.71 These include opinions to NCAs, supervisory briefings, public statements and the use of question and answer (Q&A) documents that are intended to provide further clarification on the meaning of EU legislation.72

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The institutional model chosen for the ESAs, and in particular the existence of the Meroni 20.32 restrictions, operates as a potential limit on the ESAs’ powers in this regard, and requires a careful balance to be maintained between the Commission and ESAs. In order to satisfy the requirements of the Meroni doctrine, the ESAs cannot be the true rulemakers, and accordingly the Commission needs to retain a level of control. The ESAs have significant technical expertise, however, and can provide valuable input into the rulemaking process, so side- lining them in this process would not be beneficial. Furthermore, too controlling a role for the Commission in this process would sit awkwardly with the ESAs’ formal independence guarantee. On the face of it, the ESAs’ rulemaking role seems to be quite constrained. The ESAs cannot adopt binding horizontal rules of general application, but can only draft technical standards which acquire binding force through the actions of the Commission. Furthermore, the ESAs’ Founding Regulations stress that the technical standards ‘shall not imply strategic 68 The ESAs can contribute to the single rulebook in other ways, for example through their general information gathering powers: Article 35 ESA Founding Regulations. 69 This reflects the Treaty distinction between delegated acts (Article 290 TFEU) and implementing acts (Article 291 TFEU). Regulatory technical standards have a normative/legislative character whereas implementing technical standards have an executive/implementing character. 70 Article 16 ESA Founding Regulations. 71 Article 29(2) ESA Founding Regulations. 72 The use of Q&As is a good example of the potential impact of these soft law measures. These are not legally binding but in practice they set out the ESA’s position as to the interpretation of EU directives and regulations and it is generally accepted that the ESA’s position is the one that will be applied by NCAs. Despite their formally non- binding nature, therefore, in practice these Q&As have a quasi-binding effect.

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578 Financial Supervision and Financial Stability decisions or policy choices’,73 although in practice issues of policy are often entangled with the matters covered by the technical standards.74 The influence of the Commission is more limited than it may appear, however. First, it cannot adopt a technical standard without a draft from an ESA.75 Second, if the Commission decides not to endorse a draft, or to endorse it subject to amendments, it must explain its reasons for doing so to the ESA,76 to the European Parliament and the Council;77 any revision must be made with prior consultation with the ESA;78 and, as regards draft regulatory technical standards, amendments may only occur in exceptional circumstances.79 In practice, the Commission has been slow to revise or veto technical standards drafted by the ESAs, although it does on occasion exercise this power.80 That the Commission exercises its power relatively rarely recognizes the fact that the ESAs are the organizations that have considerable technical expertise on the matters in question. 20.34

In practice, the balance reached between the ESAs and the Commission means that the rulemaking powers exercised by the ESAs are more far reaching than might appear to be the case at first sight, and have the potential to affect the day-to-day conduct of EU financial supervision. The soft law powers of the ESAs are also more significant than they might appear. Although they are not legally binding, NCAs and financial institutions are required to ‘make every effort’ to comply with them.81 Financial institutions can be required to report whether they are complying82 and NCAs have to explain any non-compliance to the relevant ESA, and this non-compliance will be made public by the ESA, and will be notified to the European Parliament, the Council, and the Commission in its annual report on guidelines and recommendations issued.83 Naming and shaming can be an effective tool in ensuring the effectiveness of soft law measures of this kind.84 These measures are therefore considerably ‘harder’ than they appear. They are a potentially powerful tool for ESAs, allowing them to ‘side-step the formal Treaty constraints which shape the binding rulebook’.85 73 Article 15(1) ESA Founding Regulations. 74 See eg the Draft Technical Standards on the information on structured financial instruments (EU) 2015/3, required by Article 8b(3) Regulation (EC) 1060/2009 of 16 September 2009 on credit rating agencies [2009] OJ L302/ 1 (hereafter CRA Regulation). 75 Articles 10(1) and 15(1) ESA Founding Regulations. The only exception is if the ESA fails to submit a draft within the time limits. 76 Ibid. 77 Article 14(1) ESA Founding Regulations. The European Parliament or Council can then request the relevant Commissioner and ESA Chairperson to attend a meeting to present and explain their differences: Article 14(2) ESA Founding Regulations. 78 Articles 10(1) and (3) and 15(1) and (3) ESA Founding Regulations. 79 Recital (23) of Regulation (EU) 1093/2010 and Regulation (EU) 1095/2010; Recital (22) of Regulation (EU) 1094/2010. In addition, if the Commission makes amendments to the ESA’s draft, the draft technical standards are then subject to more significant scrutiny by the European Parliament and the Council: Article 13(1) ESA Founding Regulations. 80 For example, the Commission rejected two of the raft of technical standards drafted by ESMA regarding EMIR (European Parliament and Council Regulation (EU) 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories [2012] OJ L201/1), one relating to the operation of the colleges of supervisors which deal with the authorization and supervision of CCPs, and another to the implementation date of EMIR. For discussion, see Moloney, EU Securities and Financial Markets Regulation (n 7) ch VI, 4.2.3. 81 Article 16(3) ESA Founding Regulations. 82 Ibid. 83 Article 16(4) ESA Founding Regulations. 84 There are examples of non-compliance among NCAs, however. For example, ESMA’s Guidelines on the exemption for market making activities and primary market operations under Regulation (EU) 236/2012 of the European Parliament and the Council on short selling and certain aspects of Credit Default Swaps triggered non- compliance from five NCAs. 85 Moloney, EU Securities and Financial Markets Regulation (n 7) 929.

The Role of the ESAs 579 Consequently, the rulemaking powers of the ESAs are anything but negligible, despite initial appearances to the contrary. The ESAs have been provided with a means to contribute in a meaningful way to the single rulebook, leading to ‘a significant intensification of delegated rule-making’.86 The Meroni restrictions have meant that the Commission has to be the ultimate rulemaker, however, and concerns have been expressed about the role of the Commission in the rulemaking process.87 In particular, Professor Moloney has suggested that the ESAs’ rulemaking powers might have been structured differently:

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A braver approach would have been to confer direct rule-making powers on ESMA . . . subject to careful delegations and an accountability model that reflects the particular dynamics of financial market rule-making rather than long-standing precedents with respect to institutional oversight of EU agencies.88

Another concern, which emerges from the Meroni restrictions, is the somewhat slow, cumbersome nature of this process, something which can be problematic where market conditions are changing rapidly, for example where liquidity is quickly evaporating, and a swift regulatory response is needed. The design of the rulemaking process is potentially problematic, leading to ‘poorer, slower and institutionally fraught rule-making’.89 These concerns chime with the view of the ESAs that they should be able to exercise direct rulemaking powers in some circumstances, in order to improve the decision-making process. For example, in March 2017 the EBA issued an opinion to the European Parliament, Council and Commission proposing that the decision-making framework for adopting supervisory reporting requirements be made more efficient by replacing the Commission’s Implementing Technical Standards with decisions adopted directly by the EBA. The endorsement process of implementing technical standards on supervisory reporting poses challenges for financial institutions and supervisors, due to systemic and significant delays in the adoption process, which disrupt the ability to update reporting requirements on a predictable schedule. In order to ensure accountability is maintained, the opinion proposes various mechanisms, including consultation and cost-benefit analysis, and a streamlined scrutiny right for the Commission.90

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B. The ESAs’ supervisory powers In addition to their rulemaking powers, the ESAs have a number of significant supervisory powers. The Commission’s 2017 proposals for reform of the ESAs recognized the importance of the ESAs’ role in furthering supervisory convergence, and propose a strengthening of the ESAs’ powers. While many of the Commission’s proposals did not survive the negotiation process, the agreed changes do envisage an increase in the ESAs’ role in supervisory 86 Moloney, ‘EU Financial Market Regulation after the Financial Crisis’ (n 14) 1345. 87 Moloney, ‘The European Securities and Markets Authority (Part (1))’ (n 17); Fahey, ‘Does the Emperor Have Financial Crisis Clothes?’ (n 24). 88 Moloney, ‘The European Securities and Markets Authority (Part (1))’ (n 17) 84. 89 Ibid, 77. 90 EBA Opinion on improving the decision-making framework for supervisory reporting requirements under Regulation (EU) 575/2013 (EBA/Op/2017/03, 7 March 2017).

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580 Financial Supervision and Financial Stability convergence, including the development of coordination groups within each ESA designed to provide platforms for competent authorities to exchange information and experience.91 20.38

Some of the ESAs’ powers may be regarded as ‘soft’ supervisory and monitoring powers, which involve the ESAs fulfilling an important coordination function, intended to support the effective functioning of the EU financial market. These include initiating and coordinating assessments of the resilience of market participants, together with the ESRB,92 and building a common EU supervisory culture by establishing training programmes and supporting information exchange between NCAs.93 However, the ESAs’ role goes beyond merely coordination, and includes a day-to-day operational role in some situations.

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In contrast to the committees that preceded them, the ESAs have the ability to direct binding decisions to NCAs, as well as to overrule them, and issue decisions directly to individual financial institutions in a Member State. So, for example, ESAs are able to investigate alleged breaches of EU law by NCAs, and may then issue a ‘recommendation’ to the NCA setting out the remedial steps necessary to ensure compliance with EU law.94 If NCAs do not comply then the Commission can issue an opinion requiring remedial action, and if the NCA still does not respond the ESA may address a decision to a financial market participant requiring action necessary to comply with its obligations under EU law.95 Any such decision will prevail over any previous decision of the NCA. In addition, in an ‘emergency’ situation the ESAs may adopt decisions requiring NCAs to take the necessary action to address the emergency.96 If the NCA does not comply, the ESA may, in relevant circumstances, adopt an individual decision addressed to a financial market participant requiring the necessary actions to comply with its obligations under the relevant rules.97 A new supervisory tool for the ESAs is ‘No Action letters’ enabling them to recommend forbearance to Member States’ national regulators with respect to the application of EU law when market confidence, consumer protection, the orderly functioning of financial markets or the stability of the EU is at risk.98 Where disagreements arise between NCAs, the ESAs may impose binding mediation decisions on the NCAs.99 Again, where an NCA fails to comply with such a decision, the ESA may adopt an individual decision aimed at a financial market participant that will prevail over any earlier NCA decision.100

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In addition to this suite of powers, the ESAs can require NCAs to comply or explain their actions in some situations which, although less intrusive, can have an important effect in promoting greater consistency in supervisory practices.101 For example, under the 2012 91 See Articles 1(38), 2(38), 3(38) Regulation (EU) 2019/2175, inserting new Article 45b into the ESA Founding Regulations. 92 Article 32 ESA Founding Regulations. 93 Article 29 ESA Founding Regulations. 94 Article 17 ESA Founding Regulations. 95 Article 17(6) ESA Founding Regulations. 96 Article 18 ESA Founding Regulations. 97 Article 18(4)–(5) ESA Founding Regulations. 98 See Articles 1(8), 2(8), 3(8) Regulation (EU) 2019/2175 inserting new Article 9c into Regulation (EU) 1093/ 2010 and new Article 9a into Regulation (EU) 1094/2010 and Regulation (EU) 1095/2010. 99 Article 19 ESA Founding Regulations. 100 Article 19(4)–(5) ESA Founding Regulations. 101 In addition, the ESAs are in some circumstances given the power to conduct a peer review of how competent authorities carry out their functions under EU legislation. One example of this is Article 35 Alternative Investment Fund Managers Directive 2011/61/EU, which grants ESMA a specific peer review function with respect to how competent authorities supervise non-EU alternative investment fund managers.

The Role of the ESAs 581 Short Selling Regulation NCAs have the ability to take certain actions, including the imposition of temporary restrictions on short selling, to deal with adverse events or developments in the market which constitute a threat to financial stability or market confidence in a Member State.102 NCAs are required to notify such actions to ESMA, which must then provide an opinion on whether the action is necessary to address the market conditions that have arisen. Where the NCA does not follow the ESMA opinion, it must publish a notice explaining its reasons.103 Where the NCA does not follow the opinion, ESMA is required to consider whether its powers of intervention with respect to short selling should be employed.104 The Short Selling Regulation provides ESMA with the ability to impose obligations directly on financial market participants in some circumstances (for example, to disclose to the public details of net short positions) which will prevail over any previous NCA measure.105 On the whole, the ESAs’ ability to address decisions to NCAs or to financial market participants arises only in exceptional or emergency circumstances where, for instance, a serious breach of EU law has occurred, as a last resort when other softer powers, such as peer review or binding mediation, have failed or are otherwise inappropriate.106 In relation to ESMA’s role in the Short Selling Regulation, for instance, this only arises where the NCAs are responding to developments which constitute a threat to financial stability or market confidence in a Member State, and where NCAs have either not acted or their actions are inadequate.107 Furthermore, ESMA must take into account the extent to which the measure addresses the threat or improves the ability of NCAs to measure the threat, and must also take account of potential downsides, such as any detrimental effect on the efficiency of the financial markets.108 Consequently, these are intended to be last resort powers that are relatively infrequently used in practice.109

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In addition to these exceptional and far-reaching emergency powers, ESMA also has a 20.42 direct supervisory role over certain market participants, including Credit Rating Agencies (CRAs) and trade repositories, and this is a role that is set to expand.110 ESMA also has direct product intervention powers in some cases.111 These powers mark a dramatic shift in the role of EU-level supervisory entities. Under the CRA regime, for example, the day-to- day supervision and enforcement competence regarding CRAs has been transferred from

102 Article 23 Regulation (EU) 236/2012. 103 Articles 26–27 Regulation (EU) 236/2012. 104 Article 27(3) Regulation (EU) 236/2012. 105 Article 28 Regulation (EU) 236/2012. 106 See ESMA, ‘Decision of the Board of Supervisors: Rules of procedure on breach of Union law investigations’ (ESMA/2012/BS/87); EBA, ‘Decision of the Board of Supervisors concerning the Internal Processing Rules on Investigation regarding Breach of Union Law’ (EBA DC 054, 5 July 2012); EIOPA, ‘Decision of the Board of Supervisors Internal processing rules on investigation regarding breach of Union law’ (EIOPA-BOS-11-017-rev2, 20 December 2017). See also Decision of the Board of Appeal (BoA 2013-008, 24 June 2013). 107 Article 28(2) Regulation (EU) 236/2012. 108 Article 28(3) Regulation (EU) 236/2012. There also some procedural requirements: Article 28(4) and (5)–(9). 109 The ESA Founding Regulations also contain a number of protections for third parties regarding these powers, including communication obligations (Article 39) and a right of appeal (Articles 60–61). 110 For discussion see ESMA, ‘2020 Annual Work Programme’ (ESMA20-95-1132, 26 September 2019). 111 Articles 40–43 European Parliament and Council Regulation (EU) 600/2014 of 15 May 2014 on markets in financial instruments and amending Regulation (EU) 648/2012 [2014] OJ L173/84 (the EBA also has product intervention powers under these provisions).

582 Financial Supervision and Financial Stability Member States to ESMA. ESMA is charged with ensuring that the Regulation is applied,112 and has exclusive competence over the registration and supervision of CRAs. ESMA may delegate specific supervisory tasks to the NCAs, such as investigations, but the balance of power is very much with ESMA. For example, competent authorities may request that ESMA suspend the use of ratings for regulatory purposes in exceptional circumstances, but ESMA is not required to follow these requests.113 ESMA is provided with a broad range of direct supervisory powers to enable it to fulfil its role, including investigatory powers and the ability to conduct on-site inspections.114 ESMA also has enforcement powers and can apply a range of monetary115 and non-monetary116 penalties where breaches are determined to have occurred. These enforcement powers are utilized, albeit relatively rarely.117 20.43

These powers, particularly those that move beyond a coordination role, are a significant departure from the pre-ESA position. They appear to offer the ESAs the ability to interfere in Member State sovereignty, and in particular the activities of NCAs, in significant ways. Their impact and importance needs to be placed in context, however. There are important limitations on the reach and applicability of these powers. As discussed, many of these powers are meant to apply only in specific, exceptional or emergency scenarios, and are not intended to alter the notion that NCAs are the primary location of supervisory power. Those that do apply on a day-to-day basis, such as the direct supervisory role given to ESMA regarding CRAs, relate to specific and limited sectors of the financial system. It is notable that many of the Commission’s proposals in 2017 for new substantive powers for the ESAs were watered down by Member States in the negotiation process.

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The Meroni doctrine also operates to limit the powers of the ESAs in this context. For example, as regards the ESAs’ powers following a breach of EU law, these are constrained by the need for prior action by the Commission. While the ESA can investigate the breach of EU law and issue a recommendation to the NCA setting out the remedial steps required to comply with EU law,118 if the NCA does not comply it is for the Commission to issue a formal opinion requiring the NCA to take the necessary remedial action119 and only if the NCA fails to comply with the Commission’s opinion can the ESA address a decision to a financial market participant. Similarly, the ESAs’ power to act in an emergency is constrained by the need for prior action by an EU institution, although in this instance it is the Council. The ESAs’ actions may only be triggered by a decision of the Council that an emergency situation exists.120 The ability of the ESAs to make use of this power is therefore 112 Article 21 CRA Regulation, as amended by European Parliament and Council Regulation (EU) 513/2011 of 11 May 2011 amending Regulation (EC) 1060/2009 on credit rating agencies [2011] OJ L145/30, and European Parliament and Council Regulation (EU) 462/2013 of 21 May 2013 amending Regulation (EC) 1060/2009 on credit rating agencies [2013] OJ L146/1. 113 Ibid, Article 31. 114 Ibid, Article 23. 115 Ibid, Article 36a. 116 Ibid, Article 24. 117 In the period 2012–16 ESMA issued one censure and three fines on supervised entities, both CRAs and trade repositories. 118 Article 17(2) and (3) ESA Founding Regulations. 119 Article 17(4) ESA Founding Regulations. 120 Article 18(2) ESA Founding Regulations. The ESAs and the ESRB are empowered to issue a confidential recommendation to the Council to do so, where they consider that an emergency situation has arisen. Once the Council has declared an emergency, it must inform the European Parliament and the Commission.

The Role of the ESAs 583 controlled by the Council. The emergency nature of these powers is emphasized by the fact that in addition to the Council declaring an emergency, the ESAs’ powers can only be utilized where exceptional circumstances exist, ie where coordinated action by national authorities is necessary to respond to adverse developments that may seriously jeopardize the orderly functioning and integrity of financial markets or the stability of the whole or part of the financial system in the EU.121 As regards the power of mediation, the ESAs’ power is again constrained, as they can only mediate on their own initiative where this is provided for in the relevant legislation and where, on the basis of objective criteria, disagreement between the NCAs can be determined.122 As regards ESMA’s oversight of CRAs and trade repositories, its role was made dependent on the Commission operationally as regards certain key matters. For instance, ESMA’s ability to charge fees to CRAs is dependent on the Commission adopting a regulation on fees.123 Further, these powers are restricted to ensuring compliance with rules that have previously been adopted through the legislative and administrative processes. Nevertheless, these provisions do represent a step-change from the pre-ESA era, and provide the ESAs with an important supervisory role both in emergency scenarios and also in more ‘normal’ conditions. If the changes proposed by the Commission are implemented, this will only enhance the reach and range of the ESAs’ role in this regard. Paradoxically, these supervisory powers are to some extent driven by financial stability concerns, issues which have a greater salience for EBA than for ESMA, and yet it is notable that all ESAs have the same powers in the ESA Founding Regulations, and it is ESMA rather than the other ESAs that has been given direct supervisory responsibilities.

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C. Comments The ESAs have been a central plank in the post-crisis reforms within the EU. They ‘constitute an institutional cornerstone of the comprehensive reform package put in place in recent years and they have played a key role in ensuring that the financial markets across the EU are well regulated, strong and stable’.124 Post-crisis EU regulation has seen a recognition that it is not enough to get the law on the books right, if the law in action is ignored. While undoubtedly there has been a focus on the development of a single rulebook at EU level, it is understood that attention must also be given to ensuring supervisory convergence, or operational harmonization. The ESAs are at the heart of this shift. Consequently, they have an important rulemaking function in the EU financial markets, but they also have a significant supervisory role, both in emergency situations, but also in ‘normal’ conditions.

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The institutional model adopted for the ESAs, namely EU agencies in all but name, has implications for the ESAs’ rulemaking and supervisory functions. In particular, the need

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121

Article 18(2) ESA Founding Regulations. Article 19(1) ESA Founding Regulations. 123 Article 19 CRA Regulation. 124 Commission, ‘Public Consultation on the Operations of the European Supervisory Authorities’ (n 43) 2. 122

584 Financial Supervision and Financial Stability to satisfy the requirements of Meroni operates as a constraint on the ability of the ESAs to fulfil their role. As regards the rulemaking function provided to the ESAs, the Meroni restrictions are potentially problematic for two related reasons: they restrain the ability of the ESAs to engage in direct rule-making, and they slow down the ability of the ESAs to engage in the rulemaking process, something that will be important particularly in difficult market conditions, perhaps where liquidity is evaporating quickly, and where a swift response is crucial. As discussed, there has already been a suggestion from EBA that this is an issue that needs to be re-thought. The ESAs can play an important rulemaking function and their institutional model, in particular the constraints of Meroni, is therefore constraining their ability to fulfil that role at the present time. The 2019 reforms of the ESAs do not really address this issue. 20.48

As regards the supervisory powers granted to the ESAs, the need to apply constraints is understandable given the potentially far-reaching powers provided to the ESAs. The Meroni restrictions may not be quite the right tool for the job, however, as they arguably undermine the performance of the ESAs’ role. The EU legislative authorities have little supervisory experience, so to disrupt the ESAs in their operational functions by preserving a role for these authorities may be regarded as problematic. Furthermore, it is arguably the Member States rather than the EU legislative authorities that are most concerned about the expansion of the ESAs’ powers in this context. As Professor Moloney has noted, the concepts of institutional delegation and control that have dominated EU agency design do not ‘have the same traction’ in relation to the ESAs’ supervisory powers.125 An example of the difficulties that can arise emerges from the CRA Regulation. ESMA’s ability to impose monetary penalties is tightly constrained by the provisions of the legislation. The relevant article sets out in granular detail the level of fines to be awarded for infringements of different provisions of the Regulation, upper and lower limits being set in each instance, as well as the factors to be considered by ESMA in determining, within those limits, the amount of fine that should be set. This approach suggests that the Parliament and the Council are better placed than ESMA to determine these detailed operational matters, something that may be doubted. This may be a comparatively small matter, but it represents an interference with ESMA’s ability to exercise oversight of CRAs that is potentially problematic, and illustrates the more general point that interference by the Commission and the other EU legislative authorities in the ESAs’ supervisory role on account of Meroni may be less than ideal.126 More generally, responses to the review of the ESAs in 2017 suggest a recognition that the ESAs need to be provided with additional tools in order to enhance their role in facilitating financial stability and orderly markets.127 The changes introduced as a result of the recent consultation process appear to accept this, and a number of the reforms, such as the introduction of ‘No Action Letters’, aim to meet this need.

125 Moloney, ‘The European Securities and Markets Authority (Part (2))’ (n 24) 221. 126 See eg Steven Maijoor, the Chair of ESMA, who has called for ESMA to have the ability to impose higher fines on supervised entities than those laid down in the legislative provisions, in order to ensure that the enforcement regime is seen as credible, Steven Maijoor, ‘Address to ALDE Seminar on the Review of the European Supervisory Authorities’ (Brussels, 8 February 2017). 127 See eg Feedback statement on the public consultation on the operations of the European Supervisory Authorities having taken place from 21 March to 16 May 2017 (Brussels, 20 June 2017) 7.

The Role of the EFSF and ESM 585

IV. The Role of the EFSF and ESM A. The operation of the EFSF and ESM In contrast to the ESAs, the role of the EFSF and ESM is narrowly focused on a single activity, namely providing financial assistance to any euro area Member State which is experiencing, or is seriously threatened by, a severe economic or financial disturbance caused by exceptional occurrences beyond its control. In this role, the EFSF and the ESM have been supported by the ECB, which has participated in the stability mechanisms in a consultative capacity, but also through its Securities Markets Programme and programme of Outright Monetary Transactions128 which have involved, inter alia, the ECB purchasing from secondary markets crisis-state debt instruments worth hundreds of billions of euro. Various forms of assistance are available, including short-term and medium-term stability support in the form of loans to a Member State experiencing financial problems, and intervention in the debt markets, for example via the purchase of a Member State’s bonds on the secondary market.129 As discussed, the EFSF was established as a temporary measure in 2010,130 and the ESM is its more permanent replacement.131 The EFSF provided funding to Ireland, Portugal and Greece, while the ESM has provided support to a number of countries to date, including Spain, Cyprus and Greece.132

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The structural model for both organizations is very similar, as discussed in Section II.B above, as is their essential function and purpose. The operational model for both is also broadly the same. First, a Member State requests assistance. The country concerned is then analysed and evaluated on all relevant financial stability matters by the European Commission, ECB and IMF in order to decide what kind of support programme should be offered, if any. The Board of Governors determines, on the basis of that assessment, whether to grant assistance. A Memorandum of Understanding (MoU) is then negotiated between the relevant euro area Member State and the European Commission, in liaison with the ECB and, wherever possible, the IMF, detailing the conditionality attached to the financial assistance facility.133 To fund this assistance, the EFSF and ESM both issue bonds. A number of differences between the two exist, however. One difference relates to the range of measures available. Initially, the EFSF and ESM were only allowed to offer financial stability loans directly to sovereign States, meaning that bank recapitalization packages were first paid to the state and then transferred to the financial sector. Consequently, these types of loans were accounted for as national debt of the sovereign state, adversely impacting its credit rating. In 2012, it was agreed that where banks are found to be in need of recapitalization

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128 See Chapter 22. 129 See Article 2(1) EFSF Framework Agreement as amended, and Articles 14–18 ESM Treaty. The options available to the ESM were subsequently increased via the introduction of the ESM Direct Bank Recapitalisation Instrument, agreed by the Eurogroup in June 2012. 130 See EFSF Framework Agreement accessed 5 February 2020. The ‘no bail-out’ provision in Article 125 TFEU had to be interpreted generously to accommodate the EFSF (ie Member States could not be required to bail out but could do so voluntarily). For discussion, see Matthias Ruffert, ‘The European debt crisis and European Union law’ (2011) 48 Common Market Law Review 1777. 131 For further discussion of the operation of the EFSF and ESM, see Chapter 33. 132 For details see accessed 5 February 2020. 133 There has been some criticism of the somewhat cumbersome processes involved, which can be problematic when swift action is required, see eg ESM, EFSF/ESM Financial Assistance: Evaluation Report (ESM 2017).

586 Financial Supervision and Financial Stability funds, the ESM should make bank recapitalization packages direct to those banks, and not to the state.134 However, this form of rescue will only be available where the primary backstop, provided by a bail-in of private creditors along with contributions from the Single Resolution Fund, as regulated by the Bank Recovery and Resolution Directive, proves insufficient. 20.51

There are also other differences in the scope and operation of the EFSF and the ESM. Lessons were learned from the establishment of the EFSF when the ESM was introduced. Some of these were operational: as discussed, the size of funds available increased significantly, to 700 billion euro (80 billion euro actually provided by Member States and 620 billion euro in committed capital and guarantees);135 and the interest rate charged for assistance was lowered.136 Another important innovation in the ESM was the introduction of private sector involvement when financial assistance is received. This is not automatic, but where it is determined that the financial assistance programme cannot realistically restore the public debt in a sustainable manner, the Member State receiving assistance will need to carry out negotiations with its creditors in good faith in order to secure their involvement in restoring the debt to sustainable levels, for example by restructuring or rescheduling the public debt.137 This can be a valuable tool for spreading the losses beyond the taxpayers in a particular state and ensuring that creditors also bear some of the pain. It needs to be used with care, however. Merely passing the losses to the banks in a particular state, for example, may re-locate rather than remedy the problem.

20.52

There are some weaknesses in the design of the financial assistance regime that are common to both the EFSF and ESM. The first of these is the moral hazard problem caused by Member States who have been living beyond their means and which free-ride on the merits of those members who have managed to maintain budgetary discipline. One of the ways in which the operation of the EFSF and ESM has sought to tackle this is via the notion of conditionality, which is built into the operation of the financial rescue regime. Indeed, conditionality is explicitly built into the Treaty amendment which forms the basis of the ESM.138 This amendment emphasizes the ‘last resort’ nature of this assistance—it should be provided only if it is ‘indispensable to safeguard the stability of the euro as a whole’—and the fact that ‘strict conditionality’ must be at the centre of any assistance provided.139 In determining that the ESM Treaty was compatible with Article 125 TFEU, the Court of Justice in Pringle140 also made it clear that ‘strict conditionality’ is a prerequisite for the disbursement of financial assistance. Such conditionality aids the attainment of the ‘higher objective’ at

134 See Euro Area Summit, ‘Statement’ (Brussels, 29 June 2012) accessed 5 February  2020. 135 The paid in capital is not used for financial assistance, but is put aside to absorb potential losses. The lending capacity is limited to 500 billion euro. This over-collateralized capital structure was chosen in order to seek to achieve an AAA rating. 136 According to the ESM 2016 Annual Report, the ESM provides loans to euro area Member States at much lower interest rates than those the market would have offered: ESM, 2016 Annual Report (ESM 2017) 48. 137 In order to facilitate such an agreement, collective action clauses are to be included in all new government securities in the Eurozone from January 2013, in order to enable Member States to find an agreement with the majority of its creditors on the restructuring of its debts without a minority of creditors being able to block the decision, Article 12(3) ESM Treaty. 138 Article 36(3) TFEU. 139 Article 36(3) TFEU. 140 Pringle (n 37). For discussion, see de Witte and Beukers, ‘Pringle’ (n 38).

The Role of the EFSF and ESM 587 the Union level, which is ‘maintaining the financial stability of the monetary union’.141 The granting of the financial assistance is therefore made subject to strict conditions, set out in the MoU, to ensure that structural reforms are adopted by the country in order to restore financial stability. The MoUs which the Member States have been required to sign as a condition of assistance not only define in aggregate terms required cuts in public expenditure, but also how the cuts should be allocated, and even set out some structural reforms to the market. For example, the Greek MoUs included commitments to comprehensive healthcare and labour market reforms, and Portugal agreed to reduce pension expenditure by detailed pension reductions and to control costs in the health sector on the basis of detailed measures listed in the MoU. Conditionality only goes so far to tackle concerns about moral hazard, however. Other, more significant measures are likely to be required. One suggestion is that contributions to these funds should depend in the first instance on the potential risk that each Member State represents.142 This is not what occurs at present. Instead, the contribution of every Member State is based on the paid-in capital key of the ECB, with Germany and France making by far the largest payments (almost 50 per cent of the total payments between them), whereas higher risk countries pay much lower sums (Greece, for instance, makes a contribution of less than 3 per cent). Even risk-adjusted contributions may not entirely deal with the danger of moral hazard, however. If a Member State is effectively guaranteed that it will not be allowed to fail, then moral hazard becomes almost inevitable. Thus, to mitigate the danger of moral hazard more fully, there needs to be a risk that Member States will be allowed to fail, either as a result of no assistance being offered, or because the Member State fails to comply with the conditions attached to the assistance programme put in place. This option does not appear to be in place in the EFSF and ESM structures. There is an implicit assumption that these intergovernmental bodies, operated by the Member States, will provide a bailout, since a bankruptcy of another euro area Member State would not be contemplated, ‘the . . . bottom-line of all these measures is that no euro area member country, no matter how strongly it offends the rules of the game, will be left out in the cold’.143

20.53

A second weakness is how closely the funds available as part of the EFSF and ESM are tied to the euro area Member States themselves. These links may mean that the more euro area Member States get into financial difficulties, the less funds are available in the financial stability fund. For example, the EFSF structure contained a provision which allowed a country that encountered financial difficulties and sought support from the EFSF to ‘step out’, ie no longer to provide guarantees for any further debt issuance by the EFSF.144 There is no equivalent provision under the ESM: even Member States that are receiving financial assistance via the ESM are obliged to make their contribution to the paid-in capital and to the callable capital if required.145 A fundamental problem at the heart of the ESM, however, is the danger of contagion between participating countries. Contagion effects arise both

20.54

141 Pringle (n 37) para 135. 142 Daniel Gros and Thomas Mayer, ‘How to deal with sovereign default in Europe; Create the European Monetary Fund now!’ (2010) CEPS Policy Brief No 202 (hereafter Gros and Mayer, ‘How to deal with sovereign default in Europe’). 143 Ansgar Belke, ‘The Euro Area Crisis Management Framework: Consequences and Institutional Follow Up’ (2010) Ruhr Economic Papers No 207, 5. 144 Article 2(7) EFSF Framework Agreement. 145 Article 8(5) ESM Treaty.

588 Financial Supervision and Financial Stability because there are strong interrelations between euro area countries due to similar economic developments, close trade relations, significant financial links and the probability that they will experience similar economic shocks and reactions,146 and also because the act of providing support to another Member State may cause further financial distress to a Member State that is already suffering financial difficulties of its own. Alternatively, it may be that other Member States, suffering financial distress themselves, cannot contribute their component of any callable capital required. If, at a time of crisis, expectations on callable capital deteriorate, the ESM may have its credit rating downgraded, causing market expectations to worsen further. Thus, the ESM may act as a ‘crisis accelerant’ rather than as a solution to financial difficulties in the euro area.147 20.55

A further difficulty of these mechanisms is the danger that they may not be able to raise the sums required to prevent a breakdown of the financial system. Given that the EFSF is no longer providing new funding this is now an issue predominantly for the ESM. Although the sums available to the ESM are larger than those made available to the EFSF, they are arguably still insufficient.148 If, for example, Spain or Italy were to require support it is possible that the sums required would be much larger than the sums available to the ESM.149 Simply increasing the size of the pot may not be sufficient. In part this is because, as discussed above, one or more of the other Member States may also be in financial difficulties and unable to provide the required support. In addition, however, there may be circumstances in which the ESM is unable to place all of the bonds that it wishes to issue in order to raise the relevant sums, perhaps because the market is sceptical of the ability of the euro area Member State countries to support the Member State(s) in difficulty. Instead, additional liquidity may be required in an emergency. At present this is supplied to some extent by the ECB, but questions arise as to the strain that such assistance might put on the ECB if one or more of the larger Member States required assistance, or indeed whether the ECB would be able to provide funds on the scale required.150

B. Comments 20.56

The European reaction to the fiscal crisis, and in particular the development of emergency financial assistance with the EFSF and ESM, demonstrates a recourse to intergovernmental measures outside the EU framework. The choice of this intergovernmental option rather than establishing the EFSF and ESM as EU agencies is, perhaps, understandable, not least because of the time constraints within which both bodies came into existence and concerns about the need for a Treaty change, at least when the EFSF was established. The European Union, which lacks the power of taxation and whose budget resources are limited, does not 146 See eg Michael G Arghyrou and Alexandros Kontonikas, ‘The EMU sovereign debt crisis: Fundamentals, expectations and contagion’ (2010) Cardiff Economics Working Papers E2010/9, demonstrating that Portugal, Ireland and Spain experienced contagion from Greece. 147 Alexandra M D Hild, Bernhard Herz, and Christian Bauer, ‘The European Stability Mechanism—bastion of calm or crisis accelerant?’ (2016) Universität Trier Research Papers in Economics No 12/16. 148 Daniel Gros and Thomas Mayer, ‘Liquidity in times of crisis: Even the ESM needs it’ (2012) CEPS Policy Brief No 265, 3 (hereafter Gros and Mayer, ‘Liquidity in times of crisis’). 149 Alessandro Giovannini and Daniel Gros, ‘The EFSF as a European Monetary Fund: Does it have enough resources?’ (2011) CEPS Commentary (22 July 2011). 150 Gros and Mayer, ‘Liquidity in times of crisis’ (n 148).

The Role of the EFSF and ESM 589 possess the fiscal capacity needed to maintain financial stability and buttress the common currency. Involving merely the euro states in a stability mechanism functioning under the EU budget would almost certainly have been constitutionally difficult. Yet, the organizational structure and institutional model adopted for the EFSF and ESM have important implications for the operation of these bodies, their transparency and accountability, and their ability to stabilize financial markets in times of economic stress. Many analysts argue that the EFSF and ESM lack the main characteristic that is necessary to end the euro area sovereign debt crisis, namely the mutualization of debt at a supranational level.151 They lock in an intergovernmental process to distribute funds by requiring unanimity of their Boards of Governors (the participating Member States) and they are therefore unlikely to convince investors, ultimately, of their ability to deal with the issues in the long term. Furthermore, it has been argued that any effective financial assistance scheme dealing with euro area sovereign financial distress needs to be able to contemplate and deal with the possibility of sovereign default.152 Without such a mechanism, debtor countries facing painful adjustment programmes retain their main negotiating asset, namely the threat of a disorderly default, creating systemic financial instability in the EU. In other words, a conflict may arise between the needs of a single financially distressed euro area Member State and the protection of the euro area as a whole. Market discipline may require some kind of failure to be possible. Some form of supranational body, independent of the national Member States, and of the Commission and the other political institutions, would arguably be better placed to weigh these issues, and to contemplate and organize an orderly sovereign default as compared to a group run by the euro area Member States themselves. A focus on the sovereign crisis, rather than on long term crisis management, led to a focus on intergovernmental solutions, rather than creating a euro area rescue fund under a supranational EU authority that would sell bonds and borrow against the guarantees from Member States.

20.57

In addition to these issues, concerns have been raised about the transparency and accountability of this model:

20.58

[I]‌ntergovernmental stability mechanisms remain outside the scope of application of both Treaty provisions on the principle of transparency and complementary secondary legislation. Such an institutional development makes any control by the European parliament or national parliaments, not to mention civil society and the citizenry, extremely difficult.153

Recourse to intergovernmental agreements can be regarded as a way of sidestepping the procedural requirements which have to be respected in amending the Treaties or in drafting and adopting secondary legislation. These forms of legislation require the engagement of 151 See eg Fabian Amtenbrink, René Repasi, and Jakob de Haan, ‘Is there life in the old dog yet? Observations on the political economy and constitutional viability of common debt issuing in the euro area’ (2016) 12 Review of Law and Economics 605. 152 Gros and Mayer, ‘How to deal with sovereign default in Europe’ (n 142). 153 Tuori, ‘The European Financial Crisis’ (n 37) 47. See also Cornel Ban and Leonard Seabrooke, ‘From Crisis to Stability: How to make the ESM transparent and accountable’ (Transparency International EU 2017). There is a level of indirect control by the European Parliament possible via European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1. See European Parliament, ‘In-depth analysis: European Stability Mechanism (ESM): Main Features, Instruments and Accountability’ (PE 497.755, April 2018) 10 accessed 5 February  2020.

590 Financial Supervision and Financial Stability all major EU institutions, as well as national parliaments. By contrast, drafting, adopting and implementing intergovernmental agreements involves merely the contracting parties. Ultimately, the EFSF and the ESM operate outside the Treaty framework. 20.59

The role of the ESM has recently been under discussion at EU level, in part as a consequence of the fact that, with only one on-going programme in place, the ESM is in a less active phase than previously, but also as a result of the Commission’s ongoing reflections on deepening Economic and Monetary Union.154 The Commission proposed the transformation of the intergovernmental ESM into a European monetary fund (EMF) under EU law. This proposal envisaged the EMF being brought within the EU framework, becoming a ‘unique legal entity under Union law’, and provided with wide-ranging tasks.155 However, the proposal met with considerable opposition, including at Council level, from those who wished to maintain the ESM’s intergovernmental character, and to expand its remit only slightly. As a result, the ESM’s role is being expanded and the ESM Treaty revised to provide a legal basis for these changes, but the changes are more modest than those proposed by the Commission, and involve the ESM retaining its name and its intergovernmental character. The most significant development is the introduction of a common backstop for the Single Resolution Fund, to be provided by the ESM on behalf of the euro area, but other changes are also envisaged, including the further development of the financial assistance instruments provided by the ESM.156 These developments present opportunities for the evolution of the ESM, but also challenges,157 and unfortunately these changes fail to tackle many of the deficiencies in the ESM model highlighted above.

V. Conclusion 20.60

One of the lessons from the financial crisis is that an economic and monetary union like the EMU needs various key components to be in place, and a coherent institutional framework, in order to function well. These things were undoubtedly lacking in 2008. The introduction of the ESAs was an important means of remedying this position. The ESAs have strengthened EU-level integration of the financial markets and, together with developments such as the Single Rule Book for financial services, the strengthening of the Banking Union (particularly through the introduction of the Single Supervisory Mechanism and the Single Resolution Mechanism), and the CMU, the ESAs have contributed to the efficient 154 See eg European Commission, ‘Reflection Paper on the Deepening of the Economic and Monetary Union’ COM (2017) 291 final. For discussion, see eg Charles Wyplosz, ‘A European Monetary Fund?’ (PE 602.076, May 2017) accessed 5 February 2020; Daniel Gros, ‘An evolutionary path towards a European Monetary fund’ (PE 602.075, May 2017) accessed 5 February 2020. 155 Commission, ‘Further Steps towards completing Europe’s Economic and Monetary Union: Roadmap’ COM (2017) 821 final; Commission, ‘Proposal for a Council Regulation on the establishment of a European Monetary Fund’ COM (2017) 827 final. 156 The revisions to the ESM Treaty were broadly agreed by the Eurogroup in June 2019: see accessed 5 February 2020. On 4 December 2019 the Eurogroup agreed in principle, subject to national procedures, on the elements related to the ESM reforms. 157 See eg Lucas Guttenberg, ‘Five Reasons why ESM Reform will fail to deliver’ (2019) Jacques Delors Institute Policy Brief accessed 5 February  2020.

Conclusion 591 functioning of the Economic and Monetary Union. In addition, the absence of financial assistance mechanisms to address sovereign debt concerns in the euro area was tackled via the introduction of the EFSF and the ESM. These two institutional innovations need to be understood not as completely separate strands of the EMU regime but as inter-linked developments which affect and respond to one another to a certain extent. For instance, the EFSF and ESM have created a level of potential moral hazard which has itself required further oversight and integration to manage the attendant risks that have arisen, and so these organizations can themselves be regarded as a driver for increased coordination, both in the euro area and more broadly. The establishment of the five entities with legal personality discussed in this chapter, namely ESMA, EBA, EIOPA, EFSF, and ESM, was a necessary response to the weaknesses demonstrated by the financial crisis. They mark a new phase in the development of the EMU, and represent a move towards greater harmonization and centralization of both rulemaking and supervision, and an increase in cooperation between euro area Member States to deal with sovereign debt problems, a process that is still ongoing as the 2019 reforms to the ESAs and the changes to the ESM Treaty agreed by the Eurogroup demonstrate. The establishment of these bodies also recognizes that some inroads into Member State sovereignty will be necessary, and can be justified, in certain circumstances, particularly in emergency situations, although some of the powers of the ESAs, particularly ESMA, also operate in ‘normal’ market conditions. The models chosen for these entities were distinct: the ESAs are EU agencies in all but name, whereas the EFSF and ESM are intergovernmental bodies. These choices have relevance for the scope and powers of the various bodies, and also impact on their ability to fulfil their roles. These bodies are going to need to continue to change and adapt to deal with the future challenges facing the EMU, and overcoming the shortcomings of their institutional models will be a necessary feature of this adaptation.

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21

EURO AS LEGAL TENDER (AND BANKNOTES) Robert Freitag

I. Introduction II. Definition of ‘Legal Tender’ III. Implication of the Concept of Legal Tender on Payment Obligations IV. Historical Background on the Euro as ‘Legal Tender’ V. Secondary EU-Legislation Relating to the Euro as ‘Legal Tender’ A. Currency Regulations

21.1 21.2 21.4 21.11 21.15 21.16

B. Regulations on (Electronic) Payments C. EU-private law other than on payment services D. Money Laundering Directives and National Restriction of Cash Payments exceeding certain Thresholds E. Miscellaneous Currency-Related Regulations F. Conclusions

21.27 21.38 21.46

21.51 21.53 VI. Use of the Euro Outside the Euro Area 21.64

I. Introduction The provisions governing the euro as ‘European Single Currency’ are at the core of the Treaty on the Functioning of the European Union’s (TFEU) rules on the Economic Monetary Union (EMU). Since the euro has replaced the former national currencies of the participating Member States and is to substitute the national currencies of any future members of the euro area, it was mandatory to ascribe to the euro the status of exclusive ‘legal tender’ as per Article 128(1) TFEU. This status of the euro seems to be so evident as to be self-explanatory—but only at first glance since the concept of ‘legal tender’ and its implications in European Union (EU) and national private and public law are less clear. A satisfactory concept of legal tender is hard to define and hardly ever given on the EU level1—resulting in a striking lack of legal certainty in a great variety of aspects of public and private law. The reasons for the current uncertainty are at least twofold: First, each of the Member States of the euro area had, prior to the introduction of the Euro, a distinct understanding of the implications of its national currency being legal tender in its territory—and the relevant concepts were in many cases not laid down in statutory law but derived from a mixture of historical pre-understandings, scarce jurisprudence and doctrine. Second, one of the most fundamental questions of the law of the European Single Currency has not been openly discussed at the time of formation of the TFEU: Did the Member States, by using

1 At least not in legislative acts. The Commission has tried to clarify the issue by means of a mere recommendation, see paragraph 21.22ff.. Robert Freitag, 21 Euro as Legal Tender (and Banknotes) In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0026

21.1

596 EURO AS LEGAL TENDER the term ‘legal tender’ in the TFEU, intend to fully harmonize each and every legal aspect in which the official currency is of importance or does primary law restrict itself to a partial harmonization of certain core-matters? In the latter case, which could be explained as an ‘open concept’, national laws referring to ‘legal tender’ would remain vastly unaffected by the introduction of the euro and would be applied to the euro in the same manner as to the former national currency.

II. Definition of ‘Legal Tender’ 21.2

The term ‘legal tender’ is generally understood as defining the physical emanations (chattel) of the official currency of a state (or an association of states), ie the term designates banknotes and coins denominated in the relevant currency and issued by the national central bank or another (usually public) institution of the relevant currency area.2 Legal tender primarily is conceived as official means of payment in the relevant territory in the private as well as in the public sector. Legal tender therefore is money, whereas the term money is not restricted to legal tender but includes other forms of money,3 in particular (but, depending on the relevant context, not necessarily) also claims for payment against credit institutions (banks) and central banks with imminent maturity.

21.3

The concept of legal tender as official means of payment usually implies that a debtor may discharge his payment obligations by transferring to the creditor such amount of cash (ie banknotes and coins in such number and composition) as correspond by their combined face-value to the nominal value of the debt.4 The exact details and implications of this concept in private and public law may, however, be highly controversial and vary significantly in the national legal orders. Consequentially, they will be discussed below.

III. Implication of the Concept of Legal Tender on Payment Obligations 21.4

The pivotal point of most discussions concerns the question whether the creditor of a payment claim must mandatorily accept legal tender offered to him by the debtor. At least as general rule the principle of ‘mandatory acceptance’ is common to most legal orders because it enhances the standing of the official currency in the relevant territory.5 If, at least in principle, mandatory acceptance is acknowledged, this does not necessarily imply that the 2 See Charles Procter, Mann on the Legal Aspect of Money (7th edn, OUP 2012) para 2.24ff (hereafter Procter, Mann on the Legal Aspect of Money); Christof Freimuth in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 128 TFEU, para 77ff (hereafter Freimuth in Siekmann (ed), EWU). See also Commission Recommendation 2010/191/EU of 22 March 2010 on the scope and effects of legal tender of euro banknotes and coins [2010] OJ L83/70. 3 Procter, Mann on the Legal Aspect of Money (n 2) para 2.25. 4 See paragraph 21.4ff. 5 See Procter, Mann on the Legal Aspect of Money (n 2) para 2.27; Stefan Grundmann in Franz Jürgen Säcker and others (eds), Münchener Kommentar zum Bürgerlichen Gesetzbuch (vol 2, 7th edn, CH Beck 2018) § 244/ 245 BGB, para 48 (hereafter Grundmann in Säcker and others (eds), Münchener Kommentar zum Bürgerlichen Gesetzbuch); Sebastian Omlor in Julius von Staudingers Kommentar zum Bürgerlichen Gesetzbuch (vol 2, Sellier-de Gruyter 2016) Vorbemerkung § 244 BGB, para B3. See also no 2 of Recommendation 2010/191/EU (limiting mandatory acceptance to a ‘rule’ in retail transactions).

IMPLICATION OF THE CONCEPT OF LEGAL TENDER 597 concept does not know any exceptions, the extent of which is subject to manifold and divergent approaches.6 First, whether the local legal tender may also be used for the discharge of payment obligations expressed in a foreign currency often depends on applicable currency regulations of the relevant state.7 Countries whose currency freely fluctuates and/or is not subject to any transfer restrictions (exchange controls) mostly do not object against the use of foreign currencies on their territory and therefore usually allow parties to agree on effective currency debts which are—according to the parties’ will—mandatorily fulfilled by payment in the relevant foreign currency. An effective currency debt may thus not be fulfilled by payment in local legal tender. Countries controlling (restricting) the transfer of foreign currencies might allow the debtor to discharge even a foreign-currency obligation by payment in local legal tender without regard to the currency in which the debt is contractually or legally denominated.

21.5

Second, national laws differ regarding the question whether a payment obligation expressed 21.6 in the local currency may be contractually restricted to non-cash payments at the time of its coming into existence. In some legal systems, the debtor may not at all be deprived of his mandatory right to discharge his debt in legal tender—often this view is based on the close link between legal tender and monetary policy. Most countries leave the choice of the contractual means of payment to the parties or differ between business-to-consumer (B2C)- contracts on the one side, and business-to-business (B2B-) and consumer-to-consumer (C2C)-contracts on the other side. This leads to the third question whether even in case a payment obligation generally is to be fulfilled by the transfer of legal tender, the creditor may refuse the acceptance of banknotes and coins offered under statutory law or according to the principle of good faith and fair dealings. Such right to refuse cash payments may be based on the high nominal value of the cash tendered by the debtor, which may expose the creditor to an unacceptable risk of theft that does not exist when payment is made electronically or otherwise. Also, the sheer physical amount of legal tender, particularly of coins, might be inacceptable to the creditor because of the costs of storage and/or transportation of the cash (or both). Finally, if the sum of legal tender presented for payment were to have the exact nominal value of the debt this would implicitly force the creditor to keep at his costs sufficient amounts of change.

21.7

Fourth, in case a state allows for party autonomy with regard to the determination of the contractual means of payment, a fall back-rule is required stating how the relevant claim is to be fulfilled by the debtor in the absence of a contractual agreement on the issue. Some countries favour a payment in legal tender whereas others decide on the subject matter according to prevailing market standards (commercial practice).

21.8

6 For more details, see European Legal Tender Expert Group, ‘Report on the on the definition, scope and effects of legal tender of euro banknotes and coins’ (Brussels, 21 January 2009) accessed 10 February 2020 (hereafter ELTEG, ‘Report on the on the definition, scope and effects of legal tender of euro banknotes and coins’). 7 One might consider the following issue as being solely currency-related nature since the relevant questions also arise in the context of payments in local currency which are not made in legal tender but by other means of payment.

598 EURO AS LEGAL TENDER 21.9

Fifth, it is debatable whether legal tender may be discriminated against by contractual agreements or provisions of statutory law according to which the use of legal tender by the debtor entails the payment of a surcharge in comparison with other means of payment.

21.10

Another (sixth) issue relating to legal tender is associated with statutory restrictions on cash payments set in place in order to avoid tax evasion and/or money laundering and/or the financing of terrorism. Many countries generally restrict cash transaction in order to force debtors and creditors to use official bank accounts allowing law enforcement agencies to track payments.

IV. Historical Background on the Euro as ‘Legal Tender’ 21.11

The euro as ‘European Single Currency’ and legal tender in the Member States of the EMU has been preceded by the European Unit of Account (EUA) and the European Currency Unit (ECU), both of which are to be detailed hereinafter.

21.12

In 1975, Council Decision 75/250/EEC8 created the EUA in order to allow for the expression of amounts of aid to be granted by Member States of the EEC to ACP-States under the ACP-EEC Convention of Lomé.9 The need for the creation of a European unit of account had arisen after the collapse of the Bretton-Woods system in 1973 and the subsequent free float of currencies. As the EUA was designed as a mere currency basket, Article 1 of Council Decision 75/250/EEC fixed the proportional weight of the national currencies represented in one EUA,10 whereas the exchange rates of the relevant currencies were allowed to float freely (see Article 2 Council Decision 75/250/EEC). Consequently, the value of one EUA depended on the daily changing exchange rates of the relevant currencies. Soon after the creation of the EUA, the EEC referred to the new unit of account in a variety of Community secondary regulations in order to express the amounts of payment obligations and values.

21.13

The EUA was replaced by the European Currency Unit (ECU) in 1978 in the course of the establishment of the European Monetary System (EMS) by the European Council.11 The EMS established the ECU as a ‘reserve asset’ and a ‘means of settlement’.12 More precisely, according to Article 2.2 of the Resolution, the ECU was to be used as: (a) the denominator (numéraire) for the exchange rate mechanism; (b) as the basis for a divergence indicator; (c) as the denominator for operation in both the intervention and the credit mechanism; and (d) as a means of settlement between monetary authorities of the European Community. As had been the case with the EUA, the ECU was conceived as a currency basket whose 8 Council Decision 75/250/EEC of 21 April 1975 on the definition and conversion of the European unit of account used for expressing the amounts of aid mentioned in Article 42 ACP-EEC Convention of Lomé [1975] OJ L104/35. 9 See Recital (3) and Article 1 Council Decision 75/250/EEC. 10 German Mark; Pound Sterling; French Franc; Italian Lira; Dutch Guilder; Belgian Franc; Luxembourg Franc; Danish Krone; and Irish Pound. 11 European Council Resolution of 5 December 1978 on the establishment of the European Monetary System (ESM) and related matters as Annex 1 to European Council, ‘Conclusions of the Presidency of the European Council’ (Resolution, Brussels, 5 December 1978) Annex 1 accessed 10 February  2020. 12 See Article 1.4 of the aforementioned European Council Resolution (n 11).

Background on the Euro as ‘Legal Tender’ 599 value and composition were identical to those of the EUA (Article 2.1 of the Resolution). In stark contrast to the former EUA-system, the EMS provided for a limitation of exchange rate-fluctuations between the participating national currencies (see Article 3.1 of the Resolution), although these limitations were not always respected. The subsequent and manifold EU-legislation pertaining to the ECU has been listed in the recitals of Regulation (EC) 3320/94 of 22 December 1994 on the consolidation of the existing Community legislation on the definition of the ECU following the entry into force of the Treaty on European Union.13 Upon implementation of the third stage of EMU in 1999, the ECU was replaced by the euro pursuant to Article 2 of Council Regulation (EC) 1103/9714 (‘1st Euro-Regulation’). The final and irrevocable conversion rates of the former national currencies into euro were determined on 31 December 1998 by Regulation (EC) 2866/98.15 The exclusive status of the euro-banknotes issued by the ECB and the national central banks as legal tender was fixed by Article 128(1) TFEU. Article 10 of Council Regulation (EC) 974/98 of 3 May 1998 on the introduction of the Euro16 (‘2nd Euro-Regulation’) repeated this provision in its Article 10, adding that Euro-denominated banknotes were to be issued only after the end of a transitional period as of 1 January 2002. Furthermore, coins denominated in euro and issued by the national central banks were ascribed status as legal tender as of 1 January 2002 by Article 11 of the 2nd Euro-Regulation (which has no parallel in the TFEU and is thus of a constitutive nature).17 Although the euro officially substituted the national currencies of the participating Member States as of 1 January 1999, the 2nd Euro-Regulation provided for a transitional period lasting from 1 January 1999 until 31 December 2001 in order to achieve a ‘balanced changeover’ from the national currencies to the euro.18 During this period, the euro was the unit of account for the ECB and the national central banks of the participating Members States (Article 4 of the 2nd Euro-Regulation). Since no Euro-denominated legal tender yet existed and in order to avoid a period without legal tender, the pre-existing national currency units were declared to be sub-divisions of the euro (Article 6 of the 2nd Euro-Regulation).The banknotes and coins denominated in a national currency and having status of legal tender as of 31 December 1998 in a participating Member State kept their status as legal tender within their territorial limits until 31 December 2001 (Article 9 of the 2nd Euro-Regulation). Even after the end of the transitional period, banknotes and coins denominated in national currency did not immediately lose their status as legal tender under Article 15 of the 2nd Euro-Regulation but kept their former status as (euro-)legal tender for six months after the end of the transitional period at the latest. 13 Council Regulation (EC) 3320/94 of 22 December 1994 on the consolidation of the existing Community legislation on the definition of the ecu following the entry into force of the Treaty on the European Union [1994] OJ L350/27. 14 See Article 2 Council Regulation (EC) 1103/97 of 17 June 1997 on certain provisions relating to the introduction of the euro [1997] OJ L162/1. 15 Council Regulation (EC) 2866/98 of 31 December 1998 on the conversion rates between the euro and the currencies of the Member States adopting the euro [1998] OJ L359/1. 16 Council Regulation (EC) 974/98 of 3 May 1998 on the introduction of the euro (‘2nd Euro-Regulation’) [1998] OJ L139/1. 17 As to the limitations on the mandatory acceptance of euro coins, see paragraph 21.17. 18 Recital (1) of the 2nd Euro-Regulation uses the term ‘balanced changeover’.

21.14

600 EURO AS LEGAL TENDER

V. Secondary EU-Legislation Relating to the Euro as ‘Legal Tender’ 21.15

Legal aspects of euro-denominated legal tender are subject to a number of legal instruments of the EU relating to monetary law, payment services, and consumer protection.

A. Currency Regulations 21.16

1. Monetary Regulations As mentioned above, euro-denominated banknotes issued by the ECB and the national central banks are the sole banknotes that have the status of legal tender in the participating Member States under Article 128 TFEU and under Article 10 of the 2nd Euro-Regulation— but no explanation is given on the practical consequences of these provisions.

21.17

Euro-denominated coins issued by the national central banks (within the European System of Central Banks) are the only coins which have status as legal tender in the participating Member States pursuant to Article 11 of the 2nd Euro-Regulation. However, mandatory acceptance of euro-denominated coins is limited under Article 11 of the 2nd Euro-Regulation to fifty coins.

21.18

Apart from these provisions, secondary legislation concerning the status of the euro as legal tender is scarce. European Parliament and Council Regulation (EU) 651/2012 of 4 July 2012 on the issuance of euro coins19 deals with certain aspects of coins denominated in euro and issued by the national central banks of participating Member States. Article 2(1) of Regulation (EU) 651/2012 states that national central banks may issue ‘circulation coins’ as defined in Article 1(1) and (2) as well as ‘collector coins’ within the meaning of Articles 1(3) and 5. Circulation coins, which include ‘commemorative coins’ (see Articles 1(2) and 4), are to be issued at face value and serve as ordinary means of payment in all Member States and are therefore ascribed the status of legal tender. In contrast, collector coins may be issued above their nominal value and have the status of legal tender only in the Member State of their issuance under Article 5(1).

21.19

All of the aforementioned legislative acts limit themselves to ascribing the status of legal tender to certain physical emanations of the single currency, but do not hint at the consequences of such status. The same is true with regard to the existing regulations on the issuance of Euro-banknotes (which are in addition limited to fixing the physical and technical characteristics of the banknotes).

21.20

In fact, there are no provisions at all in primary or secondary EU-law providing for a definition of the term ‘legal tender’ in general. This finding is not questioned by the fact that the ECB has stated in its decision dated 6 December 2001 on the issue of euro banknotes, that these banknotes ‘are expressions of the same and single currency, and subject to a single legal regime’.20 The legal effects of this recital are limited. First, a mere recital to an act of 19 European Parliament and Council Regulation (EU) 651/2012 of 4 July 2012 on the issuance of euro coins [2012] OJ L201/135. 20 Recital (2) of ECB Decision of 6 December 2001 on the issue of euro banknotes (ECB/2001/15) [2001] OJ L337/52.

SECONDARY EU-LEGISLATION RELATING TO THE EURO 601 EU-secondary legislation is not binding but only serves to explain the intentions of the legislator. Second and more important, the ECB-decision only deals with certain (very significant) monetary and balance sheet-aspects of the issuance of euro-banknotes, such as the issue of the notes by the ECB and the NCBs (Article 2), the handling and withdrawal of EU-banknotes by the NCBs (Article 3) and the allocation of obligations resulting from the issuance of Euro-banknotes within the Euro-system (Article 4). In contrast, the decision does not cover the role of EU-banknotes as legal tender with regard to payment obligations under public, penal or private law.

2. ELTEG working group and Commission’s 2010 Recommendation on the scope and effects of legal tender The lack of binding secondary legislation lead the Commission to address a ‘Recommendation on the scope and effects of legal tender of euro banknotes and coins’ to all euro area Member States, the ECB and to European and national trade and consumer associations in 2010.21 Pursuant to Article 1 of the recommendation, the legal tender of euro banknotes and coins ‘should’ (not ‘shall’) imply the following:

21.21

(a) Mandatory acceptance—The creditor of a payment obligation cannot refuse euro banknotes and coins unless the parties have agreed on other means of payment. (b) Acceptance at full face value—The monetary value of euro banknotes and coins is equal to the amount indicated on the banknotes and coins. (c) Power to discharge from payment obligations—A debtor can discharge himself from a payment obligation by tendering euro banknotes and coins to the creditor. This understanding reflects internationally accepted standards22—at the exception of the incomprehensible distinction between (a) and (c) of the Recommendation: Litera (a) and (c) both address an identical issue since it is not conceivable that a debtor may discharge his debt by payment in legal tender without the existence of a corresponding obligation of the creditor to accept such payment.

21.22

The Commission’s recommendation has been strongly influenced23 by the findings of the European Legal Tender Expert Group (ELTEG) regarding ‘the definition, scope and effects of legal tender of euro banknotes and coins’.24 The ELTEG group started its report by referring (under point 1) to the aforementioned Decision of the ECB dated 6 December 2001 according to whose Recital (3) euro banknotes were to be the expression of the same and single legal regime. Obviously, the group interpreted this recital as if referring to the euro as legal tender, ie to the legal consequences of legal tender in claims for payment under private and public law. This is highly debatable since the relevant ECB decision dealt with monetary and administrative (central bank) aspects of the euro only.25 Despite the intention of the group to reach a common understanding of the term ‘legal tender’, there was no unity among the Member States on the question of whether the EU has already defined the term

21.23

21 See Recital (3) of Commission Recommendation 2010/191/EU of 22 March 2010 on the scope and effects of legal tender of euro banknotes and coins [2010] OJ L83/70. 22 See Section II. 23 See Recital (4) of Recommendation 2010/191/EU. 24 See ELTEG, ‘Report on the on the definition, scope and effects of legal tender of euro banknotes and coins’ (n 6). 25 See paragraph 21.20.

602 EURO AS LEGAL TENDER legal tender in an autonomous manner. A majority of Member States considered the EU to be competent to rule on all issues relating to legal tender, but that it had not yet made use of such competence. A minority of Member States were of the opinion that certain aspects of the topic already had been dealt with by EU law but that a large amount of room for manoeuvre had been left available to the national legislature.26 21.24

21.25

21.26

The group then unanimously stated that the concept of legal tender should have the implications later mentioned in Article 1 of Commission’s Recommendation dated 22 March 2010. Only majority positions could be reached on a number of further issues relating to legal tender; the most important ones will be addressed hereinafter. The majority of the group agreed that at least in B2C-relationships the creditor (if it is a business) generally has to accept cash payments and may refuse legal tender offered by the consumer only on reasons related to the ‘good faith’ principle (see Section 2.1.2 of the ELTEG-Report). Also, a majority of countries does not allow for surcharges on cash payments in legal tender (either express or by measures of equivalent effect on all other available means of payment) (see Section 2.1.3 of the ELTEG-Report). As regards the possibility for the debtor to pay with ‘high denomination banknotes’, the majority opinion was that the creditor was ‘in principle’ supposed to accept such payments. A right of refusal was only to be acknowledged in light of the principle of ‘good faith’ and/or specific national rules (eg the obligation de faire l’appoint in French law pursuant to which the debtor of payment obligation has to pay the exact amount in legal tender and can thus not demand that the creditor accepts higher payments against the return of change).

3. Preliminary summary Currency regulations on the euro as legal tender are mostly limited to technical aspects, namely to questions regarding the competences of the ECB and the NCBs when issuing euro-denominated banknotes and coins and to the physical criteria to be met by legal tender. In contrast, secondary law does not define the fundamental implications of the single currency as a means of payment. These issues only are dealt with in the non-binding ‘recommendation’ of the Commission from 2010 which itself is based on the merely declaratory findings of an inter-institutional working group including national and European experts. An exception is made by Article 11 of the 2nd Euro-Regulation with regard to the right of the creditor to refuse acceptance of more than fifty euro-denominated coins. The implications of this rule are unclear, in particular with regard to the pivotal question whether Article 11 of the 2nd Euro-Regulation is an explicit exception to the implied general rule that a creditor has to accept euro-denominated legal tender (banknotes and coins). Alternatively, Article 11 of the 2nd Euro-Regulation could be read as a stand-alone rule limiting any possible national rules under which acceptance of more than fifty coins having status of legal tender is mandatory. Neither the recitals of the 2nd Euro-Regulation nor the comments of the Commission on its proposal27 give any insights on the issue. The wording 26 See ELTEG, ‘Report on the on the definition, scope and effects of legal tender of euro banknotes and coins’ (n 6) 2. 27 Commission, ‘Proposal for a Council Regulation on the introduction of the euro’ COM (1996) 499 final, 29.

SECONDARY EU-LEGISLATION RELATING TO THE EURO 603 of Article 11 of the 2nd Euro-Regulation is not very helpful either: Pursuant to Article 11 the Member States may specifically designate persons who have to accept more than fifty euro-denominated coins. Whether this rule was introduced in order to allow for the Member States to legislate on the issue (see Articles 2(1) and 3(1)(c) TFEU) or whether it shall limit a pre-existing competence of the Member States cannot be determined by applying the standard means of interpretation of secondary law.

B. Regulations on (Electronic) Payments As part of the initiative to create a single financial market, the EU has massively harmonized the law on electronic payments, leading to the emergence of a ‘Single European Payment Area’ (SEPA). The relevant legislation serves to create a level playing field not only with regard to supervisory issues, ie the authorization and prudential supervision of payment service providers and their payments services, but also with regard to the private law aspects of electronic payments. The applicable rules have a potential effect on the understanding of legal tender insofar as it tends to lessen the practical importance of payments in cash.

21.27

1. Payment Services Directives 2007 and 2015 The core legislation of the EU on payment services is contained in Directive 2015/2366/EU 21.28 on payment services in the internal market (PSD2)28 which has replaced Directive 2007/64/ EC on payment services in the internal market (PSD1).29 The core rules of PSD2 are supplemented by in a number of regulations on technical aspects of cross-border payments.30 PSD2 contains a comprehensive supervisory regime for payment service providers as well as a detailed harmonization of the private law of electronic payments. PSD2 applies to electronic payments within the Union (Article 2(1) PSD2) and made (or to be made) in the currency of any Member State (Article 2(2) PSD2), ie including electronic payments in euro inside the euro area. Given its purpose and nature, PSD2 exempts from its scope of application payments in legal tender (see Article 3(a) PSD2) and other services relating to ‘cash’ (see Article 3(b)–(f) PSD2). PSD2 only covers the legal relationship between (i) payment service providers (banks) and their customers; as well as (ii) between the payment service providers (banks) involved in a payment. In contrast, PSD2 does not—at least as a general rule—govern the legal relationship between the payee and payer, which has given rise to the payment. As an exception to the aforementioned limited scope of application of PSD2, Article 62(3) PSD2 states as follows: 28 European Parliament and Council Directive (EU) 2015/2366 of 25 November 2015 on payment services in the internal market amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) 1093/ 2010, and repealing Directive 2007/64/EC [2015] OJ L337/35. 29 European Parliament and Council Directive 2007/64/EC of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC [2007] OJ L319/1. 30 See European Parliament and Council Regulation (EC) 924/2009 of 16 September 2009 on cross-border payments in the Community [2009] OJ L266/11; European Parliament and Council Regulation (EU) 260/2012 of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) 924/2009 [2012] OJ L94/22.

21.29

604 EURO AS LEGAL TENDER The payment service provider shall not prevent the payee from requesting from the payer a charge, offering him a reduction or otherwise steering him towards the use of a given payment instrument. 21.30

This provision addresses the situation in which the creditor (the payee) honours the use of specific payment instruments by way of (i) granting the debtor (the payee) a reduction of the price; or (ii) demanding a (sur-)charge for the use of the discriminated means of payment. Although Article 62(3) PSD2 only regulates the contractual relationship between the payment service provider (bank) and its customers, it presupposes that in the relationship between creditor (payee) and debtor (payor) a discrimination of certain means of payment is permissible. The ELTEG-group31 discussed whether the provision also allows for the discrimination of payments in legal tender in favour of electronic payments. The negative answer can be derived from the fact that Article 62(3) PSD2 refers to charges demanded or reductions granted for the use of ‘a given payment instrument’. This term is defined by Article 4(14) PSD2and only relates to specific means of electronic payments, ie it does not encompass legal tender.

21.31

Under Article 62(4) PSD2: a payee shall not request charges for the use of payment instruments for which interchange fees are regulated under Chapter II of Regulation (EU) 2015/751 and for those payment services to which Regulation (EU) 260/2012 applies.

21.32

21.33

By virtue of this provision, creditor and debtor may not validly agree that the debtor is to pay a surcharge for being able to discharge his debt by credit transfer or direct debit (scope of application of Regulation (EU) 260/2012) or by making use of certain debit cards (regardless of the currency) (scope of application of Regulation (EU) 2015/751). This is to ensure that the ‘internal market functions effectively’ and ‘to promote and facilitate the use of electronic payments to the benefit of merchants and consumers’.32 Article 62(4) PSD2 economically aligns electronic payments in euro and made within the Single European Payment Area to payments in legal tender with regard to the costs associated with the means of payment—all forms of payments are to be without additional cost for the payer. As is the case with regard to Article 62(3) PSD2, Article 62(4) PSD2 does not address the question whether payments in legal tender may be validly discriminated against or even excluded on a contractual basis or by statutory law.

2. E-Money-Directives 2000 and 2009 By means of the E-Money-Directive (EMD2),33 which has replaced the original E-Money- Directive (EMD1),34 the EU has installed a common supervisory mechanism with regard 31 See ELTEG, ‘Report on the on the definition, scope and effects of legal tender of euro banknotes and coins’ (n 6) 7. The discussions of the ELTEG Working Group referred to Article 52(3) PSD1 whose wording is identical to that of Article 62(3) PSD2. 32 See Recital (9) of Regulation 2015/751 and Recital (66) of PSD2. 33 European Parliament and Council Directive 2009/110/EC of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC [2009] OJ L267/7 (EMD2). 34 European Parliament and Council Directive 2000/46/EC of 18 September 2000 on the taking up, pursuit of and prudential supervision of the business of electronic money institutions [2000] OJ L275/39 (EMD1).

SECONDARY EU-LEGISLATION RELATING TO THE EURO 605 to institutions issuing ‘electronic money’, ie to electronic units of payments as defined by Article 2 No 2 EMD2. Recital (7) EMD2 hints at the relationship between E-Money and legal tender by stating that the definition of ‘E-Money’ should cover all situations where the payment service provider issues a pre-paid stored value in exchange for funds, ‘which can be used for payment purposes because it is accepted by third persons as a payment’.

21.34

A debtor may thus only discharge his obligation by payment of E-Money if the creditor has agreed to this method of payment. This leaves open to discussion which form of payment is owed in cases in which no agreement on the method of payment has been reached. The same applies to the question whether payments in legal tender have to be accepted by the creditor even in case a payment in E-Money has been agreed upon by the parties.

21.35

Any other private law aspects of payments in E-Money are governed by the Payment 21.36 Services Directive (PSD2).35 Therefore, Article 62(3) also is applicable to payments in E-Money, whereas Article 62(4) PSD2 does not apply because the SEPA-regulations mentioned in Article 62(4) only govern credit transfers, direct debits and electronic card- payments but not E-Money.

3. Preliminary Summary Secondary legislation on electronic payment services neither deals with payments made or to be made in legal tender nor does it regulate whether a debtor under a payment claim is allowed to discharge his obligation by transferring legal tender to the creditor. Furthermore, applicable legislation does not provide for a clear picture on the relationship between payments in legal tender and electronic payments: With regard to E-Money Directive EMD2 clearly indicates that E-Money may only replace a payment in legal tender if the debtor and the creditor have contractually agreed on the use of E-Money. By contrast, the pricing rule contained in Article 62(4) PSD2 demonstrates that the EU legislator favours electronic payments by forbidding any surcharges on the payer for electronic SEPA-payment.

21.37

C. EU-private law other than on payment services EU-secondary legislation on private law, in particular on consumer law, has to address payment claims and one is thus tempted to assume that applicable legislation allows for a deeper understanding of the private law effects of the concept of the euro as legal tender. However, this is not the case.

35 Pursuant to its Article 1(1) and Article 2(1), PSD2 is applicable to ‘payment services’ which Article 4 no (3) PSD2 defines as the services mentioned in Annex 1 to PSD2. According to no 3 of the Annex 1 as well as to Article 2(2) PSD2, the term ‘payment services’ encompasses the administration of ‘payment transactions’ as per Article 4 no (5) PSD2, ie the act of placing, transferring or withdrawing ‘funds’ as defined by Article 4 no (25) PSD2. Under the latter definition, ‘funds’ comprise ‘banknotes and coins, scriptural money or electronic money as defined in point (2) of Article 2 of Directive 2009/110/EC’. See also Recital (25) PSD2.

21.38

606 EURO AS LEGAL TENDER 21.39

1. Directive 2011/83/EU on Consumer Rights Directive 2011/83/EU on consumer rights (Consumer Rights Directive)36 regulates a number of specific rights and obligations of consumers and ‘traders’ under B2C-contracts. With regard to payments to be made under a contract falling within the scope of application of the Consumer Rights Directive, Article 19 of that directive complements Article 62(3) PSD237 by stating the following: Member States shall prohibit traders from charging consumers, in respect of the use of a given means of payment, fees that exceed the cost borne by the trader for the use of such means.

21.40

According to Recital (54) to the Consumer Rights Directive this rule is to protect consumers against additional costs associated with specific means of non-cash-payments. Beyond this limited reasoning, Recital (54) indicates that the legislator wished ‘to encourage competition and promote the use of efficient payment instruments’. This formulation hints at the intention of the EU-legislator to make electronic payments more popular in B2C-transactions. Nevertheless, it does not exclude that by virtue of monetary law a consumer may at all times discharge his debt by payment in legal tender without any additional charges.

21.41

The Consumer Rights Directive also regulates distance contracts between traders and consumers relating to the sale of goods and to services, with the exception of financial services.38 For distance contracts, in particular for cross-border-contracts, the principle of mandatory acceptance of legal tender (cash) by the creditor (the possibility of the debtor to discharge the obligation by payment in legal tender) is often highly impractical and/or economically unfeasible even if one takes into consideration the possibility of collection at delivery. Distance contracts for this reason usually only allow the buyer electronic payments via the banking system. The validity of such contractual agreements requires the principle of mandatory acceptance of legal tender (cash) to be subject to party autonomy even in B2C-relationships. However, neither the Consumer Rights Directive nor the Directive on the distance marketing of consumer financial services address this issue, although both directives have been enacted after the introduction of the euro as single currency. The reasons for this silence remain unknown but it is safe to assume that the EU legislator was not of the opinion that such contractual agreements pose a relevant problem under national private or European monetary law.

21.42

2. Commission’s 2011 proposal for a Regulation on a Common European Sales Law Article 124ff of the Commission’s proposal for a Regulation on a Common European Sales Law (CESL) from 201139 was to govern the payment obligations of the buyer under a sales 36 European Parliament and Council Directive 2011/83/EU of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council [2011] OJ L304/64. 37 Insofar as Article 63(3) PSD2 is applicable, it provides for more protection of the payer. Article 63(3) PSD2 is to be considered a lex specialis towards Article 19 Consumer Rights Directive with regard to electronic SEPA-payments. 38 See Article 3(3)(d) Consumer Rights Directive. Insofar European Parliament and Council Directive 2002/ 65/EC of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC [2002] OJ L271/16 is applicable. 39 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law’ COM (2011) 635 final.

SECONDARY EU-LEGISLATION RELATING TO THE EURO 607 contract falling within the scope of application of the CESL. Although the Commission has practically abandoned to further pursue the legislative procedure regarding CESL,40 the proposal’s rules on payment obligations at least give an indication as to how the Commission views certain aspects of the topic. This indication is by its nature limited to payment obligations which would have arisen out of sales contracts falling within the scope of application of the proposed CESL. The proposed rules therefore would have only applied to cross-border sales agreements concluded between traders or between traders and consumers when the trader was to be the seller41 and which were to be governed by CESL due to a valid choice of the instrument by the parties.42 Under these premises, Article 124(1) of the CESL-proposal stated that:

21.43

payment shall be made by the means of payment indicated by the contract terms or, if there is no such indication, by any means used in the ordinary course of business at the place of payment taking into account the nature of the transaction.

This rule is based on two assumptions: First, the parties may validly choose any means of 21.44 payment even if this is to exclude payment in legal tender. Second, the default rule contained in Article 124(1) CESL does not favour payment in legal tender over other forms of payment but leaves the determination of the allowed means of payment to market standards and good faith. Arguably, both rules can be explained by the nature of contracts which were to fall into the scope of application of the proposal: The CESL was to cover cross- border contracts which usually are distance contracts and often have to take into consideration different currency regimes. Cash payments, even in Euro, are extremely rare under these conditions.

3. Preliminary Summary Current EU-legislation on private law does not address payments in legal tender but only 21.45 payments by other means. Insofar, the Consumer Rights Directive protects consumers against the contractual obligation to pay any surcharge for the use of a given means of (electronic) payment. However, this rule will only rarely apply because of the wider-reaching protection already granted under Article 62(4) PSD2, which requires that electronic SEPA- payments are to be free of any charge for any payer. By contrast, the obsolete proposal for a CESL had intended to treat payments in legal tender and other forms of payment equally, the mode of payment to be exclusively decided on by the contracting parties and, lacking an explicit or implicit agreement, to be determined according to market standards.

D. Money Laundering Directives and National Restriction of Cash Payments exceeding certain Thresholds In its effort to fight money laundering the EU has enacted a number of directives, the latest relevant instrument being the fourth Anti-Money Laundering Directive 2015/849/EU 40 See Annex II (List of withdrawals or modifications of pending proposals) of Commission, ‘Commission Work Programme 2015—A New Start (Communication)’ COM (2014) 910 final, 60. 41 See Article 4 of the draft Regulation. 42 See Article 3 of the draft Regulation.

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608 EURO AS LEGAL TENDER (‘AMLD4’).43 Recital (6) of MLD4 declares that large cash payments—regardless of the currency used—are ‘highly vulnerable to money laundering and terrorist financing’. Despite this danger, the Directive itself does not prohibit cash payments exceeding certain thresholds. Article 11 AMLD4 only demands that ‘obliged entities’ must apply ‘customer due diligence measures’ to certain payment transactions exceeding defined thresholds. This namely includes the case that a buyer pays in cash to a ‘trader’ a price amounting to 10,000 euro or more under Article 11(c) AMLD4. This does not imply that the EU legislator did not at least consider the possibility of banning payments in legal tender. This task is referred to the Members States by Recital (6) AMLD4 which reads as follows: Member States should be able to adopt lower thresholds, additional general limitations to the use of cash and further stricter provisions. 21.47

Although the recital has no legislative authority it clearly indicates that the EU-legislator is of the opinion that the Member States may restrict the use of cash—including euro-denominated legal tender—for payment operations. An explicit delegation of competences to the Member States can be found in Article 5 AMLD4, which allows the Member States to adopt or retain in force stricter provisions on money laundering and terrorism financing ‘within the limits of Union Law’.

21.48

Recital (6) MLD4 goes back to Recital (18) of the third Anti-Money Laundering Directive 2005/60/EC (‘AMLD3’),44 which had the following wording: In view of the different situations in the various Member States, Member States may decide to adopt stricter provisions in order to properly address the risk involved with large cash payments.45

21.49

Recital (18) AMLD3 had no precedent in the first Anti-Money Laundering Directive 91/ 308/EC (‘AMLD1’)46 and in the second Anti-Money Laundering Directive 2001/97/EC (‘AMLD2’).47 Recital (18) AMLD3 also was not contained in the Commission’s proposal for AMLD348 but proposed in the course of the legislative process by the European Parliament. The latter explained the proposed rule only by mentioning its desire to ‘insert a reference to the particular risk of money laundering involved in cash transactions’.49 Monetary implications of the proposed amendment as well as the questionable competence of the Member 43 European Parliament and Council Directive (EU) 2015/849 of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC [2015] OJ L141/73. 44 European Parliament and Council Directive 2005/60/EC of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing [2005] OJ L309/15. 45 As adopted by the European Parliament in the first reading on 26 May 2005, see [2005] OJ C117E/16. 46 Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering [1991] OJ L166/77. 47 European Parliament and Council Directive 2001/97/EC of 4 December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering [2001] OJ L344/ 76. 48 Commission, ‘Proposal for a Directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing’ COM (2004) 448 final. 49 See Committee on Civil Liberties, Justice and Home Affairs, ‘Report on the proposal for a directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing’ (A6-0137/2005, 3 May 2005) 11.

SECONDARY EU-LEGISLATION RELATING TO THE EURO 609 States on the subject matter were not discussed. This might be due to the fact that Recital (18) AMLD3 is formulated vaguely and does not (other than Recital (6) AMLD4) explicitly mention the possibility of limitations on cash payments. The legislative history of Recital (6) AMLD4, which explicitly addresses the possibility 21.50 that Member States restrict payments in legal tender, is even less helpful for the understanding of EU-monetary law. The provision is the consequence of a deliberate decision taken in the legislative procedure leading to the adoption of AMLD4. The Commission’s Impact Assessment dated 5 February 201350 accompanying the Commission’s proposal for AMLD451 explicitly listed existing national restrictions on cash payments52 and further mentioned that the divergent national rules had given rise to complaints. Despite these findings, the policy options mentioned in the Impact Assessment did not even consider to implement an EU-wide ban on certain cash-payment. In line with these preparatory works, the Commission’s proposal for AMLD4 did not contain any reference to the possibility of limitations of cash payments and Recital (6) of the proposal mirrored the wording of Recital (6) AMLD3.53 Although the final wording of Recital (6) AMLD4 starkly contrasts with this approach no explanation for this change has been given as it was the result of an inter- institutional compromise reached between Parliament, Commission, and Council.54

E. Miscellaneous Currency-Related Regulations Under Article 23 Regulation (EC) 1008/2008 of the European Parliament and of the Council of 24 September 2008 on common rules for the operation of air services in the Community,55 an air carrier offering his services to the general public shall indicate in his publications the final price of his services for all air services from an airport located in the territory of an EU Member State. The final price is to include the ‘air fare’ or ‘air rate’ (as defined in Art 2(18) and (19) of the Regulation, respectively), as well as all taxes, fees etc. foreseeable and unavoidable at the time of the publication. Under the definition of these terms, an ‘air fare’ and ‘air rate’ has to be expressed in euro or in a ‘local currency’. By its ‘Germanwings’-decision rendered on 15 November 2018, the European Court of Justice 50 Commission, ‘Impact Assessment—Accompanying the document “Proposal for a Directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing and Proposal for a Regulation of the European Parliament and of the Council on information accompanying transfers of funds” ’ SWD (2013) 21 final. 51 Commission, ‘Proposal for a Directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing’ COM (2013) 45 final. 52 See Table 5 of SWD (2013) 21 final, 25ff. 53 It reads as follows: ‘(6) The use of large cash payments is vulnerable to money laundering and terrorist financing. In order to increase vigilance and mitigate the risks posed by cash payments natural or legal persons trading in goods should be covered by this Directive to the extent that they make or receive cash payments of EUR 7 500 or more. Member States may decide to adopt stricter provisions including a lower threshold.’ 54 See Council, ‘Results of the 3368th session of the Council’ (ST 6085/15, 10 February 2015) 7. The final wording was first stipulated in the position adopted by the Council at first reading, see Position (EU) 9/2015 of the Council at first reading with a view to the adoption of a Directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC [2015] OJ C187/1. 55 European Parliament and Council Regulation (EC) 1008/2008 of 24 September 2008 on common rules for the operation of air services in the Community (Recast) [2008] OJ L293/3.

21.51

610 EURO AS LEGAL TENDER held that air carriers not expressing their fares or rates in euro are required to choose a local currency that is objectively linked to the service offered; the latter is the case in particular of the currency which is legal tender in the Member State in which the place of departure or arrival of the flight is located.56 21.52

The impact of the regulation and of the ECJ’S Germanwings ruling on the quality of the euro as legal tender are limited. Neither the Regulation nor the ECJ demand that the price for the relevant air service is to be effectively paid in euros, let alone in euro-denominated legal tender. The euro (or an eligible local currency) merely serve as means of comparison of prices offered by competing air carriers.57

F. Conclusions 21.53

Article 128 TFEU as well as the relevant monetary regulations on the introduction of the euro use the term ‘legal tender’, but do not define its content, which therefore remains uncertain. This uncertainty persists until this day because the EU has not yet made use of its exclusive legislative competence in monetary matters under Article 3(1)(c) TFEU to clarify the issue. Even more astoundingly, the Commission has issued a mere ‘recommendation’ on how the term legal tender ‘should’ be understood when reference is made to the physical emanations of the single European currency. There is only one single statutory provision of secondary EU-law relating to the principle of mandatory acceptance of the euro as legal tender with regard to euro-denominated coins (Article 11 of the 2nd Euro-Regulation). Unfortunately, it is impossible to ascertain whether this provision constitutes an exception to the implied general rule that euro-denominated legal tender is subject to the principle of mandatory acceptance or whether the provision is to be seen as a stand-alone rule.

21.54

Minimal indications on how the term ‘legal tender’ should be understood with regard to the (il)legality of restrictions on cash payments can be derived from Recital (6) of the Fourth Anti-Money-Laundering Directive (AMLD4). Through this provision the European legislator has made clear that according to his opinion even Member States of the euro area may maintain or introduce restrictions on cash payments in euro under national law in their fight against money laundering and the financing of terrorism. Any such national measure would be in blatant violation of the exclusive competence of the EU in monetary matters if the concept of the euro as legal tender was to be understood in such manner as to prohibit Member States the use of euro-denominated legal tender for payment purposes. However, the legislative provisions of AMLD4 do not completely reflect this understanding since the Member States may adopt stricter regulations under Article 5 AMLD4 only ‘within the limits of EU law’, which might also imply that no restrictions on cash payments may be adopted under national law at all.

21.55

The existing EU regulation on electronic payment services (including E-Money) as well as on consumer rights in B2C-transactions is even less clear. They undoubtedly show a strong tendency to make electronic SEPA-payments more attractive to market participants by 56 Case C-330/17 Verbraucherzentrale Badenwuerttemberg v Germanwings GmbH [2018] ECLI:EU:C:2018:916 (hereafter Germanwings). 57 See Germanwings (n 57) para 24ff.

SECONDARY EU-LEGISLATION RELATING TO THE EURO 611 assimilating their costs to those of payments in legal tender, ie by avoiding that the buyer has to pay a surcharge on payments not made in legal tender. The applicable provisions on payment services may not, however, be interpreted in the sense that they allow for a discrimination of legal tender with regard to the pricing of the payment instrument used. These findings apply mutatis mutandis also to consumer protection law. At least the E-Money-Directive (EMD2) makes sufficiently clear that payments in E-Money require the acceptance of such payment by the creditor. Whether EMD2 should be interpreted as implying that it must be possible for the debtor to discharge a payment obligation by transfer of legal tender (mandatory acceptance), or whether the transfer of legal tender is the standard method of payment remains unclear.

21.56

The only precise regulation on the private law implications of legal tender can be found in the proposal of the Commission on a Common European Sales Law. The proposal did not favour payments in legal tender but promoted the principle of party autonomy. If no agreement of the parties on the means of payment can be ascertained, the debtor was be allowed to discharge his obligation by such ‘means of payment used in the ordinary course of business at the place of payment taking into account the nature of the transaction’. After the Commission has abandoned to pursue the legislative initiative on the CESL, the proposal merely serves as a means of determining the Commission’s political stance on the subject matter, but does not help interpreting existing primary or secondary legislation.

21.57

That being said, the question remains how the term legal tender as used by the TFEU and secondary monetary legislation is to be interpreted. According to general principles of European Union law, especially the primary law provision are to be interpreted in an autonomous manner.58 This does not, however, necessarily imply that the ECJ must develop a genuine European concept of the euro as legal tender.59 Such concept would inevitably be arbitrary to a very significant extent due to the lack of a clearly defined concept of ‘legal tender’ in European Union law. An autonomous interpretation of Article 128 TFEU might as well result in the finding that the term ‘legal tender’ is devoid of any common understanding on the EU level, and that Article 128 TFEU and the 2nd EuroRegulation refer to the pre-existing understanding found in each Member State of the euro area.

21.58

Such an interpretation of the designation of euro-denominated banknotes and coins issued by the ECB and the NCB’s as legal tender under an ‘open concept’ is not only in conformity with Recital (6) AMLD4. It also reflects the Commission’s official position on the matter, which it has published under the heading ‘Legal tender of the euro: Q&A on the new Commission recommendation’.60 The relevant passage (answer No 1) reads as follows:

21.59

Since the introduction of the Euro, the status of legal tender of euro banknotes and coins is a European matter. Even though, the Lisbon Treaty and the Regulations set basic principles, 58 See Franz C Mayer in Eberhard Grabitz, Meinhard Hilf and Martin Nettesheim (eds), Das Recht der Europäischen Union (62th edn, CH Beck 2017) Article 19 TEU, para 53; Bernhard W Wegener in Christian Calliess and Matthias Ruffert (eds), EUV/AEUV (5th edn, CH Beck 2016) Article 19 TEU, para 13. 59 See, in favour of such a position, Grundmann in Säcker and others (eds), Münchener Kommentar zum Bürgerlichen Gesetzbuch (n 5) §§ 244/245 BGB, para 48. 60 See Commission, ‘Legal tender of the euro: Q&A on the new Commission recommendation’ (MEMO/ 10/92, 22 March 2010) accessed 10 February 2020.

612 EURO AS LEGAL TENDER the concrete effects of the legal tender of euro banknotes and coins for citizens in their daily life may still differ across euro area Member States, depending on the pre-euro legal traditions. 21.60

Only very recently has a member of the governing council of the ECB subscribed to this understanding.61 This is also the position taken by a number of German courts, which had to decide on whether the concept of legal tender relating to the euro also encompasses the principle of mandatory acceptance. The question arose under German regulations on the payment of licence fees for public radio and TV, which—for administrative convenience—exclude cash payments by the debtors and only allows for electronic payments in the form of direct debits or credit transfers. In 2017, the Higher Administrative Court (Oberverwaltungsgericht) Münster upheld the national payment rules based on German law (Section 14(1) sentence 2 BundesbankG)—without any reference to EU-law at all.62 This is all the more surprising since Section 14(1) sentence 2 BundesbankG simply repeats the wording of Article 128 TFEU in a declaratory manner and therefore refers to the higher ranking EU legislation. By another decision in 2017, the Higher Regional Court (Oberlandesgericht) of Stuttgart at least considered the possibility of interpreting Article 128 TFEU in such way as to imply that the debtor was to be allowed cash payments in Euro.63 The court, however, stated that Article 128 TFEU was limited to defining which chattel was to have the status of legal tender but did not say anything about the relationship between cash payments and electronic payments. Another judgement on the subject matter was issued by the Higher Administrative Court of Hessen (VGH Kassel) in 2018.64 the court interpreted Article 128 TFEU as not forbidding the Member States to limit cash payments in euro-denominated legal tender for administrative reasons. Finally, the German Bundesverwaltungsgericht has asked the ECJ for a preliminary ruling on the issue in 2019.65

21.61

The aforementioned interpretation is not conclusive but only displays a common understanding of the EU institutions as well as of the Member States. However, an open concept of the euro as legal tender can easily be explained by the historic situation prevailing at the time of the introduction of the Euro. Before the introduction of the euro the national laws significantly diverged in their understanding of the implications of legal tender in private and monetary law. Despite these differences, the introduction of the euro was primarily discussed and thoroughly regulated with regard to the pivotal competential matters of the single currency only. In contrast, a harmonization of national private law (regarding mandatory acceptance of legal tender by the creditor, possible discriminations of legal tender by way of pricing etc.) or of national administrative law (particularly with regard to restrictions on cash payments) was not envisaged, let alone undertaken. Instead, Article 14 of the 2nd Euro-Regulation simply stated, that after the introduction of the Euro:

61 See Yves Mersch, ‘The role of euro banknotes as legal tender’ (4th Bargeldsymposium of the Deutsche Bundesbank, Frankfurt am Main, 14 February 2018) accessed 10 February 2020. 62 See OVG NRW, decision (Beschluss) dated 13.6.2017, case 2 A 1351/16, (2017) DÖV 873. 63 OLG Stuttgart, decision (Beschluss) dated 08.06.2017, case 19 VA 17/16, (2017) BeckRS 115030, para 10ff. 64 VGH Kassel, judgement (Urteil) dated 13.02.2018, case 10 A 2929/16, [2018] DÖV 491. 65 Bundesverwaltungsgericht, decision (Beschluss) dated 27.03.2019, case 6 C 6.18, (2019) 30 EuZW 604.

Use of the Euro Outside the Euro Area 613 [w]‌here in legal instruments existing at the end of the transitional period reference is made to the national currency units, these references shall be read as references to the euro unit according to the respective conversion rates.

This passage clearly shows that the euro was to merely replace the former national currency units and national legal tender of the Member States. The latter thus did not intend to abandon their national law insofar as it governed (and continuous to govern) the effects of legal tender in private and administrative law66—probably simply because they did not consider the existing differences to be material enough to require legislative action.

21.62

Consequentially, Article 128 TFEU ought to be read as enshrining an ‘open concept’ of the euro as legal tender, ie as limiting itself to substituting the former national currencies having status as legal tender under national law by the euro and by defining the exclusive competence of the Union to issue legal tender. Euro-denominated legal tender, although physical expression of one single currency, may therefore have a different status as means of payment in different Member States of the euro area.

21.63

VI. Use of the Euro Outside the Euro Area As a currency may only be ascribed the status of legal tender by a state (or union of states) for its own territory, the euro is genuine legal tender in the Member States of the euro area only. By virtue of monetary agreements entered into between the EU and Andorra,67 Monaco,68 San Marino,69 and Vatican City,70 the euro has status of legal tender also in these states. The Monetary Agreement dated 12 July 2011 between the European Union and the French Republic on keeping the euro in Saint-Barthélmy following the amendment of its status with regard to the European Union71 has not yet entered into force.

21.64

Whether the euro may be used for payment or speculation purposes outside the euro area depends on the applicable regulation of the relevant foreign State. For example, Montenegro and the Kosovo have unilaterally decided to use the euro as legal tender, whereas other countries have linked their local currencies to the euro.72 From the EU perspective, countries in which the euro is de facto (by virtue of unilateral decisions) legal tender pose a certain danger to the euro since the EU has no means of influencing local monetary law and practice. This has, however, not lead to sanctions—to the contrary, it seems that the EU has

21.65

66 In this sense also Freimuth in Siekmann (ed), EWU (n 2) Article 128 TFEU, para 81. 67 Monetary Agreement between the European Union and the Principality of Andorra [2011] OJ C369/1. 68 Monetary Agreement between the Government of the French Republic, on behalf of the European Community, and the Government of His Serene Highness the Prince of Monaco [2002] OJ L142/59. 69 Monetary Agreement between the Italian Republic, on behalf of the European Community, and the Republic of San Marino [2001] OJ C209/1. 70 Monetary Agreement between the Italian Republic, on behalf of the European Community, and the Vatican City State and, on its behalf, the Holy See [2001] OJ C299/1. 71 Council Decision 2011/433/EU of 12 July 2011 on the signing and conclusion of the Monetary Agreement between the European Union and the French Republic on keeping the euro in Saint-Barthélemy following the amendment of its status with regard to the European Union Monetary Agreement between the European Union and the French Republic on keeping the euro in Saint-Barthélemy following the amendment of its status with regard to the European Union [2011] OJ L189/1. 72 For details, see Commission, ‘The euro outside the euro area’ accessed 10 February  2020.

614 EURO AS LEGAL TENDER accepted the use of the euro in the named countries. The members of the ESCB may even issue additional legal tender for use outside the euro area. 21.66

Under Regulation (EC) 1889/2005 on controls of cash entering or leaving the Community,73 any natural person entering or leaving the EU and carrying cash of a value of 10,000 euro or more must declare that sum to the competent authorities. This provision does not restrict the use of euro outside the EU but only complements the activities of the EU on anti-money laundering and financing of terrorism.

73 European Parliament and Council Regulation (EC) 1889/2005 of 26 October 2005 on controls of cash entering or leaving the Community [2005] OJ L309/9.

22

MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) Klaus Tuori

I. Introduction II. Monetary Policy Objectives and Strategy

22.1 22.3

A. The objective of common monetary policy—price stability B. Monetary policy strategy

22.7 22.18

III. Monetary Policy Transmission Mechanism IV. Operational Framework

A. General principles of the operational framework B. Minimum reserves C. Open market operations and standing facilities D. Collateral policy and practices E. Payment Systems as part of monetary policy framework F. Communication as part of monetary policy

V. New and Unconventional Monetary Policy During the Crisis A. Eurosystem measures during the financial crisis B. Eurosystem measures during the sovereign debt crisis

VI. The Securities Market Programme (SMP) A. The aims of the programme

22.25 22.30 22.30 22.36 22.40 22.53 22.65 22.71 22.76 22.77 22.108 22.117 22.123

B. Constitutional remarks on the SMP

22.140

VII. The Outright Monetary Transactions Programme (OMT) 22.148 A. Events leading to the introduction of the OMT—fears move to Spain and Italy B. The specifics of the OMT programme C. Economic analysis of the OMT programme D. Constitutional issues

22.149 22.153 22.156 22.170

VIII. Public Sector Purchase Programme (PSPP)—the Eurosystem’s Quantitative Easing 22.179 A. The key features and legal basis of the PSPP B. The economics of the PSPP C. Constitutional issues

22.182 22.192 22.206

IX. The Constitutional Elements of Monetary Policy After the Crisis

22.214

A. The redefined content of monetary policy B. Or stepping in the area of Member State economic policy competence? C. Prohibition of central bank financing (and non-bail out) D. Central bank independence E. Conformity with the market mechanism F. Other issues—the discretion allowed and the principle of democracy

22.215 22.229 22.235 22.240 22.248 22.250

I. Introduction Monetary policy became the exclusive competence of the Community in the Maastricht Treaty, but the Treaty was not very explicit on what this exclusive monetary policy competence included. The Treaty provisions on monetary policy did rely on some general idea of what monetary policy consisted of and what it did not. However, instead of trying to assess what this ‘consensus’ view on monetary policy was in the early 1990s,1 it is more convenient 1 As done in Klaus Tuori, The Eurosystem and the European economic constitution (Helsingin yliopisto 2017) (hereafter Tuori, The Eurosystem and the European economic constitution). Klaus Tuori, 22 Monetary Policy (Objectives and Instruments) In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0027

22.1

616 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) to look directly at the key concepts related to monetary policy and how they were manifested in the setting-up and actual conduct of monetary policy by the Eurosystem. In this regard, three different but interlinked concepts need to be clarified: the monetary policy strategy, the monetary policy transmission mechanism, and the operational framework. Monetary policy strategy describes the way the Eurosystem sees its role in the economy and how it achieves the objectives it has been assigned. The monetary policy transmission mechanism is embedded in the monetary policy strategy. It seeks to explain how the central bank policy decision are transmitted to the economy and how they help to fulfil central bank’s objectives, particularly price stability. The operational framework facilitates this transmission by setting up the framework through which the Eurosystem interacts with financial markets and ultimately the economy at large. 22.2

The economic reality with the various interlinked crises since 2007 put the original framework to an enormous test. In the latter part of this chapter, the various policy responses to unforeseen events are described and assessed separately, as it is not yet clear how permanent these new features in monetary policy are. Each measure is explained and assessed and the constitutional issues involved are presented. Finally, the chapter ends with some constitutional conclusions that are drawn from the overall changes in the euro area central banking system.

II. Monetary Policy Objectives and Strategy 22.3

Monetary policy strategy refers to the central bank’s thinking on how its own measures contribute to its intermediate targets and final objectives. It thus describes the way the economy functions according to the central bank and how the central bank contributes to this functioning. Internally, these considerations have informed central banking over the years, but publicly announced strategies for central banks are a relatively recent feature that relates to the idea that central banks need to engage the public in their policy also by providing understanding of the economy and the role of central banks in it.2 Monetary policy strategies include the final objectives but also the intermediate targets of the central banks. In practice, the final objectives have been assigned in the legislation, imposed by the government or defined by the central bank itself as part of its monetary policy strategy. The latter was the case with the Eurosystem.

22.4

One of the first tasks of the freshly founded European Central Bank (ECB) was to decide upon and communicate its monetary policy strategy. The initial Eurosystem strategy was published in October 1998 under the name A stability-oriented monetary policy strategy for the ESCB. In practical terms, the Eurosystem monetary policy strategy contained the general principles of conducting monetary policy including the intellectual framework for making decisions on the official interest rates. The strategy had three main elements: a quantitative definition of the primary objective of the monetary policy, price stability; a prominent role for money with a reference value for the 2 The first announced strategies are often related to the collapse of the Bretton Woods system in the early 1970s and particularly the German Bundesbank.

Monetary Policy Objectives and Strategy 617 growth of a monetary aggregate (M3); and a broadly-based assessment of the outlook for future price developments.3 The starting point for the Eurosystem monetary policy strategy was that as the monopoly issuer of central bank money the Eurosystem can affect the conditions in money markets and in the economy more generally. The strategy largely followed the 1990s economics consensus on central banking that included two critical economic issues. Firstly, inflation was fundamentally perceived as a monetary phenomenon. After an adjustment period, monetary policy only affects the price level, not the real economy. Secondly, central banks were assumed to have appropriate tools to influence the price level, their ultimate objective.4 Hence, for the Eurosystem monetary policy strategy, the key underlying assumption was the longer-term neutrality of money with a preference for price stability. The strategy insisted that longer-term income and employment levels resulted mainly from structural features of the economy, not from issues that monetary policy could influence. The analysis of the European Central Bank (ECB) argued for the price stability objective on economic and social grounds underlying its legal position as the primary objective. The benefits of price stability stem from a number of sources which improve the efficiency of the economy (including transparency of relative prices and lower inflation risk premia) and help the economy to reach its full potential. Furthermore, surprise inflation was seen to cause arbitrary redistribution of wealth and income that can have even devastating social consequences.5

22.5

The Eurosystem made a considerable effort to explain and communicate its monetary policy strategy as well as the uncertainties surrounding it.6 This reflected the understanding of the experimental nature of the euro and the resulting potential for major structural discontinuities arising from the change in the monetary system.7 The Economic Monetary Union (EMU) monetary policy started off as a discovery process. The Eurosystem tried to educate people and financial markets about the new realities that it was also trying to master with the information that was becoming available. To this end, a combination of communication approaches was employed. The starting point was the Governing Council decision on strategy and its publication. Members of the Executive Board actively held speeches to enlighten the public. The ECB published a book summarizing the accumulated knowledge of the preparatory period and the first years of the euro.8 In addition, many ECB staff members

22.6

3 ECB, ‘A stability-oriented monetary policy strategy for the ESCB’ (Press Release, 13 October 1998) accessed 5 February 2020 (hereafter ECB, ‘A stability-oriented monetary policy strategy for the ESCB’). 4 A large number of authors have documented this development. See for example, Martin Feldstein, The Costs and Benefits of Price Stability (University of Chicago Press 1999); Alex Cukierman, Central Bank Strategy, Credibility, and Independence (MIT Press 1992); Frederic S Mishkin, ‘Monetary Policy Strategy: How did we get here?’ (2006) NBER Working Paper 12515. 5 ECB, The Monetary Policy of the ECB (ECB 2004) 41–43 (hereafter ECB, The Monetary Policy of the ECB). 6 See Jakob de Haan, Fabian Amtenbrink, and Sandra Waller, ‘The Transparency and Credibility of the European Central Bank’ (2004) 42 Journal of Common Market Studies 775–94. 7 Vitor Gaspar, ‘The Conduct of Monetary Policy under Uncertainty’ (2003) Economic Policy Symposium— Jackson Hole 249; Otmar Issing and others, Imperfect Knowledge and Monetary Policy (CUP 2006) (hereafter Issing and others, Imperfect Knowledge and Monetary Policy). 8 ECB, The Monetary Policy of the ECB (n 5) (first published in 2001 and a revised second edition published in 2004).

618 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) published scientific articles and books to convince people about their knowledge on the new economic setting and to engage the scientific community.9

A. The objective of common monetary policy—price stability 22.7

In the designing of the Eurosystem monetary policy strategy the objectives were particularly important. In the Treaty, the primary objective was labelled price stability without more specific attributes. The same vagueness could be seen in the task of supporting the general economic policies in the Union (Article 127(1) of the Treaty on the Functioning of the European Union (TFEU)). It was thus left open how the objectives of the Eurosystem should be defined, and what role they should play in the actual conduct of monetary policy. However, the Treaty was not unclear of the hierarchy of the objectives and tasks. Price stability was the overriding objective.

22.8

The Treaty gave prominence to the price stability objective without defining it. Hence, a key element of the Eurosystem monetary policy strategy was the quantitative definition of price stability. In the first strategy of 1998, the Governing Council defined price stability as a year-on-year increase in consumer prices (HICP) for the euro area of below 2 per cent.10 The main arguments for this selection were the adequate margin to avoid the risk of deflation, the possibility of measured inflation slightly overstating true inflation, and a sufficient margin to take into account inflation differentials in the euro area. The Eurosystem monetary policy strategy was revised in May 2003, and the price stability was defined as a rate below but close to 2 per cent. ‘This clarification underlines the ECB’s commitment to provide a sufficient safety margin to guard against the risks of deflation. It also addresses the issue of the possible presence of a measurement bias in the HICP and the implications of inflation differentials within the euro area.’11 It may be recalled that during the first four years of the EMU, the risks to price stability were mostly on the downside, which called for a further assurance that price stability was incompatible with deflation also.

22.9

There are a few important elements in the definition of the price stability objective. To begin with, it was the Eurosystem that took upon itself to define the price stability it was aiming at. The question was not explicitly addressed in the Treaty,12 and other approaches could have been selected. Price stability could have been left undefined in exact terms, or it could have been left to the ECOFIN Council to signal its preference for a definition of price stability. In inflation targeting regimes various models have been used, including ones where the inflation target is set by the Ministry of Finance or the government rather than left to the discretion of the central bank.13 The question was addressed in the ECB strategy explanations. 9 See, for example, Otmar Issing and others, Monetary Policy in the Euro Area: Strategy and Decision-Making at the European Central Bank (CUP 2001). Also, Issing and others, Imperfect Knowledge and Monetary Policy (n 7). 10 ECB, ‘A stability-oriented monetary policy strategy for the ESCB’ (n 3). 11 ECB, ‘The ECB’s monetary policy strategy’ (Press Release, 8 May 2003) accessed 5 February 2020 (hereafter ECB, ‘The ECB’s monetary policy strategy’). 12 See, for example, Paul de Grauwe, ‘The design of the European Central Bank’ (1998) CME Working Papers 1/ 1998, 10. 13 Most notably, the Bank of England had just shifted to a system where the inflation target was given by the Minister of Finance.

Monetary Policy Objectives and Strategy 619 The Governing Council clearly read the numeric inflation target as part of the defining and implementing of the common monetary policy (Article 127(2) TFEU). The position of the Eurosystem can be defended as no other body was assigned any role in defining price stability. Even the exchange-rate related tasks of the ECOFIN Council were conditioned on the price stability objective (Article 219 TFEU). Indeed, the independence of the Eurosystem as well as the lack of broader economic policy responsibilities could argue against giving the ECOFIN Council a role in defining the price stability, when this was not explicitly assigned to it in the Treaty in contrast to the provision on exchange rate arrangements (Article 219 TFEU). The decision to give a numerical definition for price stability can be debated, and any specific number for price stability could be subjected to criticism. Alternatively, price stability could have been described in a behavioural manner, referring to price changes that can hamper economic decisions by households and companies. The Eurosystem chose a numerical definition mostly on the grounds that it would help to anchor inflation expectations and enhance the accountability of the Eurosystem monetary policy.14 It was also understood that by selecting the same inflation rate as was the case with the German Bundesbank earlier,15 the Eurosystem hoped to inherit some of its credibility in maintaining price stability. A higher than the Bundesbank’s inflation target could have signalled a break from the Bundesbank’s stability-oriented monetary policy tradition.

22.10

The numerical inflation definition involved some further issues. The Eurosystem definition referred only to consumer prices, not to all prices. Hence, asset prices were excluded, reflecting the thinking that central banks are not well equipped to determine appropriate price levels for various assets. Asset prices and also financial stability concerns can still be taken into account in the conduct of monetary policy if they affected the outlook for price stability and economic activity.16 It was pointed out that the strategy made it possible to include asset market developments, particularly if they were driven by credit expansion.17

22.11

The numerical inflation rate was presented as a medium-term target, reflecting the fact 22.12 that monetary policy affects prices only with uncertain time lags. Trying to balance short- term changes in inflation could create unnecessary fluctuations in the real economy. The medium-term orientation also made it explicit that the Eurosystem would not, as a rule, react to temporary swings in inflation. Temporary consumer price changes stemming, for example, from oil prices should generally stay outside the Eurosystem’s reaction function.18 The case for medium-term orientation of the objectives can be convincingly made based on economic thinking, although the definition of medium-term is somewhat ambiguous. 14 See ECB, The Monetary Policy of the ECB (n 5) 50–52. 15 Although defined as the maximum tolerable rise in consumer prices. See Christina Gerberding, Franz Seitz, and Andreas Worms, ‘How the Bundesbank really conducted monetary policy’ (2005) 16 The North American Journal of Economics and Finance 277–92. 16 In central banking, this was sometimes referred to as the ‘Jackson Hole’ consensus. See, for example, Frank Smets, ‘Financial Stability and Monetary Policy: How Closely Interlinked?’ (2014) 10 International Journal of Central Banking 269. 17 Here a direct reference was made to the developments in Japan in the ECB background documents for the strategy revision. See Klaus Masuch and others, ‘The role of money in monetary policy making’ (2003) BIS Papers No 19, 158–91. 18 ECB, The Monetary Policy of the ECB (n 5) 53–55. See also Efrem Castelnuovo, Sergio Nicoletti-Altimari, and Diego Rodríguez-Palenzuela, ‘Definition of price stability, range and point inflation targets’ (2003) ECB Working Paper No 273, 43–90.

620 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) Sometimes it refers to a period over the economic cycle and some other times it simply excludes short-term or temporary issues. 22.13

A somewhat difficult issue stemmed from inflation differentials between euro area countries. The numerical definition of price stability for the euro area is the weighted average of the euro area consumer prices.19 It was explained that inflation differentials are normal features in monetary unions and even within one country. In the euro area, they were even assumed to be relatively large because of the catching-up effect that was to take place in the poorer euro area countries. It was assumed that the euro area countries with the lowest income levels would close the gap over the years and that their average inflation rates during that period could be higher. To the extent that this was a transitory phenomenon, it would not be a major problem. However, the Eurosystem policy could not react to these differentials even if they were not transitory. The Eurosystem monetary policy strategy made it explicit that Eurosystem objective was only the euro area average inflation rate.20 Non- transitory inflation differentials demanding policy actions were to be addressed at the national level with other than monetary policy tools. This was not without complications. The Treaty seems to require price stability everywhere in the euro area. High inflation in half of the Member States countries and a substantial deflation in the other half would hardly constitute a situation of price stability. At the same time, it is difficult to adjust monetary policy to local circumstances, and hence the only realistic option was the euro area-wide definition. The national differences could be taken into account in the communication as a means to put pressure on the national economic policy and social partners to take responsibility for national deviations. In this regard, the Eurosystem has been cautious and preferred to stay outside domestic economic policy discussions. However, also the national central banks (NCBs) have been reluctant to voice concerns even when the deviations were destabilizing such as the run-up to the Greek crisis or in a slightly milder form in the decline of Spanish or Portuguese competitiveness due to domestic price increases until 2009.

22.14

Turning to the actual numerical value chosen by the Eurosystem of a less than 2 per cent annual rate of harmonized consumer prices, the question could probably be reversed. Is the definition incompatible with price stability? The answer on the basis of economic and constitutional analyses is ‘no’. The definition is probably as good as a large variety of other price stability definitions. The price changes should mainly contain information about relative price changes. Households and companies should be able to make longer-term plans relying on the Eurosystem’s promise that overall price level will not change substantially.

22.15

The decision to select 2 per cent annual increase did not explicitly tackle the issue of changes versus levels in consumer prices. In other words, should the target inflation rate aim at balancing also past deviations from the average 2 per cent trend increase? It was mentioned that a strict price level objective could contain negative risks, suggesting that price stability could not be defined as constant prices. However, there was a hint in the direction of price levels, when President Draghi stated that if inflation was for a long time below 2 per cent, it could also be some time above 2 per cent.

19 See Gonzalo Camba-Mendez, ‘The definition of price stability: choosing a price measure’ in Otmar Issing (ed), Background Studies for the ECB’s Evaluation of its Monetary Policy Strategy (ECB 2003) 32–42. 20 ECB, The Monetary Policy of the ECB (n 5) 53–54.

Monetary Policy Objectives and Strategy 621 Start of Stage Three of EMU 4 3 2

1.72%

1 0 –1

2000

2005

2010

2015

Figure 22.1 Inflation in the euro area in annual percentage changes1 1 accessed 20 August 2019.

Source:

The actual conduct of monetary policy could indicate how the Eurosystem has reacted to changes in the inflation. Has price stability been primary objective for the Eurosystem in reality? The launch of the euro in 1999 took place in a very moderate inflation environment; the inflation rate was close to 1 per cent and many politicians voiced deflation fears.21 However, quite soon the inflation rate surpassed the target of below 2 per cent, initially through an increase in oil prices, but in 2001 also core inflation22 rose above the target (see Figure 22.1). Inflation rate remained somewhat above the target for most years until 2009, while the ECB main refinancing rate witnessed seemingly quite unrelated patterns of increase and decreases. These events could have multiple interpretations. Some could claim that the Eurosystem failed to achieve its own numerical target for price stability relatively constantly over the first decade of its existence. The counterargument could be that the stability of the euro area inflation rate confirmed that the Eurosystem was able to maintain inflation and inflation expectations at a low level. The fact that it did not react vigorously to small deviations from the target proved that the ECB followed its strategy of targeting medium-term inflation and that it also took other issues into consideration to the extent that inflation was deemed to be in line with price stability.

22.16

In conclusion, it could be claimed that there is very limited evidence that the Eurosystem would have disregarded price stability either in its monetary policy strategy or in its actual conduct of monetary policy. The open question relates to the divergent inflation paths that were disregarded by the Eurosystem monetary policy strategy and also by the actual conduct of monetary policy. It is possible that slow reactions to an inflation rate above 2 per cent were related to deflation fears in some euro area countries, which would indicate that the Eurosystem did not use only aggregate inflation rate but also weighted the risks of inflation and deflation at country levels as well.

22.17

21 Most notably, the German Minister of Finance Oscar Lafontaine put considerable pressure on the freshly founded ECB to lower the inflation rate amid fears about deflation in 1999. See, for example, Martin Dedman, The Origins and Development of the European Union 1945–2008 (2nd edn, Routledge 2009) 154. 22 Core inflation can be derived from overall consumer price inflation by excluding items that fluctuate due to some temporary factors such as food and energy.

622 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS)

B. Monetary policy strategy 22.18

In the monetary policy strategy, the numerical value for the price stability objective was complemented with an analytical framework for the conduct of monetary policy. In the euro area context, the explicit formulation of the analytical framework served a number of important purposes. For the Eurosystem itself, it was important to develop analytical tools to understand economic developments in the euro area. At the same time, the Eurosystem needed to convince euro area citizens and financial markets that it was capable of assessing the euro area economic developments correctly and also educate its stakeholders (people, social partners and financial markets) how to transform their perspective from the national level to the euro area level. In particular, the Eurosystem had to convince that it had sufficient tools to detect risks to price stability and the means to mitigate those risks.

22.19

The original October 1998 strategy introduced a so-called two-pillar approach, which referred to a thorough analysis of economic developments based on two analytical perspectives: economic analysis and monetary analysis. These formed the basis for the ECB Governing Council’s overall assessment of risks to price stability and its monetary policy decisions. Thus, the Eurosystem adopted some elements of the monetarist approach similar to the approach used by the Bundesbank previously, giving a major role for monetary analysis in the form of a reference value for the growth rate of the broad monetary aggregate (M3).23 The strategy hence linked the inflation objective with the growth rate of money. It was not a target as such but a reference value that could inform about the risks for longer- term price stability.24 The reference value for a broad monetary aggregate represented the rate of growth of monetary aggregates that over the medium-term would be compatible with price stability, but it was not a straightforward trigger for monetary policy actions.25 The first reference value was set at 4.5 per cent annual growth in M3, which was reached by summing up a trend real GDP growth 2–2.5 per cent, inflation below 2 per cent and a change in velocity of money by 0.5–1.0 per cent.26

22.20

In practice, the monetary pillar of the strategy gained less importance. The general public was not accustomed to monetary analysis except perhaps in Germany. In addition, the central banking consensus had become more critical towards using monetary aggregates due to their perceived instability. Consequently, the role of money was downplayed in the strategy update in 2003 (see Figure 22.2). It continued to be part of the analysis and communication but with a diminished role: ‘[T]‌he monetary analysis mainly serves as a means of cross- checking, from a medium to long-term perspective, the short to medium-term indications

23 Monetary aggregates refer to liabilities of the money creating institutions, mainly banks. M3 is the broadest monetary aggregate that includes, inter alia, currency in circulation, overnight deposits, deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months and specific marketable liabilities of these institutions. Basically, M3 should include all the euro items that people consider as money. 24 The Bundesbank model both maintained a link to monetary aggregates but also saw them in a pragmatic way. See Richard Clarida and Mark Gertler, ‘How the Bundesbank Conducts Monetary Policy’ in Christina D Romer and David H Romer (eds), Reducing Inflation: Motivation and Strategy (University of Chicago Press 1997) 364–65. 25 ECB, The Monetary Policy of the ECB (n 5) 62–65. The simple form for the reference value was the sum of expected real GDP growth inflation minus the increase in the velocity of money. 26 ECB, ‘The quantitative reference value for monetary growth’ (Press Release, 1 December 1998) accessed 5 February  2020.

Monetary Policy Objectives and Strategy 623 PRIMARY OBJECTIVE OF PRICE STABILITY

Governing Council takes monetary policy decisions based on an overall assessment of the risks to price stability MONETARY ANALYSIS

ECONOMIC ANALYSIS Analysis of economic dynamics and shocks

cross-checking

Analysis of monetary trends

FULL SET OF INFORMATION

Figure 22.2 The Eurosystem monetary policy strategy1 1 See accessed 20 August 2019.

coming from economic analysis.’27 Subsequently, annual reviews of the reference value were discontinued.28 Economic analysis is the most critical part of the analytical framework. With limited empirical information and large assumed structural breaks in the behaviour of the economic agents, the analysis of economic developments was very broad from the start. The focus was on the factors that could be useful in assessing the expected development of prices over the short-to medium-term. It was hoped that euro area economic analysis would become more accurate over the years and economic developments would become more predictable. The Eurosystem economic forecasts were initially only for internal use, but from June 2004 onwards they were published under the heading of Eurosystem staff macroeconomic projections for the euro area.29 In addition, the economic analyses contain assessments of financial markets, exchange rates, and other forecast and indicators.

22.21

The strategy as it stands is presented by the ECB in the form of a flow chart.

22.22

It can be concluded that the Eurosystem monetary policy strategy has seen many refinements early on, reflecting the experimental nature of the common currency and monetary policy. The basic approach of the Eurosystem was one of substantial transparency over the strategy and economic analysis behind its conduct of monetary policy. First and foremost, the Eurosystem tried to incorporate the media, financial sector analysts, and also academia into the discussions over the monetary policy strategy and monetary policy decision-making. Thus, communication was a major element of the strategy. Explaining monetary policy decisions to the public in a clear and transparent manner was seen to help the Eurosystem to carry out its mandate more effectively. This also related to transparency that was enhanced by providing the public with information on ECB strategy, assessments and policy decisions as well as on its procedures in an open, clear and timely

22.23

27

Paul de Grauwe, Economics of Monetary Union (OUP 2014) 192–93. ECB, ‘The ECB’s monetary policy strategy’ (n 11). 29 See accessed 5 February  2020. 28

624 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) manner. Transparency facilitates the effective conduct of monetary policy, because when the bases for monetary policy is understood and the Eurosystem is perceived as able and willing to fulfil its primary objective, inflation expectations became more firmly anchored. Public scrutiny of the conduct of monetary policy can also provide incentive for decision- making bodies to fulfil their mandates, helping the market participants to better anticipate monetary policy over the medium term, in turn, making monetary policy more effective.30 22.24

The impact of the new measures introduced and implemented to combat the crises on the Eurosystem monetary policy strategy is still unclear. The Eurosystem has not incorporated the measures to the broader monetary policy strategy framework, but rather has treated the measures separately, underlining their ad hoc nature. This approach is followed here as long as there is no indication that these new types of measures would have become normal features in the contemporary central banking and monetary policy. Naturally, in the separate assessments, the measures need to be seen also in the light of the objectives and analysis framework of the existing Eurosystem monetary policy strategy.

III. Monetary Policy Transmission Mechanism 22.25

Monetary policy transmission mechanism is a fundamental concept in central banking that describes the assumed process through which monetary policy decisions affect the economy and particularly prices. It is surrounded by great uncertainty with regard to the importance of the various elements and time lags involved, and these uncertainties have been particularly large in the case of the euro area.31 A sketch of a standard transmission mechanism is provided by the ECB. The top of the flow chart is the monetary policy action and the bottom is the objective of the action (see Figure 22.3).

22.26

The multiple routes through which monetary policy ultimately affects prices are called transmission channels. The starting point is a change in the official interest rates directly or through a change in the amount of funds provided to the banking sector. This is the Eurosystem monetary policy action that is based on its position as the monopoly issuer of central bank money. The Eurosystem can determine the interest rates for its own operations and consequently by and large short-term interest rates. The actual and expected changes in the official interest rates affect other interest rates in the economy. Generally speaking, the influence is the most direct in the short-term interest rates on the least risky assets. As the maturity or the risk level increase, other economic considerations start to play a more substantial role. Actual and expected official interest rates also affect asset prices, including 30 From a vast literature, see, Issing and others, Imperfect Knowledge and Monetary Policy (n 7); Athanasios Orphanides and John Williams, ‘Imperfect Knowledge, Inflation Expectations, and Monetary Policy’ in Ben S Bernanke and Michael Woodford (eds), The Inflation-Targeting Debate (University of Chicago Press 2004); Alan S Blinder, ‘Central-Bank Credibility: Why Do We Care? How Do We Build It?’ (2000) 90 The American Economic Review 1421–31; Otmar Issing, ‘Inflation targeting: a view from the ECB’ (Inflation Targeting: Prospects and Problems Symposium, St Louis, 16–17 October 2003); Athanasios Orphanides and Volker Wieland, ‘Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero’ (1998) Finance and Economics Discussion Series 1998/35; Richard Clarida, Jordi Galí, and Mark Gertler, ‘Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory’ (2000) 115 Quarterly Journal of Economics 147–80. 31 Issing and others, Imperfect Knowledge and Monetary Policy (n 7). See also Ignazio Angeloni, Anil K Kashyap, and Benoît Mojon, Monetary Policy Transmission in the Euro Area (CUP 2003), a decade after the introduction of the euro; ECB, ‘Monthly Bulletin May 2010’ (ECB 2010).

Monetary Policy Transmission Mechanism 625 Shocks outside the control of the central bank

Official interest rates Expectations

Money, credit

Money market interest rates

Bank rates

Asset prices

Wage and price-setting

Exchange rate

Supply and demand in goods and labour markets Domestic prices

Import prices

Changes in risk premia Changes in bank capital Changes in the global economy Changes in fiscal policy Changes in commodity prices

Price developments

Figure 22.3 Transmission mechanism of monetary policy1 1 See accessed 20 August  2019.

the exchange rate. Finally, current and expected money market interest rates affect both quantities and interest rates in the banking sector, including supply and demand for loans and deposits. All of these together form the financial market layer of monetary policy transmission mechanism.32 The changes in various interest rates and asset prices (including the exchange rate) are deemed to affect various supply and demand decisions by economic actors. Two areas are often separated due to their different implications on inflation. In the product markets, changes in interest rates affect the timing of consumption and investment decisions. Generally speaking, higher interest rates tend to postpone consumption decisions and make funding of investments more expensive. In the labour markets, the situation is more complicated as the social partners play a role, which also differs across euro area countries. In one country setting, the relationship between the social partners and monetary policy could have been interactive, as the wage demands were affected by the assumed (or even communicated) monetary policy reactions. Indeed, the relationship between monetary policy and social partners could be an area where information and traditions from the national monetary policy era could have limited validity for the Eurosystem. In the euro area, the disciplinary role of the interactive relationship between the central bank and the social partners is weaker, because there is a smaller anticipated monetary policy reaction to excessive wage increases, as none of the social partners is large enough to have euro area wide implications.33

32 ECB, The Monetary Policy of the ECB (n 5) 44–46. 33

See, for example, ECB, The Monetary Policy of the ECB (n 5) 45–46.

22.27

626 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) 22.28

Finally, the transmission mechanism needs to reveal how changes in product and labour markets affect domestic and import prices and hence the overall price developments. The ECB has provided some estimations on the routes and time lags that indicate that monetary policy changes first affect demand and employment, and only later the level of prices.34 This has some important implications, as the path and timing from the monetary policy actions to the price level can be difficult to estimate. If monetary policy reacts only to actual changes in prices, it can cause significant fluctuations in output and employment. Hence, monetary policy tries to be forward-looking by reacting to expected inflation, but this leads to major uncertainties and forces a central bank to decide on the risks it is prepared to take. Furthermore, the uncertain monetary policy transmission mechanism makes the exact formulation of monetary policy and particularly the formulation of intermediate targets difficult, which can also have implications for the accountability mechanisms.

22.29

In sum, monetary policy transmission mechanism is an essential element in understanding the functioning of a central bank. It shows that the channels through which monetary policy affects the economy are numerous and vary in importance. However, the analysis of monetary policy transmission is far from being an exact science and it is not a field where the central bank poses exclusive knowledge or private information. It is an area where central banks try to convince their stakeholders that the monetary policy measures they have taken benefit the economy. This is particularly important when the measures have different short-term and medium-term effects. The Eurosystem in particular has aimed at analysing and showing to the public how the euro area monetary policy transmission mechanism functions. This is the expert knowledge it should convey to the people, and if successful, the efficiency of its monetary policy could in turn be enhanced. Moreover, accountability and ultimately legitimacy could be improved as a by-product.

IV. Operational Framework A. General principles of the operational framework 22.30

The monetary policy strategy and the assumed monetary policy transmission mechanism are the basis for the Eurosystem’s monetary policy to achieve its objectives. To make monetary policy operational, they need to be accompanied with a set of monetary policy instruments and procedures called the operational framework. The Eurosystem’s operational framework influences the transmission mechanism by affecting short-term interest rates through its position as the sole issuer of the monetary base, consisting of currency in circulation as well as reserves and deposits banks hold with the Eurosystem. Through this monopoly, the Eurosystem can manage the liquidity situation in the money markets and influence money market interest rates. The description starts with the classical function of issuing money, turns to the main operational framework and concludes with some remarks on the payment system function to the extent that it is part of the operational framework.

34 ECB, The Monetary Policy of the ECB (n 5) 48.

Operational Framework 627 The main purpose of the operational framework and monetary policy instruments therein is to implement the monetary policy decisions made by the ECB Governing Council. The legal basis for the operation framework is the first indent of Article 127(2) TFEU and Articles 3.1, 9.2, 12.1, 14.3, 18.2, and 20 ESCB and ECB Statute. The Eurosystem has made a considerable effort to explain its operational framework, for example in The implementation of monetary policy in the euro area—General documentation on Eurosystem monetary policy instruments and procedures.35 The main elements of the operational framework are the minimum reserve system, which affects the monetary base directly, and official interest rates, particularly the main refinancing rate and interest rates on standing facilities. The amounts allocated and interest rates applied in the main refinancing operations and other money auctions affect the interest rates and liquidity situation in the money markets. As a result of the crises, the operational framework was supplemented by a number of ad hoc measures aimed at correcting specific problems and malfunctions. These will be discussed separately as unconventional monetary policy in Sections –.

22.31

The Eurosystem announced some guiding principles for the operational framework. 22.32 The starting point is the Treaty requirement to act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources (Article 127(1) TFEU), which is made more concrete by the other principles of the Eurosystem. First, the operational efficiency principle is defined as the operational framework’s ability to implement monetary policy decisions rapidly and correctly, mostly to short-term money market interest rates. Operational efficiency is different from cost- efficiency, which is another guiding principle. Second, all credit institutions are to be treated equally regardless of their size or country of establishment. Third, the Eurosystem relies on a decentralized implementation of monetary policy, where the ECB coordinates the operations, but the direct links to banks and the actual transactions are carried out by the NCBs. Furthermore, the Eurosystem has announced that it follows the principles of simplicity, transparency and continuity, whereby a substantial effort is made in designing a simple and explainable monetary policy framework that is not changed without a major reason. Finally, the principle of safety ensures that the Eurosystem’s financial and operational risks are kept to a minimum.36 These principles have led to some specific features concerning the Eurosystem operational framework. The number of counterparties that are eligible to participate is very large, as most euro area credit institutions can be eligible for monetary policy operations. They simply need to fulfil four requirements: they are subject to the Eurosystem’s minimum reserve system (based on Article 19.1 ESCB and ECB Statute), they are financially sound, they are properly supervised and they fulfil operational requirements by the home NCB or the ECB with respect to the specific operation in question. In practice, more than 2,000 banks have been eligible for open market operations and even more 35 See the latest version: ECB, The Implementation of Monetary Policy in the Euro Area—General Documentation on Eurosystem monetary policy instruments and procedures (ECB 2011) accessed 5 February 2020 (hereafter ECB, The Implementation of Monetary Policy in the Euro Area). The earlier version was published as ECB, The single monetary policy in the euro area: General documentation on Eurosystem monetary policy instruments and procedures (ECB 2002). See also ECB, ‘The monetary policy operational framework of the Eurosystem: a brief introduction’ ECB Monthly Bulletin January 1999, 18–19. 36 See ECB, The Implementation of Monetary Policy in the Euro Area (n 35) and also the earlier versions as well as accessed 5 February  2020.

22.33

628 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) banks have gained access to the standing facilities. The large number of counterparties is a Eurosystem speciality that is based on some good arguments but also has some implications. Other main central banks operate directly with only a limited number of large banks that in turn take care of the liquidity provision to the rest of the banking system.37 In the euro area context, with initially limited cross-border ties between banks and with a large number of existing national arrangements, a restricted operational framework would not have been feasible. Furthermore, against the background of assumed substantial structural breaks and related uncertainty, ensuring sufficient liquidity across the euro area demanded many counterparties. It could be claimed that a transparent and non-exclusive list of counterparties is better in line with the principle of an open market economy. Paradoxically, the same could also be said about a narrow list of major banks, but for the reason that it would have limited the central bank involvement in the banking sector. 22.34

The broad list of counterparties is based on transparent and relatively simple criteria, which had implications for the other roles of the Eurosystem. In a restricted system, the inclusion of banks in a narrow list of preferred counterparties can be used as a persuasion tool for the central bank to ‘guide’ major banks.38 With the broad list of counterparties and simple entry criteria, the Eurosystem has a more distant relationship with banks and hence it initially assumed a lesser role in maintaining financial stability. This was enforced by the decentralized operational model, where direct contacts with banks were under the responsibility of the NCBs. However, as monetary policy is indivisible, implementation needs to follow a strict model that is based on formal ECB Guidelines harmonizing NCBs procedures in implementing the monetary policy framework.39

22.35

As mentioned, the main target of the Eurosystem operational framework has been to affect the very short-term interest rates in the euro area money markets. However, in contrast to some other major central banks, the Eurosystem operational framework uses the official interest rate for the actual funds it auctions to banks, which then influences the money market interest rates. The broad list of counterparties could have affected this, as the Eurosystem preferred to create a liquidity shortage in the banking sector and then use that to steer interest rates through its provision of liquidity. In contrast, the New York Federal Reserve (‘The Desk’) operates directly in the money markets to achieve the overnight 37 This is typically a primary dealer-based system. 38 One recent and clear example was the handling of the LTCM crisis by the NY Fed. See, for example, Michael Fleming and Weiling Liu, ‘Near Failure of Long-Term Capital Management-September 1998’ (Federal Reserve History, 22 November 2013); see also The President’s Working Group on Financial Markets, ‘Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management’ (28 April 1999). 39 The most important guidelines are: ECB Guideline (EU) 2015/510 of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) [2015] OJ L91/3 and its amendments; ECB Guideline (EU) 2016/65 of 18 November 2015 on the valuation haircuts applied in the implementation of the Eurosystem monetary policy framework (ECB/2015/35) [2016] OJ L14/30; ECB Guideline (2014/304/EU) of 20 February 2014 on domestic asset and liability management operations by the national central banks (ECB/2014/ 9) [2014] OJ L159/56; ECB Decision (2014/337/EU) of 5 June 2014 on the remuneration of deposits, balances and holdings of excess reserves (ECB/2014/23) [2014] OJ L168/115; ECB Decision (2014/541/EU) of 29 July 2014 on measures relating to targeted longer-term refinancing operations (ECB/2014/34) [2014] OJ L258/11; ECB Decision (EU) 2015/509 of 18 February 2015 repealing Decision ECB/2013/6 on the rules concerning the use as collateral for Eurosystem monetary policy operations of own-use uncovered government-guaranteed bank bonds, Decision ECB/2013/35 on additional measures relating to Eurosystem refinancing operations and eligibility of collateral and Articles 1, 3, and 4 of Decision ECB/2014/23 on the remuneration of deposits, balances and holdings of excess reserves (ECB/2015/9) [2015] OJ L91/1.

Operational Framework 629 Federal Funds rate defined by the Federal Open Market Committee.40 Also in Japan, the Bank of Japan (BoJ) targets the overnight call rate to be close to the level set by the Policy Board, although since 2001, the BoJ has adopted quantitative operational targets due to the extreme circumstances.41

B. Minimum reserves A minimum reserve system is a traditional central bank tool to affect the banking sector directly by requiring banks to hold reserves at the central bank based on some criteria, usually the amount of their liabilities. The legal basis for requiring minimum reserves is Article 19.1 ESCB and ECB Statute, which assigns the ECB a power to require credit institutions to hold minimum reserves on accounts with the Eurosystem, with a qualification that the requirements need to relate to the conduct of monetary policy. The Eurosystem can make regulations related to the determination and calculation of the minimum reserves. However, the provisions on the actual basis for minimum reserves, maximum permissible ratios, and sanctions for non-compliance are decided by the ECOFIN Council in accordance with Article 129(4) TFEU. Accordingly, the Council must act either on a proposal from the Commission and after consulting the European Parliament and the ECB or on a recommendation from the ECB and after consulting the European Parliament and the Commission. The Council regulation on minimum reserves was issued before the euro was introduced,42 which provided the basis for more specific regulations by the ECB.43 The ECB must not to impose minimum reserve requirements independently, because minimum reserves have individual credit institutions as direct addressees, although the Council regulation followed the ECB recommendation.44

22.36

The Eurosystem imposes reserve requirements based on a very broad list of bank liabilities. Basically all the liabilities of up to two years maturity are included.45 The Eurosystem list is the most extensive among the major central banks.46 However, the Eurosystem minimum reserves are remunerated, and hence do not provide funding for the Eurosystem nor do they impose costs for banks. The minimum reserve system is part of the overall monetary policy framework, and the main argument for this extensive use of minimum reserves was that they help to stabilize money market interest rates around the level of the policy rate. Reserves are averaged over the maintenance period, meaning that banks can hold extra reserves when interbank rates are lower and release these reserves when rates are higher, thereby dampening the volatility of short-term interest rates. The minimum reserve

22.37

40 See Denis Blenck and others, ‘The main features of the monetary policy frameworks’ (2001) BIS Paper No 9 (hereafter Blenck and others, ‘The main features of the monetary policy’). 41 Ibid. For further discussion on these unorthodox monetary policy methods, see Section IV.D. 42 Council Regulation (EC) 2531/1998 of 23 November 1998 concerning the application of minimum reserves by the European Central Bank [1998] OJ L318/1. 43 ECB Regulation (EC) 1745/2003 of 12 September 2003 on the application of minimum reserves (ECB/2003/ 9) [2003] OJ L250/10. 44 For example, Article 4.1 of the Regulation sets a range of zero to 10 per cent reserve ratio even though at the time the ECB was contemplating a reserve ratio of 2 per cent. 45 Article 4 ECB Regulation (EC) 1745/2003. 46 Many central banks do not have any minimum reserves and the Fed has them only for transaction accounts, see Simon Gray, ‘Central Bank Balances and Reserve Requirements’ (2011) IMF Working Paper 11/36 (hereafter Gray, ‘Central Bank Balances and Reserve Requirements’).

630 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) requirements also aimed to ensure that the banking sector had a liquidity shortage and needed to draw on the Eurosystem liquidity provision through the open market operations. This established a role for the Eurosystem operational framework, particularly the main refinancing operations.47 22.38

The Eurosystem minimum reserve system could be seen to indicate a division of labour in EU macroeconomic management. The policy decisions and their rationales remain in the hands of the independent expert organization, the Eurosystem, but there are some limitations when it comes to imposing requirements or costs on individual addressees. The overall boundaries are imposed by the Council. However, the initial Council regulation was excessively broad and to an extent surrendered a large proportion of its protective role. In practice, individual economic actors were subjected to the direct coercive power of an independent expert, the Eurosystem, but this was perhaps understandable in the context of uncertainty over the need for and planned use of the minimum reserves.

22.39

The minimum reserve requirements have not been used as active policy tools. At a general level, minimum reserves could be used for a couple of purposes: prudential, monetary control, and liquidity management.48 The prudential use relates to early central banking (and the gold standard), when banks’ deposits-taking and even issuance of their own banknotes needed to be constrained by requirements to hold reserve balances to reduce the risks of liquidity crises. The reserve system can also be used as a means for monetary control. If there is a limited supply of reserves, it can directly restrict bank lending. Central banks could also change the ratio for unremunerated reserves to reduce or increase the costs of bank funding (deposits) and also influence monetary aggregates. In the case of the Eurosystem, neither prudential concerns nor direct monetary control have motivated minimum reserves. It is only the liquidity management reason that has applied to the Eurosystem. Reserve requirements aim to ensure constant liquidity needs that are fulfilled by Eurosystem open market operations. The averaging procedure also makes the reserve requirement system a stabilizing factor in short-term interbank markets. What is more, the fact that Eurosystem minimum reserves have been small and remunerated has excluded arguments based on other aspects than liquidity. Hence, it is clear that the Eurosystem has used the minimum reserves only for monetary policy-related reasons.

C. Open market operations and standing facilities 22.40

The implementation of the Eurosystem monetary policy is primarily focused on reaching a level of short-term interest rates that is in line with the monetary policy stance deemed appropriate by the ECB Governing Council. Additionally, it should contribute to the proper functioning of money markets through provision of liquidity and ensure an equal treatment of financial institutions.49 The most important part of standard monetary policy implementation are open market operations. They are used to steer interest rates, manage the liquidity

47 ECB, The Monetary Policy of the ECB (n 5) 101. 48 Gray, ‘Central Bank Balances and Reserve Requirements’ (n 46). 49 See, for example, Fabian Eser and others, ‘The use of the Eurosystem’s monetary policy instruments and operational framework since 2009’ (2012) ECB Occasional Paper Series No 135.

Operational Framework 631 situation in the money markets and signal monetary policy stance. Open market operations are mostly conducted through reverse transactions, so called repos.50 The Eurosystem can also make outright transactions, issue debt certificates, conduct foreign exchange swaps and collect fixed-term deposits (Article 18 ESCB and ECB Statute). The framework is largely decentralized and guided by the ECB guidelines that provide the general legal framework for the ECB and the NCBs.51 The basic approach to the open market operation of the Eurosystem has been different from other major central banks. While the US Federal Reserve, the Bank of Japan and the Bank of England have a relatively small list of large counterparties, the Eurosystem open market operations are open to a very large number of banks across the euro area. Although only a part of all the eligible banks have participated in auctions, the number of between 300 and 700 banks has been high in comparison.52 In the US Federal Reserve has relied on roughly twenty-five primary dealers as counterparties. The Bank of Japan has typically thirty or fifty counterparties.53

22.41

The Eurosystem monetary policy operational framework found its main shape already during the designing phase of the monetary union. The broad list of instruments and counterparts facilitated the inclusion of the fairly different national practices prevailing in the Member States without causing an unnecessarily large number of immediate changes in the national financial markets. At the same time, it was clear that the operational framework would gradually become more streamlined. Some national elements would first become unnecessary in practice before being abolished formally. It was also foreseen that centralization of operations would increase, not necessarily at the ECB but among the NCBs. This notwithstanding, the underlying approach was arguably close to the one used by the Bundesbank, including a relatively strong hold on the formation of money market interest rates.54

22.42

Four types of Eurosystem open market operations can be differentiated according to their aim, regularity and procedure: main refinancing operations (MROs), longer-term refinancing operations (LTROs), fine-tuning operations and structural operations.55

22.43

1. Main refinancing operations (MROs) The key monetary policy tool of the Eurosystem is the MROs, the ‘official ECB rate’. The MROs are weekly liquidity-providing reverse transactions with a frequency and maturity of 50 The process of borrowing money by combining the sale of an asset (usually a fixed income security) with the subsequent repurchase of that same asset for a slightly higher price (which reflects the borrowing rate). See accessed 5 February  2020. 51 ECB Guideline (EU) 2015/510. 52 The number of bidders started at a high level in 1999 but declined soon by one-half. In actual MROs, the first auction was participated by as many as 700 banks, but the number declined to 400 in 2001 and to 250 banks in 2003. Later the number has oscillated broadly between 300 and 400 bidders per auction. In LTROs the initial number was around 300 and declined to 150 by 2003. See, Kjell Nyborg, Ulrich Bindseil, and Ilya A Strebulaev, ‘Bidding and Performance in repo auctions: evidence from ECB open market operations’ (2002) ECB Working Paper No 157; Tobias Linzert, Dieter Nautz, and Ulrich Bindseil, ‘The longer term refinancing operations of the ECB’ (2004) ECB Working Paper No 359 (hereafter Linzert, Nautz, and Bindseil, ‘The longer term refinancing operations of the ECB’). 53 Blenck and others, ‘The main features of the monetary policy’ (n 40). 54 See, for example, Sylvester C W Eijffinger, ‘Monetary policy of the ECB: Strategy and Instruments’ in Jakob de Haan (ed), The History of the Bundesbank—Lessons for the European Central Bank (Routledge 2000) 140–41. 55 See Article 4 ECB Guideline (EU) 2015/510 for an illustrative table.

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632 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) 350000

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Figure 22.4 Eurosystem Main Refinancing Operations (billion euro)1 1 See ECB, Statistical Data Warehouse accessed 20 August 2018.

Source: European Central Bank-StatisticalDataWarehouse

one week. The aim of these operations is to signal monetary policy stance, to ensure proper functioning of the money market and to help credit institutions meet their liquidity needs in a smooth manner. They use standard tenders and a pre-specified calendar. High frequency and short maturity MROs are used to actively steer the liquidity of the banking sector. In normal times, they provide the bulk of refinancing to the financial sector the demand for which was at least partially created by the minimum reserve requirements. 22.45

The main refinancing operations started with a fixed interest rate, so that the interest rate was given by the Eurosystem and banks bid for the amount they wished to loan. This led to structural over-bidding by banks, because the Eurosystem only provided the amount of liquidity that was based on its pre-determined assessment of the liquidity shortage in the banking sector. The amounts provided had to rationed, which encouraged banks to bid for more than they actually wished to receive. As soon as the euro area banking sector was deemed accustomed to the new euro area operational framework and short-term money market structure, the MROs were changed to variable rate auctions, where the need for rationing was taken care of by the price mechanism.56

22.46

Before the crisis, the MROs were the main means of allocating liquidity to banks, but the crisis put emphasis on the longer-term operations and other measures. However, it could be expected that the MROs will regain their role in the conduct of monetary policy, when the situation normalizes. The standard procedure is described in the ECB guideline. The regular MRO takes place on each Tuesday. Banks can submit bids to their local NCB from Monday afternoon to Tuesday morning. With variable rate auction, banks say how much 56 See Paul Mercier and Francesco Papadia, The Concrete Euro—Implementing Monetary Policy in the Euro Area (OUP 2011) 323.

Operational Framework 633 money there are willing to loan at different interest rate. With fixed rate tenders, banks simply state how much liquidity they want. The allotment of funds depends on the procedure. In normal times and with variable rate, the ECB lists the bids in descending order of offered interest rates and bids are accepted to the point of full amount to be allocated. With fixed rate tenders, the procedure is simpler as the allocation follows the pro rate principle or in full allotment all the banks get all the amount they bid for.57

2. Longer-term refinancing operations (LTROs) The longer-term refinancing operations (LTROs) are similar to the main refinancing operations, but they have a somewhat different role. By contrast to MROs, the infrequent LTROs normally have fixed amounts and have been used to provide banks with additional longer-term refinancing unrelated to short-term liquidity fluctuations. They are regularly conducted with a monthly frequency and with a maturity of three months. Additionally, irregular longer-term operations can be conducted even at short notice with other maturities. All these LTROs aim at providing additional longer-term refinancing to the banking sector rather than signalling monetary policy stance. The LTROs are mainly conducted as variable rate tenders without a minimum bid rate and the Eurosystem as a price-taker.58 As will be discussed later, the LTROs were used in exceptional amounts and maturities during and after the crisis. The most noteworthy operations were the two three-year LTRO auctions on both sides of year-end 2011 as well as the series of targeted longer-term refinancing operations (TLTROs).59 The LTRO tender procedures follow mainly the one described with MROs, but the information about the up-coming schedule can be of policy importance.

22.47

22.48

3. Fine-tuning operations Fine-tuning operations can be executed on an ad hoc basis to manage the liquidity situation 22.49 in the money markets and to steer interest rates. Fine-tuning operations have been used to take care of the unexpected changes in the liquidity needs of the banking sector between the weekly main refinancing operations. For example, the ECB estimates for liquidity needs could prove to be false or some unexpected shocks could occur in the banking sector. As the name suggests, these operations are for a specific need or situation. They are conducted with a small number of major banks in order to have a speedy and straightforward process. Fine- tuning operations are also primarily executed as reverse transactions. Liquidity-providing fine-tuning reverse transactions are generally executed through quick tenders or through bilateral procedures, and liquidity absorbing normally through bilateral procedures.60 4. Structural operations Structural operations can be executed whenever the Eurosystem wishes to adjust its structural position of the Eurosystem vis-à-vis the financial sector. 57 See ECB Guideline (EU) 2015/510 and its amendments for more details. 58 Linzert, Nautz and Bindseil, ‘The longer term refinancing operations of the ECB’ (n 52). 59 ECB Decision (EU) 2016/810 of 28 April 2016 on a second series of targeted longer-term refinancing operations (ECB/2016/10) [2016] OJ L132/107. 60 Part 3.1.4: ‘Fine-tuning reverse operations’ in ECB Guideline (2011/817/EU) of 20 September 2011 on monetary policy instruments and procedures of the Eurosystem’ (recast) (ECB/2011/14) [2011] OJ L331/1.

22.50

634 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) 22.51

22.52

5. Standing facilities In addition to open market operations, the Eurosystem also has standing facilities to maintain a stable liquidity situation in the banking sector. Standing facilities provide a corridor around the MRO interest rate. Marginal lending facility provides overnight credit above the MRO rate and deposit facility can be used to deposit overnight money at below MRO rate. The Eurosystem started off with 100 basis point corridor, meaning that lending rate was 50 basis points above and deposit rate 50 basis points less than the MRO rate. As the euro area money markets started functioning, the corridor was widened to 200 basis points, creating sufficient incentives for banks to sort out their liquidity needs without daily recourses to central bank. During the crisis, the corridor was made narrower again and the deposit rate has fallen to negative territory. The lending facility provides overnight liquidity for banks from the Eurosystem against sufficient collateral. The standing facilities were designed as a last resort for banks to access or deposit extra liquidity. Hence, the use of standing facilities was to be exceptional when the markets were functioned properly, and the recourse to the standing facilities remained modest up to the crisis and took place mainly during the last days of the minimum reserve period.61

D. Collateral policy and practices 22.53

An important part of the operational framework is the Eurosystem collateral policy. Collateral consists of assets that are pledged to the Eurosystem as security for its credit operations, mainly the auctions discussed previously. Central banks can operate directly in securities markets without a need for collateral, but even then, the same issues arise with regard to the soundness of the instruments that are used in transactions. However, many central banks and particularly the Eurosystem have preferred to operate through what could be called temporary open market operations (credit auctions and standing lending facility), through which the central bank lends money to banks. This lending demands collateral to be safe. If a bank became insolvent, the collateral could be sold to make good of the liability. The most typical transaction is the repurchase agreement, where the central bank becomes a temporary owner of the eligible asset for a fixed period of time and at a fixed reselling price.62

22.54

The main legal basis for the collateral policy is the legal basis for the implementation of monetary policy and to a lesser extent the promotion of the smooth operation of payment systems. Additional relevant Treaty provisions could be Articles 123 and 124 TFEU, which prohibit the Eurosystem from financing public entities and require that public and private banks are treated equally with regard to Eurosystem operations. Provisions of the Statute relate more directly to the collateral policy with Article 18.1 ESCB and ECB Statute demanding that lending is based on adequate collateral. With

61 ECB, The Monetary Policy of the ECB (n 5) 86. 62 That equals the amount lent and the interest paid. Samuel Cheun, Isabel von Köppen-Mertes, and Benedict Weller, ‘The collateral frameworks of the Eurosystem’ (2009) Occasional Paper Series No 107 at 7–9 (hereafter Cheun, von Köppen-Mertes, and Weller, ‘The collateral frameworks of the Eurosystem’).

Operational Framework 635 regard to payment systems, there is no similar provision in Article 22 ESCB and ECB Statute. The use of collateral increases the safety of central bank lending, preventing financial losses and ultimately the loss of public trust. Central bank laws and statutes often contain general provisions on the safety of operations as well as some restrictions that, for example, exclude some types of lending on the basis of the counterpart, instrument or collateral.63 However, often it is left to the central bank to decide what the appropriate safety features are. For the Eurosystem, the specific features stem from its institutional independence that distances it from the taxpayers and governments, and perhaps also from the risk that it could become a transfer mechanism between the Member States. The Eurosystem also had to combine various national traditions and financial structures, which advocated flexibility on collateral policy with a small number of ex ante legal limitations.

22.55

In the Eurosystem vocabulary, an asset can be ‘eligible’ collateral if it fulfils certain criteria. These criteria form the Eurosystem collateral policy that is communicated in a regularly up-dated document The implementation of monetary policy in the euro area: General Documentation on Eurosystem monetary policy instruments and procedures.64 The specific features of Eurosystem collateral policy are the large number of counterparties (banks), the broad list of eligible collateral and the decentralized procedures through the NCBs.65

22.56

The Eurosystem started off with a diversified collateral policy in 1999, in which the collateral pool considered national practices in the run-up to the single currency. At the same time, the need for collateral was deemed to be high, as the Eurosystem wanted to have a relatively strong hold on the money markets by creating a liquidity shortage. This large amount of collateral included both public and private assets.66 This contrasted with the US model, which was solely based on government bonds and the bonds of semi-public agencies. There were no euro area government bonds, only Member State government bonds that were somewhat suspect instruments, because of their potential to create moral hazard in public finances in the special EMU setting.67

22.57

Euro area financial market structure is also different from the US or even the UK. Traditional bank lending has a substantially larger role in the euro area financial intermediation. Corporate bond markets are mostly quite small and both mortgage and SME lending are provided by banks. Subsequently, before the EMU some central bank used bank loans as collateral. In order to incorporate this type of peculiarities into the Eurosystem framework, the collateral policy started with a two-tier collateral framework. Tier1 collateral consisted of marketable debt instruments fulfilling uniform and harmonized euro area-wide eligibility criteria specified by the Governing Council. Tier2 collateral list consisted of marketable and nonmarketable assets which were deemed important for the national banking systems of some Member State. Tier2 eligibility criteria were set by the individual NCBs

22.58

63 Cheun, von Köppen-Mertes, and Weller, ‘The collateral frameworks of the Eurosystem’ (n 62) 9–10. 64 The latest version is the ECB Guideline 2011/817/EU. 65 Cheun, von Köppen-Mertes, and Weller, ‘The collateral frameworks of the Eurosystem’ (n 62) 9. 66 It could be recalled that there was a fundamental discussion concerning the acceptance of public bonds at all during the drafting of the Maastricht Treaty and the Statute. 67 Cheun, von Köppen-Mertes, and Weller, ‘The collateral frameworks of the Eurosystem’ (n 62) 11–12.

636 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) and they were only subject to the minimum criteria established by the ECB Governing Council.68 22.59

The two-tier structure was a temporary solution, and national differences were to disappear from the Eurosystem operational framework. The integration in the euro area banking market and the need for a level playing field for banks argued against national peculiarities. This was done gradually by transferring those assets that were deemed to needed also in the future to the uniform list, expanding the Tier1 list and preparing for the ending of the Tier2 list.69 The topic was important for banks and involved national sensitivities. In this balancing act the Eurosystem followed a gradual and open way of proceeding. The changes were first announced at the principal level in 2004, which was followed by an initial enlargement of the Tier1 list from 1 July 2005 onwards.70 As a second step Tier1 list was further enlarged, but some national items were excluded.71 The most important new asset to the uniform list was the bank loans.72 Further details were announced in 2005 with a transitional period until 2012.73

22.60

From 2007, the Eurosystem moved to a single and uniform collateral framework. The integration of the euro area banking and financial markets had reduced the need for national lists of collateral, which even hampered further integration by maintaining national differences.74 Compared to other central banks, the collateral list was broad. It was argued that private financial markets had moved towards collateralized transactions, increasing the demand for marketable securities as collateral. ‘By accepting bank loans as eligible assets, the Eurosystem is allowing credit institutions to reserve their marketable securities for use in private payment and securities settlement systems.’75 At the same time, the euro area financial markets remained bank centred with a fairly modest role for corporate bond markets and mortgage bonds. The inclusion of bank loans in eligible collateral provided banks with extra liquidity cushions. However, it could also be argued that bank loans are more directly linked to the real economy and their inclusion was in line with the prohibition to give government bonds a privileged position in the Eurosystem operations (Article 124 TFEU).

22.61

The Eurosystem’s collateral policy aimed at neutrality, and it was not to prevent further developments in the financial markets. Hence, it needed to be relatively open to new requests from banks and other actors and have sufficiently balanced acceptance criteria. Two elements were important. The safety criteria had to be transparent, and they had to be defined 68 See ECB archives for the lists of eligible collateral and, for example, Deutsche Bundesbank, ‘The creation of a single list of eligible collateral throughout the euro area’ (2006) 58 Monthly Report 29–38 (hereafter Deutsche Bundesbank, ‘The creation of a single list of eligible collateral throughout the euro area’). 69 ECB, ‘Review of the Eurosystem’s Collateral Framework: First Step towards a Single List’ (Press Release, 10 May 2004) accessed 5 February  2020. 70 ECB, ‘First step towards the introduction of the single list of collateral provided for in the revised version of the “General Documentation” ’ (Press Release, 30 May 2005) accessed 5 February 2020. 71 Deutsche Bundesbank, ‘The creation of a single list of eligible collateral throughout the euro area’ (n 68) 31. 72 ECB, ‘Review of the Eurosystem’s collateral framework: Second Step towards a Single List’ (Press Release, 5 August 2004) accessed 5 February 2020. 73 ECB, ‘Decisions taken by the Governing Council of the ECB (in addition to decisions setting interest rates)’ (Operational Issues, 18 February 2005) accessed 5 February 2020. 74 Cheun, von Köppen-Mertes, and Weller, ‘The collateral frameworks of the Eurosystem’ (n 62) 11–12. 75 Deutsche Bundesbank, ‘The creation of a single list of eligible collateral throughout the euro area’ (n 68) 33.

Operational Framework 637 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

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Figure 22.5 Eurosystem eligible collateral (billion euro)1 1 See accessed 20 August  2019.

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with reference to default probabilities and credit ratings.76 In addition, variable haircuts in the collateral values were to take into account other risk features, such as credit default and liquidity risks. Figure 22.5 below shows how the amount of assets to be used as collateral increased from 2004 onwards, although the statistics are provided only for the harmonized Tier1 list and hence the changes up to 2006 should be analysed with caution. Nevertheless, the amount of assets that could be used as collateral has been enormous also in comparison to the GDP or bank lending let alone in relation to a typical amount of Eurosystem lending to banks.

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The actual use of collateral shows the amount of assets that banks have pledged at the Eurosystem for intra-day payments and for Eurosystem funding. It shows a similar increase. However, the noteworthy feature was that the use of government bonds declined even in absolute terms until 2008, and the use of uncovered bank bonds increased substantially.

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In the beginning, the collateral policy faced the criticism for including all the government bonds in the highest safety category with the lowest haircut. This was not based on economic reasoning alone. Most likely it was based on the issues such as national pride, but at the same time it could even be seen as a subsidy to the lowest credit quality euro area governments, particularly Greece. In this regard, it might have violated the prohibition of preferential treatment of the government debt in the Eurosystem monetary policy operations and at least questioned the aim of the fiscal prudence of the Member States.77

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76 Deutsche Bundesbank, ‘The creation of a single list of eligible collateral throughout the euro area’ (n 68) 33–34. 77 The point is convincingly made by Willem H Buiter and Anne Sibert, ‘How the Eurosystem’s Treatment of Collateral in its Open Market Operations Weakens Fiscal Discipline in the Eurozone (and what to do about it)’ (2005) CEPR Discussion Paper No 5387.

638 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) 3,000 2,500 2,000 1,500 1,000 500 0

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Figure 22.6 Use of collateral and outstanding credit (billion euro)1 1 See accessed 20 August  2019.

Source: ECB website:

E. Payment Systems as part of monetary policy framework 22.65

Central banks have close links to payment systems. One of the origins for the central bank notes and coins was to facilitate payment transactions, and bank notes are still primarily used for payment purposes. The security features and even nominations of the notes can be seen from the perspective of their role in facilitating safe payments. In the euro changeover, the issuance and logistics of the huge amounts of euro notes was, from a substantive point of view, also a payment system project that proved to be successful. A major part of the retail payment systems throughout the euro area was transformed in a matter of months.78

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Normally, when payment systems are discussed in the context of central banks, they refer either to the actual role of central banks in operating payment systems, or to their oversight function of payment systems that are operated by private actors. The Eurosystem has both of these functions, of which the former can be seen as part of the monetary policy framework discussed here. The Eurosystem operates its own payment system TARGET (Trans- European Automated Real-time Gross Settlement Express Transfer System) based on the basic task of the Eurosystem (Article 127(2) TFEU) to promote the smooth operation of payment systems as well as on the task of implementing monetary policy.79 The ESCB and ECB Statute also refers to the Eurosystem payment system to be created to facilitate safe transfers of large, particularly monetary policy-related payments. The payment system is

78 See CPSS, Payment and settlement systems in selected countries (BIS 2003) 75–76. 79 See Marco Lamandini, ‘The ECB and Target 2—Securities: questions on the legal basis’ (Economic and Monetary Affairs Committee of the European Parliament, Brussels 2006).

Operational Framework 639 used to pay and settle the transactions related to the operational framework, but it also uses the same collateral for other intra-day payment transactions. When the EU central banks prepared for the EMU, they needed to design a payment system to enable the conduct of common monetary policy operations. Given the decentralized structure of the Eurosystem, the payment system had to settle euro payments across national borders in the EU.80 The new system focused on large payments and for reason of security was to settle payments in real time and on a non-netting basis. On this basis, it was decided to establish the TARGET system, confirming that linkages would be established between national real time gross systems (RTGS) rather than by creating a new system. Most NCBs already had their own RTGS for the settlement of transactions in their national currencies and the settlement accounts were held at the NCBs, not at the ECB.81 The first version of TARGET was thus based on linking the existing RTGS systems and defining only a minimum set of harmonized features in the areas of the provision of intraday liquidity, operating times and pricing.82

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The legal framework for TARGET contained two main elements. Firstly, the ECB Guideline 22.68 on TARGET described the operational elements for the euro area NCBs and the ECB. Second, an agreement on TARGET was agreed upon by the ECB and the NCBs, namely to tackle the relations between euro area NCBs and the ECB on the one hand and non- euro area NCBs on the other. National rules and agreements with banks were amended accordingly.83 As soon as the initial changeover procedures were conducted successfully in 2002, the Governing Council decided on the long-term strategy for its payment system to be called TARGET2. It was based on a Single Shared Platform (SSP) offered by the largest euro area NCBs, namely the Banque de France, the Banca d’Italia and the Bundesbank, which were assigned the task of designing a new platform and of managing its daily operation. All the euro area NCBs agreed to join TARGET2 so that it could replace national payment systems, although legally national systems continued and NCBs remained the counterparts for their banks.84 The TARGET2 system was launched in 2007 as a uniform and more centralized payment system.85 Unexpectedly, TARGET2 received considerable attention during the crisis, when the outstanding balances within the system started to grow and became a permanent feature.

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The Eurosystem payment system is deemed necessary for monetary policy reasons, but at the same time it is competing with private payment systems. This is made more complicated by the fact that as a payment system overseer, the Eurosystem can face potential conflicts of interest. It would need to make sure that there is a level playing field and that it does not

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80 EMI, The EMI’s intentions with regard to cross-border payments in Stage Three (EMI 1994). 81 EMI Council Decision (March 1995) accessed 5 February 2020. 82 EMI, ‘The TARGET system—Trans-European Automated Real-time Gross Settlement Express Transfer System, a payment system arrangement for Stage III of EMU’ (EMI Report May 1995). 83 See for example, ECB, ‘TARGET Annual Report 2001’ (ECB 2002) 35–37. 84 See for example, ECB, ‘TARGET Annual Report 2006’ (ECB 2007) 29. 85 ECB, ‘TARGET2 successfully launched’ (Press Release, 19 November 2007) accessed 5 February  2020.

640 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) use the oversight information to its competitive advantage.86 The Eurosystem TARGET2 system has the additional role of promoting European integration, and the transition of the Eurosystem to TARGET2 and to a single list of collateral could be seen to promote banking integration and facilitate financial market integration more generally.87

F. Communication as part of monetary policy 22.71

The communication practices of the central banks have varied considerably through time. Only in the 1990s, most central banks began to endorse communication as a key policy instrument.88 The traditional central bank secrecy had lost ground also because it became to be perceived as fundamentally undemocratic practice, as something that shields the central bank from accountability or political oversight.89 Communication has hence become an important accountability mechanism over the last few decades, but this is discussed elsewhere.90

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The basics of the Eurosystem communication have remained broadly the same from the start. It has not been so much based on legal requirements, but rather on the needs of the effectiveness of monetary policy and as well as on the broader acceptability and accountability of the new institution.91 The legal requirements in the Maastricht Treaty and the ESCB and ECB Statute for communication and transparency are limited, and hence they were considered as the minimum level of communication rather than the guideline. The Treaty and the ESCB and ECB Statute left considerable discretion to the new institution to decide on the most appropriate forms of communication. Furthermore, national practices had differed considerably.92

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The ECB is obliged to make and publish reports on the Eurosystem activities at least quarterly (Article 15.1 ESCB and ECB Statute), and a consolidated financial statement has to be published each week (Article 15.2 ESCB and ECB Statute). The main formal publication tool is the Annual Report on the activities of the Eurosystem (ESCB) and on the monetary policy of both the previous and the current year (Article 284(3) TFEU and 15.3 ESCB and

86 See, for example, ECB, ‘TARGET Annual Report 2006’ (ECB 2007) 25–26. 87 BIS, CPSS—Red Book (BIS 2012) 93–97; see also BIS, CPSS—The role of central bank money in payment systems (BIS 2003) 23. 88 Famously, in 1928 the Bank of England deputy governor pointed out in his testimony in front of the Parliamentary Committee that ‘to defend ourselves is somewhat akin to a lady starting to defend her virtue’, see Macmillan Committee (Committee on Finance and Industry (1931) 27–31), also quoted in Otmar Issing, ‘Communication, Transparency, Accountability’ (2005) 87 Federal Reserve Bank of St Louis Review 65–83 (hereafter Issing, ‘Communication, Transparency, Accountability’). Even the US Federal Reserve declined to disclose its target for Federal Funds rate until February 1994. See, for example, Michael Ehrmann and Marcel Fratzscher, ‘Transparency, Disclosure, and the Federal Reserve’ (2007) 3 International Journal of Central Banking 179–225. The other extreme is represented by the New Zealand Central Bank, which published inflation targeting and its own forecasts on policy rates at the same time. 89 Frederic S Mishkin, ‘Can Central Bank Transparency Go Too Far?’ (2004) NBER Working Paper 10829,  48–65. 90 See Part 4 of this work. 91 Issing, ‘Communication, Transparency, Accountability’ (n 88) 65–83. 92 Most EU central banks that took part in the ERM had to follow the Bundesbank interest rate policy with very limited national discretion. In that situation, communication about one’s own action could hardly contain much policy content. See John Benjamin Goodman, Monetary Sovereignty: The Politics of Central Banking in Western Europe (Cornell UP 1992).

New and Unconventional Monetary Policy 641 ECB Statute). It also has special addressees, namely the European Parliament, the Council, and the Commission, elevating its importance. The Annual Report contains a broad description of the tasks and activities of the European System of Central Banks (ESCB) and reports on the Eurosystem’s monetary policy. It includes the Annual Accounts of the ECB that are also published as a separate document before the Annual Report. It is usually published in April of the following year and is presented by an ECB Executive Board member to the European Parliament at a public hearing. However, this has not turned out to be the main formal oral communication in the European Parliament. The most important is the Hearing at the European Parliament’s Economic and Monetary Affairs Committee, where the ECB President is present. The idea seemingly was that much like in the US, the members of the EP Committee would gain expertise in the monetary field and the Committee could become a serious counterpart to the ECB President. Furthermore, it was expected that the hearing would attract wider media and public attention, and thereby also enhance the role of the European Parliament. So far, these hearings have not gained the headlines that were hoped for, but the level of expertise might well have increased.93

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In practice, the most important actual means of monetary policy communication by the ECB is the monthly Governing Council statement after the first meeting of the month, and the following press conference with the President and Vice President. This was complemented by the publication of the Monthly Bulletin, which provided the ECB view on the economic and monetary development as well as a few topical articles providing background information relevant for the monetary policy analysis. The Monthly Bulletin is published one week after the Governing Council monetary policy meeting. It was replaced (or renamed) by an Economic Bulletin from the start of 2015. For more information, the reader is advised to turn to specific sections on Communication as well as Accountability.

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V. New and Unconventional Monetary Policy During the Crisis The first decade of the new monetary policy was relatively calm. The operational framework designed for the euro area monetary policy seemed to function well and the changes were incremental and evolutionary. However, the following decade turned out to be very different. The financial crisis started already in 2007, intensified in 2008 and turned into a sovereign debt crisis in 2010. It put to the Eurosystem monetary policy and monetary policy framework under an enormous stress. The Eurosystem responses have ranged from extended use of the existing operational framework to the introduction of many new types of policy measures. It remains unclear, which of the measures will turn into permanent elements of the monetary policy framework and which will fall in oblivion. It is hence chosen to discuss them separately, and to raise some issues that might speak against their role in the normalized euro area monetary policy.

93 See ‘Special Issue: The ECB’s accountability in a multilevel European order’ (2019) 26 Maastricht Journal of Comparative and European Law with elaborate discussion on the role of parliamentary hearings.

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1. The first phase of the financial crisis The first signs of the upcoming financial crisis were becoming visible in 2007,94 although it took time before crisis became the main concern for central banks. The Eurosystem increased its main refinancing rate twice during the first half of 200795 and once more in July 200896 in order to fight inflation concerns. The financial market problems at hand were mostly linked to the US subprime markets and to liquidity problems in individual banks.97 When the first major implications of the crisis became apparent, the Eurosystem responded with a series of measures that mainly targeted the liquidity situation in the banking sector to ensure short-term market funding for (solvent) banks. This was the starting point for the evolution of Eurosystem monetary policy during the crisis. It was somewhat complicated by the unrelated transition to the single Eurosystem collateral framework and to the TARGET2 payment system at the same time.98 The use of ad hoc measures started in August 2007, when the ECB Governing Council indicated that it would provide all the liquidity needed for markets to perform,99 beginning a series of announcements on liquidity policy and fine-tuning operations both of which were aimed at addressing short-term nervousness in the money markets. The general theme was that the Eurosystem tried to convince the markets that it would provide the necessary liquidity and that allotments in weekly tenders would be such that the variable interest rate would be close to the refinancing rate. However, as these measures were considered insufficient, the Eurosystem engaged in a series of ad hoc or supplementary measures concerning longer-term financing to the banking sector aimed at normalizing conditions in the money markets. The LTRO tenders were all with variable rate and mainly for three months.100 They reached a total outstanding amount of initially 120 billion euro and later 150 billion euro. The banking sector was perceived to be generally sound, but it faced liquidity shortage 94 One of the key events was the disclosure by Bear Stearns, a major US investment bank, of major losses of value of two hedge funds investing in so called sub-prime loans. The surprise losses subsequently led to a realization that many risks were heavily underestimated. As a consequence, banks’ ability to trust one another was at times questioned leading to malfunctioning interbank markets, a major source of funding for the banking sector. 95 ECB, ‘Monetary policy decisions’ (Press Release, 8 March 2007) accessed 5 February 2020 and ECB, ‘Monetary policy decisions’ (Press Release, 6 June 2007) accessed 5 February  2020. 96 ECB, ‘Monetary policy decisions’ (Press Release, 3 July 2008) accessed 5 February 2020; see also ECB, ‘Annual Report 2008’ (ECB 2009) 16. And the ECB Financial Stability Review that concluded that, ‘with the euro area financial system in a generally healthy condition and the economic outlook remaining favourable, the most likely prospect is that financial system stability will be maintained in the period ahead’, ECB, ‘Financial Stability Review June 2007’ (ECB 2007) 9. 97 Liquidity shortage or liquidity problems refer to a situation in which a bank cannot find short-term financing. Other banks could raise their short-term deposits at the bank or refuse to lend in the short-term interbank markets. 98 On 8 March 2008 the Governing Council of the ECB decided that it was feasible to go ahead with TARGET2- Securities, and a list of measures were taken which also affected collateral policy. The TARGET2-Securities project was officially launched on 17 July 2008. 99 This was followed by a full allotment in the following weekly tender, ie banks received all the financing they asked for, and a statement by Governor Trichet on 14 August, mainly to calm down markets. 100 On 27 August a supplementary liquidity-providing longer-term refinancing operation with a maturity of three months for an amount of 40 billion euro. This was followed on 6 September by a supplementary liquidity- providing longer-term refinancing operation with a maturity of three months carried out as a variable rate tender. These in turn were followed on 8 November by a decision to renew them with two supplementary LTROs carried out through variable rate tenders, each of 60 billion euro. These supplementary operations were renewed with somewhat different amounts and lengths on 7 February, 28 March and 31 July 2008.

New and Unconventional Monetary Policy 643 partly due to some re-leveraging as well as US-induced uncertainties.101 The recourse to longer-term liquidity provision was based on the assessment that liquidity shortage could persist. Another ad hoc measure was the provision of US dollar liquidity in connection with the US Federal Reserve Term Auction Facility.102 The aim was to provide non-US banks active in the US dollar market with US dollar liquidity by using local collateral. This was an external part of the US Federal Reserve programme to guarantee funding to the banking sector, and underlined the role US financial markets also with regard to the financial centres in Europe.

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Hence, the Eurosystem measures before the Lehman collapse were motivated by banks’ increased liquidity needs rather than by a fear of a banking crisis. The problems stemmed mainly from the US subprime markets, in which some euro area banks were revealed to have unexpected exposures.103 The credit default swaps for the European banks had increased quite moderately and by much less than for the US investment banks.104 Hence, the liquidity shortage was perceived to signal increased risk awareness and apprehension about unexpected risk exposures in some counterparts, but not a fundamental concern over the European financial sector health.

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The Eurosystem measures during the first stage of the financial crisis had a few key features. First, the Eurosystem operated mostly through its pre-announced operational framework. The bulk of the exceptional liquidity was provided by weekly main refinancing operations and to some extent by structural longer-term operations. The only truly exceptional measure was acting as an agent for the US Federal Reserve by using Eurosystem collateral.

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Second, there was a serious attempt to maintain the market conformity of operations. The main refinancing operations were conducted as variable rate tenders although accompanied with statements that the rate would be close to the refinancing rate. Longer-term operations were carried out with truly variable interest rates and with fixed allotments. The Eurosystem influence on the financial market price mechanism did increase with market uncertainty, but it remained under check, as the Eurosystem remained mostly a price-taker in the marketplace.

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Third, although the underlying risk of the Eurosystem over the euro area banking sector increased even substantially due to increased lending to banks, there was no serious doubt

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101 ECB, ‘Financial Stability Review December 2007’ (ECB 2007) 18. 102 The first case took place on 12 December 2007, when the ECB jointly with the Bank of Canada, the Bank of England, the Federal Reserve and the Swiss National Bank announced coordinated measures to address pressures in short-term funding markets. The ECB decided to offer US dollar funding to Eurosystem banks with two US dollar operations. The US dollars would be provided by the Federal Reserve. The actual operations were conducted on 14 and 19 December with a fixed rate defined by the Fed. These were then renewed in January for the same total amount of up to 20 billion USD. In March the total amount was somewhat increased. More fundamentally, on 2 May, again as part of a joint effort, the ECB announced a regular bi-weekly provision of dollar monthly liquidity of 25 billion USD, raising the outstanding amount to 50 billion USD with provision of currency coming continuously from the Fed. 103 For example, some German banks such as the IKB and some landesbanks had used Special Purpose Vehicles to gather exposure to the US market. These SPVs were basically funded in the money markets and remained outside of supervision. See, Felix Hüfner, ‘The German Banking System: Lessons from the Financial Crisis’ (2010) OECD Economics Department Working Paper No 788, 17–18 (hereafter Hüfner, ‘The German Banking System’). 104 ECB, ‘Financial Stability Report December 2007’ (ECB 2007) 81.

644 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) that the reason was anything else than liquidity provision and the functioning of the interbank market. The Eurosystem explicitly remained outside any discussions over banking sector solvency support.105 Liquidity support was not mixed with indirect solvency support or indirect public financing. Most fundamentally, there were no questions over the Eurosystem’s focus on its primary objective of price stability.

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2. Monetary policy during the actual financial crisis Financial market stress did not ease in 2008 and central banks’ measures to maintain liquidity were unable to improve the situation. This raised ’more fundamental concerns about creditworthiness and the capital positions of several key financial firms’.106 Such concerns hampered the liquidity conditions in the banking market, affecting financing conditions of non-financial companies, households and even some governments.107 For banks, central banks and supervisors alike a picture emerged whereby the amount and complexity of risk had reached unforeseen levels in the run-up to the crisis, making it difficult to predict which banks could be facing serious problems. And worse, banks had used mechanisms to hide their risks from regulators and many banks had relied on short-term funding for their longer-term investments.108 The financial crisis took a decisive turn for the worse on 15 September 2008 with the collapse of Lehman Brothers, the fourth largest US investment bank active in most financial market sectors. It was, for example, one of the largest derivatives counterparties.109 The collapse of Lehman Brothers turned out to be a shock to market confidence and particularly interbank markets. The fact that a bank of Lehman’s size could and was allowed to fall into bankruptcy came as a surprise to many.110 Its large exposures to most main markets and counterparties increased the likelihood that other banks could face unbearable losses once Lehman failed to make good its liabilities. Hence, the ability of banks to trust each other was eroded to an unforeseen extent. The euro area banking sector was in the middle of the crisis. In September 2008, for example, two large Benelux banks, Fortis and 105 In the case of a German bank failing over US subprime liabilities, ECB President Trichet stated in a press briefing on 2 August 2007, ‘I will not add anything to what has been said by the German entities concerned themselves, by the authorities and by Axel Weber’. This made it very clear that the ECB had nothing to do with a bank failure in a euro area country. At a press conference on 2 October 2008, Trichet pointed out even more explicitly where responsibility lay concerning Fortis Bank: And in a period when it appears that the situation calls for government responsibility, I confirm that we judge it appropriate that governments take up their responsibilities. I think they did well in the case you mentioned, they did well in other cases, including in this country: I confirm that I think the government did well in Germany. 106 ECB, ‘Financial Stability Review June 2008’ (ECB 2008) 11. 107 Ibid,  77–78. 108 Hüfner, ‘The German Banking System’ (n 103) 17–19; and Matthäus Buder and others, ‘The rescue and restructuring of Hypo Real Estate’ (2011) Competition Policy Newsletter 41–44 (hereafter Buder and others, ‘The rescue and restructuring of Hypo Real Estate’). 109 The US Federal Reserve, the US Treasury, and the Federal Deposit Insurance Corporation (FDIC) were involved in attempts to sell Lehman Brothers first to the Korean Development Bank and during the last day to British Barclays and Bank of America, but finally these failed due to the US officials’ reluctance to guarantee the deal. The description of the events can be found on multiple sources. See, for example, Rosalind Wiggins, Thomas Piontek, and Andrew Metrick, ‘The Lehman Brothers Bankruptcy A: Overview’ (2014) Yale Program on Financial Stability Case Study 2014-3A-V1; Nick K Lioudis, ‘The collapse of Lehman Brothers: A case study’ Investopedia (2017) accessed 5 February  2020. 110 This surprise was probably made bigger by the fact that Bear Stearns was rescued only six months earlier through a sale to J P Morgan Chase that was facilitated by financial assistance from the NY Federal Reserve.

New and Unconventional Monetary Policy 645 Dexia, had to be rescued by their governments. They were joined by Hypo Real Estate in Germany in September 2008 and Anglo Irish Bank in January 2009.111 For central banks, the main concern was the functioning of the interbank markets. When banks could not trust each other, they could not borrow or lend in the interbank market. The lack of interbank funding can lead to large-scale reductions or even withdrawals of lending and the fire-sale of assets that contained the potential to transform a liquidity crisis into a solvency crisis and economic crisis. The Eurosystem was forced to react in order to avoid malfunctioning of the economy. The standard monetary policy measure, the main refinancing rate, was lowered after the Lehman collapse. The first decision was taken as part of a joint action in 8 October 2008 by many central banks, such as the Bank of Canada, the Bank of England, the Eurosystem, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank.112 The Eurosystem rate cuts continued until the main refinancing rate reached 1 per cent in May 2009.113 The monetary policy decisions were mainly argued on the basis of inflation developments.114

3. Eurosystem measures on collateral policy Collateral policy became a key measure through which the Eurosystem tried to adjust its monetary policy for the demands of the crisis. Paradoxically, just a few days before the Lehman collapse, the Eurosystem decided on changes concerning its collateral policy as its regular review of every second year. Three changes were implemented partly because the collateral rules had led to a perceived deterioration of the collateral quality.115 A uniform haircut116 of 12 per cent was set for asset-backed securities (ABSs) making rules slightly stricter and a haircut add-on of 5 per cent to unsecured bank bonds was applied. In addition, higher rating disclosure standards were introduced. However, an opposite deviation to previous collateral policy took place already on 15 October as a response to the Lehman shock.117 This time the aim was to broaden the collateral framework considerably and quickly.118 Excessive funding needs by the euro area banking sector caused by malfunctioning interbank markets had rendered available collateral a potential constraint for liquidity creation. The list of eligible collateral in Eurosystem credit operations was temporarily expanded until the end of 2009. The main additions included marketable debt instruments denominated in other currencies, syndicated 111 See various sources, including Buder and others, ‘The rescue and restructuring of Hypo Real Estate’ (n 108). 112 ECB, ‘Monetary policy decisions’ (Press Release, 8 October 2008) accessed 5 February 2020. 113 ECB, ‘Monetary policy decisions’ (Press Release, 7 May 2009) accessed 5 February 2020. 114 ECB, ‘Annual Report 2008’ (ECB 2009) 16–21. 115 ECB, ‘Introductory statement with Q&A Jean-Claude Trichet’ (Press Conference, 4 September 2008) accessed 5 February  2020. 116 Haircut refers to how much the collateral value is compared to the market value. It gives protection to creditors. 117 The decision was quickly made in the form of ECB Regulation (EC) 1053/2008 of 23 October 2008 on temporary changes to the rules relating to eligibility of collateral [2008] OJ L282/17, because it amended, albeit temporarily, the ECB Guideline of 31 August 2000 on monetary policy instruments and procedures of the Eurosystem (ECB/2000/7) [2000] OJ L310/1, and needed to have direct applicability throughout the Eurosystem and soon after adopted the respective ECB Guideline (2008/880/EC) of 21 November 2008 on temporary changes to the rules relating to the eligibility of collateral (ECB/2008/18) [2008] OJ L314/14. 118 A telling example was the fact that syndicated UK loans were excluded from the ECB Guideline formalizing the decision only eleven days later, which indicates extreme urgency in designing the expanded list.

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646 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) euro-denominated loans governed by UK law, debt instruments issued by credit institutions traded on accepted non-regulated markets (CDs), and subordinated debt instruments with an acceptable guarantee. In addition, the Eurosystem lowered the credit threshold for marketable and non-marketable assets from A-to BBB-.119 This was probably more substantial than was understood at the time, because the new rating threshold did not include any buffer between eligible collateral and the speculative credit rating, which made credit rating changes more dramatic. Another small change was implemented a year later on 20 November 2009.120 22.89

The next major change in collateral policy, and this time to towards more safety, took place on 8 April 2010, when the ECB introduced graduated valuation haircuts for lower-rated assets.121 The smallest haircuts applied to most liquid assets with shortest maturities, while the largest haircuts applied to least liquid assets with longest maturities. The change was intended to reduce the exposure of the Eurosystem to low quality collateral and also to increase the market conformity of the collateral policy. The graduated haircuts were introduced to make the framework less rigid and binary by nature. Importantly, the announcement was used to confirm that the major temporary expansion introduced in October 2008 and prolonged in May 2009, would cease by the end of 2010.122

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Overall, the available collateral pool for the Eurosystem liquidity operations (and payment systems) increased substantially during the crisis. Government bonds had accounted for more than half of the collateral in 2005, but their share declined when uncovered bank bonds and asset-backed securities became more important. The same pattern was even more pronounced concerning the collateral actually used. Government bonds actually played a minor and declining role (see Figure 22.6). However, it is not very clear, how important an issue collateral actually was. No very clear indication of shortage was reported at least before the Eurosystem LTRO lending in 2011 and 2012.123

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4. Measures in the normal operational framework The Eurosystem signalled another substantial change in its crisis assessment in October 2008, when it changed its normal tender procedure and the standing facilities corridor. The weekly MROs were changed to a fixed rate tender procedure with full allotment and the corridor of standing facilities was reduced from 200 basis points to 100 basis points. These 119 Standard and Poors, for example, states that an obligation rated ‘BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation’. Compared to A-rating ‘the obligor’s capacity to meet its financial commitment on the obligation is still strong’, see Standard&Poors, ‘S&P Global Ratings Definitions’ accessed 5 February 2020. Other rating agencies have similar qualifications between A and B ratings. 120 The Eurosystem amended rating requirements for the ABSs with two ratings and the ‘second-best’ rule to ensure that the requirement of high credit standards for collateral was met. See ECB, ‘ECB amends rating requirements for asset-backed securities in Eurosystem credit operations’ (Press Release, 20 November 2009) accessed 5 February  2020. 121 The actual new haircut schedule was published on 28 July 2010. 122 Marketable debt instruments denominated in currencies and debt instruments issued by credit institutions traded on the accepted non-regulated markets. Subordinated debt instruments protected by a guarantee were not to be accepted from 2011 onwards. 123 A BIS report concluded that ‘there was plainly no such squeeze in 2010’ referring to potential collateral shortage, see William A Allen and Richhild Moessner, ‘The liquidity consequences of the euro area sovereign debt crisis’ (2012) BIS Working Paper No 390, 15.

New and Unconventional Monetary Policy 647 measures reduced the market mechanism from the euro area money markets.124 Also some ad hoc measures were continued and were given a more permanent status such as provision of dollar liquidity at the Eurosystem’s own credit risk.125 Special LTROs became more regular and the maturity of operations was increased, and importantly also the LTROs were changed to fixed rates and full allotment procedures.126 A new type of measure was introduced in May 2009, namely a covered bond programme.127 The programme amounted to 60 billion euro and was carried out by means of direct purchases in both the primary and the secondary markets. A minimum rating of AA was set and purchases were directed at relatively large issues. The outright purchases were another major shift in policy, as in October 2007 the Eurosystem had decided to exclude outright transactions for fine-tuning operations.128

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The aim of the covered bonds programme was to support a specific financial market segment that was important for bank funding and that had been particularly affected by the financial crisis. In some euro countries’ bank funding effectively relied on covered bonds, and hence the programme could be seen symmetrical measure to the LTROs. The programme was used in full in 2009. The Eurosystem announced to keep the purchased covered bonds until maturity,129 effectively becoming a longer-term financier in that market segment, although the aim was only to restore the functioning of the market segment.130

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Turning to actual use of the Eurosystem standard operations, the outstanding amounts in- 22.94 creased to a new level. The MROs increased from slightly more than 220 billion euro to more than 300 billion euro (see Figure 22.4) and the LTROs rose even more (see Figure 22.7).131 Hence, the role played by the Eurosystem in providing short-term financing to the euro area banking sector increased substantially, and the balance shifted strongly towards longer- term operations. The use of standing facilities provides additional information on the situation in the banking sector. The marginal deposit facility is a good stress indicator. The deposit rate is lower than the MRO rate and the short-term money market rate. When banks deposit money at the Eurosystem, either they do not trust any other bank enough or they are hoarding excess cash. Accordingly, the use of the deposit facility was generally very small, but coloured 124 Two subsequent changes were introduced on the same day. See ECB, ‘Monetary policy decisions’ (Press Release, 8 October 2008) accessed 5 February 2020; ECB, ‘Changes in tender procedure and in the standing facilities corridor’ (Press Release, 8 October 2008) accessed 5 February  2020. 125 The first in a series of decisions was taken on 26 September 2008 and was a coordinated measure with other central banks. 126 For example, on 7 May 2009 the ECB announced for the first time a schedule of one-year auctions with fixed rate and full allotment, representing a considerable lengthening of maturity. 127 Officially, the ECB Decision was made on 2 July 2009 on implementation of the covered bond purchase programme (ECB/2009/16) [2009] OJ L175/18. 128 ECB Guideline of 20 September 2007 amending Annexes I and II to Guideline ECB/2000/7 on monetary policy instruments and procedures of the Eurosystem (ECB/2007/10) [2007] OJ L284/34. 129 Another covered bond programme was later announced but not fully implemented. 130 The Eurosystem purchases were a relatively small part of the total market estimated to total 2.4 trillion euro in 2008. ECB, ‘Monthly Bulletin August 2010’ (ECB 2010) 32–34; and John Beirne and others, ‘The impact of the Eurosystem’s covered Bond Purchase Programme on the Primary and Secondary Markets’ (2011) Occasional Paper Series No 122. 131 See ECB Datafiles accessed 5 February 2020.

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with stints of uncertainty (Figure 22.8), before the excess liquidity created by the PSPP programme from early 2015 onwards. 22.96

Marginal lending facility contains somewhat different information. When the weekly MROs were conducted with full allotments, it ensured that only completely unforeseen events impose banks to draw on marginal lending facility. Figure 22.9 shows that such events were rare but nevertheless argued for the maintenance of the facility.

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During the financial crisis, the Eurosystem use of broad list of counterparts helped in maintaining sufficient bank liquidity. From mid-2008 onwards, when the banks were losing trust in each other, the number of bidders rose rapidly. During the worst weeks of the financial crisis, the number of participants in the weekly tenders exceeded 700 banks, signalling a serious dysfunctionality of the inter-bank markets. However, as Eurosystem liquidity provisions with full allotments became a persistent feature, banks became used to getting funding from the central bank rather than interbank markets.132 Over time, this could have turned into a problem, as banks have become accustomed to rely on short–term central bank funding, increasing segmentation in the euro area banking markets.

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The financial market situation calmed down from the end of 2009. On 4 March 2010, the Eurosystem decided on a gradual phasing-out of its crisis measures with a potential ending of the MROs with fixed rate and full allotment in the latter half of 2010. As part of the normalization, the Eurosystem also decided to return to variable rate tender procedures in regular longer- term refinancing operations in April 2010. These decisions were not fully operationalized, as the wave of even worse uncertainty hit the markets in the form of a sovereign debt crisis.

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As long as the root causes of the problems stemmed from the financial sector, the Eurosystem monetary policy measures focused on the money market. The Eurosystem supported the functioning of the financial markets by providing mainly short-term liquidity to banks predominantly by weekly fixed rate full allotment actions and by longer-term auctions of up to twelve months. By the first-half of 2011, the situation in money markets had recovered and monetary policy interest rates even increased in April and July. However, these decisions were soon reversed, as concerns about the sovereign debt market increased again.133

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132 133

ECB, Statistical Data Warehouse accessed 5 February 2020. ECB, ‘Annual Report 2011’ (ECB 2012) 14.

650 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) For example, the ten-year government bonds yield in Italy increased from less than 5 per cent to more than 7 per cent,134 in Ireland from less than 10 per cent to more than 14 per cent,135 and in Portugal it exceeded 13 per cent towards the end of 2011.136 In a low inflation environment, these yields, if persisted, contained intolerable real interest rates. 22.100

In this situation, the Eurosystem decided ‘on additional enhanced credit support measures to support bank lending and liquidity in the euro area money market’.137 The decision contained two LTROs with an unprecedented maturity of three years. The auctions were conducted at fixed rate and full allotment. Furthermore, the decision was accompanied with a relaxation in the collateral policy.138 The first three-year LTRO operation on 21 December 2011 provided 489.2 billion euro to banks, and the second on 29 February 2012 added another 529.5 billion euro.139 These auctions had elements of both, supporting the functioning of the financial markets and Eurosystem engagement in sovereign debt crisis. Even the Eurosystem communication mentioned both the financial sector problems and the sovereign debt crisis. Formally they were measures to enhance financial sector ability to function and closely related to other elements of the operational framework.

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An important background development in the interbank markets was the drying-up of cross-border interbank lending also related to the lack of creditworthiness of banks in troubled countries. The reduced cross-border lending had been replaced by lending from the Eurosystem. The pattern was most profound in Greece, where lending from the Eurosystem accounted for 10 per cent of bank liabilities already in 2009 and increased above 15 per cent in 2010. A similar development took place in Ireland and from 2010 onwards in Portugal. This was followed by Italian and Spanish banks in late 2011 and early 2012 when they used the Eurosystem LTRO lending extensively.

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5. Constitutional issues related to the Eurosystem measures during the financial crisis The constitutional analysis of the Eurosystem measures during the financial crisis is complicated by the gradual nature of the events and the type of measures applied. The Eurosystem response relied on a more extensive use of its existing operational framework mainly by increasing size and maturity. A legal assessment based on individual provisions of the TFEU and ESCB and ECB Statute hardly reveals the potential economic and institutional relevance of these measures. Furthermore, the measures have not been challenged in courts, but some questions gained more prominence with the later measures by the Eurosystem including whether the measures should be understood as monetary policy and how they related to the primary objective of price stability. The starting point is the economic content of the measures, their actual economic (and potentially political) context. 134 accessed 5 February 2020. 135 accessed 5 February 2020. 136 accessed 5 February 2020. 137 ECB, ‘ECB announces measures to support bank lending and money market activity’ (Press Release, 8 December 2011) accessed 5 February 2020 (hereafter ECB, ‘ECB announces measures to support bank lending and money market activity’). 138 ECB, ‘ECB announces measures to support bank lending and money market activity’ (n 137). 139 ECB, ‘Annual Report 2011’ (ECB 2012) 16.

New and Unconventional Monetary Policy 651 The measures taken in the course of the financial crisis form a pattern and need to be seen as part of the Eurosystem’s total reaction to unforeseen and rapidly evolving events. The main aim was to maintain the functioning of the European inter-bank market, which was seriously hampered by the Lehman Brothers collapse, and more fundamentally by the losses that banks had or were feared to have suffered in various markets and instruments.140

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In order to provide banking sector with liquidity in times of a dysfunctional inter-bank markets, the Eurosystem increasingly replaced the money markets with its own operational framework. The Eurosystem guaranteed unlimited funding to banks as long as they had collateral, which was helped by the expansion of the eligible collateral list. It also purchased covered bonds directly. The increased role of the Eurosystem in the euro area banking market is visible in the evolution of its balance sheet. Eurosystem loans to euro area residents were 560 billion euro in July 2007, 1,080 billion euro in July 2009, and reached 1,780 billion euro in March 2012. The Eurosystem’s exposure to euro area financial markets increased more than threefold since 2007.

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A specific issue related to the Eurosystem collateral policy is, whether the relaxations questioned the applicability of the term ‘adequate collateral’, as stated in Article 18.1 ESCB and ECB Statute. A straight-forward answer cannot be provided, as the term ‘adequate collateral’ remains ambiguous. However, it could be claimed that to some extent the Eurosystem collateral policy could have reduced market discipline and even increased systemic risks. Particularly the inclusion of bank-created assets could have increased moral hazard.

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The liquidity provision via standard auctions and special auctions could be assessed from the perspective that they could have questioned the principle of the market economy. However, the provision of liquidity as such is a traditional central bank function, and even the excessive liquidity creation could be considered proportionate in the face of the strength of the destabilizing forces. Relying more on the market mechanism could have been considered too great a risk for the euro area economy.141 The Eurosystem LTRO operations with three-year maturity could potentially be assessed somewhat differently. The length of the operation was very unusual for monetary policy. Moreover, the gap between the communication of the operation and its actual outcome raises some questions.142

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Fundamentally, the Eurosystem measures during the financial crisis could be assessed from the perspective of whether they should be classified as monetary policy.143 The main objective for the Eurosystem measures during the financial crisis was to regain stability and

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140 Without going into too much detail, it was clear that some supervisory solutions, like the transition of potentially problematic assets including some government bonds from application of the mark-to-market accounting principle to hold to the maturity principle of the banking book, were elementary in increasing distrust in the system. 141 See, for example, ECB, ‘Euro Money Market Survey 2011’ (ECB 2011); and ECB, ‘Euro Money Market Study 2012’ (ECB 2012). 142 ECB, ‘ECB announces measures to support bank lending and money market activity’ (n 137). See also ECB, ‘Introductory statement to the press conference (with Q&A)’ (Press Conference, 8 December 2011) accessed 5 February 2020 (hereafter ECB, ‘Introductory statement to the press conference (with Q&A) 8 December 2011’), and admission that the decision on the measures was not unanimous. 143 Following the ECJ argumentation in the Pringle case, the legal assessment of the Eurosystem measures could find some quite peculiar routes. The FCC used the legal logic of the Pringle case to exclude bond purchases from the monetary policy function. See BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 64.

652 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) sufficient liquidity in the euro area financial markets not price stability in a strict sense. The Eurosystem even made a distinction between standard monetary policy that aimed at price stability and unconventional measures that had also other aims, but were still monetary policy. However, the history of central banking supports the idea that the provision of liquidity to the banking sector is part of monetary policy even without a direct link to price stability objective.

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It is somewhat arbitrary to draw a line between the financial crisis and the sovereign debt crisis. The Eurosystem measures since the early 2010 could be explained by either of these strongly interlinked crises. However, the Eurosystem measures during the financial crisis developed gradually and were mostly based on the pre-crisis operational framework. Even the measures labelled as unconventional monetary policy were in fact incremental evolutions from the existing measures already included in the Eurosystem operational framework. The ‘new’ element was generally the size, length or the rationale of the measure that made them different from the pre-crisis monetary policy. In contrast, the measures during the sovereign debt crisis marked a clearer change. The Eurosystem engaged in new measures that were mostly controversial from the start, raising also legal questions.144 The measures have included verbal interventions, involvement in rescue operations, and outright purchases of government bonds such as the Securities Market Programme (SMP), the Outright Monetary Transactions Programme (OMT) and finally quantitative easing (PSPP).

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The background for these measures was that the sovereign debt crisis intensified in the spring 2010. The most important element was the situation in Greece.145 Critically, the Greek rescue package in May 2010 failed to ease the situation, and worries spread to Ireland and Portugal, albeit for different reasons.146 The Greek situation kept surprising negatively despite new rounds of financial assistance, creating a feeling of helplessness that fed into other vulnerable countries. From late 2009 to early May 2010, the interest rate on Greek ten-year government bonds increased from 5 per cent to 12 per cent, and from thereon to reach more than 35 per cent,147 before the debt restructuring in March 2012.148 In addition, government bond yields in Ireland and Portugal started to increase from mid-2010 onwards. The interest rate differentials, the spreads, between the troubled countries and Germany widened even more because the German Bund yields declined due to safe haven flows to Germany.149 144 All the landmark cases, ECJ’s Pringle and Gauweiler and the FCC’s OMT and ESM judgments have links to the Eurosystem’s role in the sovereign debt crisis. 145 The economic events and related official rescue measures related to the sovereign debt crisis have been discussed thoroughly elsewhere. See, for example, KaarloTuori and Klaus Tuori, The Eurozone Crisis: A Constitutional Analysis (CUP 2014) (hereafter Tuori and Tuori, The Eurozone Crisis). 146 In Portugal, fiscal deficits stemmed from persistent competitiveness problems and worsening fiscal balances. In Ireland, the root cause of the problems was the bursting of the local real estate bubble and the banking crisis. In November 2010, the EU and the IMF agreed to an 85 billion euro bailout package to the Irish Republic. In May 2011 a similar package of 78 billion euro was agreed for Portugal, but with the euro area Member States and the IMF. 147 accessed 5 February  2020. 148 Jeromin Zettelmeyer, Christoph Trebesch, and Mitu Gulati, ‘The Greek Debt Restructuring: An Autopsy’ (2013) 28 Economic Policy 513–63 (hereafter Zettelmeyer, Trebesch, and Gulati, ‘The Greek Debt Restructuring’). 149 Robert A De Santis, ‘The Euro Area Sovereign Debt Crisis’ (2012) ECB Working Paper Series No 1419.

New and Unconventional Monetary Policy 653 In the second half of 2011, the worries spread also to Spain and Italy. Spain had witnessed a bursting of a real estate bubble and banking problems similar to Ireland. The cause of worry over Italy were less obvious, but the large government debt together with political uncertainty could help to explain the increase in Italian bond spreads. It was also seen as an example of contagion within the euro area.150 Poor euro area economic development worsened the financial and public sector imbalances; the situation by the end of 2011 was described as ‘a burning building with no exits’.151 Even the decision on the European Stability Mechanism (ESM) on 2 February 2012 was insufficient to calm down worries. For example, Italian government bonds yields declined during the first quarter of 2012 from 7 per cent to less than 5 per cent, but started edge higher again towards the summer, reaching 6 per cent in July 2012.152 Spanish bond yields also rose,153 as the banking sector problems piled up. On the more positive side, Spain was promised 100 billion euro for bank bailout in June 2012 and Greek voters agreed to the demands of the bailout package.154

1. The Eurosystem’s verbal interventions and involvement in rescue plans Communication is an essential part of contemporary central banking. A central bank influences the plans and decisions of the households and companies through its communication. During the financial crisis and the sovereign debt crisis, this communication became even more important as monetary policy was conducted in uncharted territories. Economic agents could not base their expectations on their previous knowledge of the economy and the central banks. Verbal interventions on the sovereign debt crisis can be defined as Eurosystem speech acts that exceeded the scope of normal commenting on the fiscal situation in the euro area. Central banks regularly assess and comment on fiscal policy as part of their analysis of economic situation. However, due its unique institutional set-up, the Eurosystem had avoided discussing individual Member States’ fiscal policy.155 This changed during the escalation of the Greek problems, when the ECB demanded that Greece and other countries ‘fully respect the Stability and Growth Pact, and fully respect the excessive deficit procedure’.156 The Eurosystem explicitly addressed a specific Member State on an issue outside monetary policy. Even clearer policy change took place in March 2010, when the Eurosystem issued a 150 Philip R Lane, ‘The European Sovereign Debt Crisis’ (2012) 26 Journal of Economic Perspectives 49–68 (hereafter Lane, ‘The European Sovereign Debt Crisis’). 151 By the UK Foreign Minister William Hague accessed 5 February 2020. 152 accessed 5 February 2020. 153 Ibid. 154 Having initially rejected them in May 2012. 155 For example, in the Introductory Statements of the regular press conferences, there has always been a paragraph on fiscal policy, often relating fiscal situation to the needs of the Stability and Growth Pact. Taken from a randomly selected statement, the key issues are: the overall pace of consolidation is disappointing; crucial to avoid the mistakes of the past; broad agreement with the main fiscal challenges as generally identified by the European Commission; speeding up fiscal consolidation and improving the outlook for fiscal sustainability; reliable compilation and timely reporting of government finance statistics; and meeting these challenges will support confidence in the soundness of public finances and in economic prospects in Europe. See ECB, ‘Introductory statement with Q&A’ (Press Conference, 6 July 2006) accessed 5 February 2020. 156 ECB, ‘Introductory statement with Q&A’ (Press Conference, 4 February 2010) accessed 5 February  2020.

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654 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) statement on Greek government fiscal consolidation measures157 aiming at convincing financial markets and the Greek people alike.158 22.113

The Eurosystem statement was followed by President Trichet’s support for the decision of Heads of State or Government that ‘euro area Member States will take determined and co- ordinated action if needed to safeguard financial stability in the euro area as a whole’.159 President Trichet comments on a potential Greek default were straightforward. When asked ‘can you, in your position, as of now categorically rule out a Greek default?’ he replied: ‘I would say that based on all the information that I have, default is not an issue for Greece’.160 He also stated that ‘we are firmly of the view that Greece will not default’.161 These interventions by the Eurosystem could have created a perception that the Eurosystem could participate in the European rescues given its financial tools.162

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The ECB also played a role in a range of broader measures planned and designed during the sovereign debt crisis. The first Greek package by the euro area governments and the IMF, involving 45 billion euro bilateral loans from euro area governments and the IMF already involved the ECB in assessing whether Greece had used all other options.163 The package was insufficient, and it was replaced by a comprehensive three-year plan of 110 billion euro, in which the involvement of the ECB was formalized. The ECB became part of the Troika concluding negotiations with governments needing financial assistance.164 President Trichet also engaged in bilateral communication with the governments of the troubled countries, inter alia, by sending letters with specific suggestions and demands, first to Irish government165 and later to Prime Ministers Berlusconi and Zapatero.166

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At the same time, the Eurosystem maintained the eligibility of the Greek government bonds167 when it otherwise tried to reduce its exposure to low quality collateral. Later it even suspended the application of the minimum credit rating threshold altogether for the 157 ECB, ‘Statement by the ECB’s Governing Council on the additional measures of the Greek government’ (Press Release, 3 March 2010) accessed 5 February 2020. 158 The internal deliberations behind the statement will become public only later, although with some likelihood, the deliberations in the formal Governing Council have taken into account the fact that they become public. 159 ‘Statement by the Heads of State or Government of the European Union’ (Brussels, 11 February 2010). 160 ECB, ‘Introductory statement with Q&A’ (Press Conference, 8 April 2010) accessed 5 February 2020 (hereafter ECB, ‘Introductory statement with Q&A 8 April 2010’). 161 ECB, ‘Introductory statement with Q&A’ (Press Conference, 6 May 2010), accessed 5 February 2020 (hereafter ECB, ‘Introductory statement with Q&A 6 May 2010’). 162 The actual impact of the verbal interventions would need further studies, but at least market commentaries took them seriously. 163 Commission, ‘The Economic Adjustment Programme for Greece’ (2010) Occasional Papers 61, ‘4 May 2010: The Commission adopts a Recommendation for a Council Decision according to Articles 126(9) and 136 of the Treaty. The draft Decision includes the main conditions to be respected by Greece in the context of the financial assistance programme’. 164 The actual term used for the Troika was the Commission, in liaison with the ECB, and the International Monetary Fund. See for example ECB, ‘ECB assesses the Greek economic and financial adjustment programme’ (Press Release, 2 May 2010) accessed 5 February 2020, on the approval of the Greek adjustment programme. 165 ‘Jean Claude Trichet letter to Brian Lenihan’ The Irish Times (6 November 2014). 166 Enrico Marro, ‘La lettera della Bce che cambiò l’Italia’ Corriere della sera (5 August 2014); and ‘Crisi: il Corriere della Sera pubblica la lettera di Draghi e Trichet a Berlusconi’ (Diretta News.it, 29 September 2011). 167 See, for example, the heated discussion at the ECB, ‘Introductory statement with Q&A 8 April 2010’ (n 160). The issue will be discussed more in the next section on fiscal policy measures.

The Securities Market Programme (SMP) 655 Greek bonds. The justification was that as part of the Troika, the ECB had assessed the Greek adjustment programme and considered it appropriate also from the risk management perspective.168 The ECB’s role in the negotiations gave it confidence in Greek government finances: ‘We had to be consistent with this judgement as regards the eligibility of the Greek government bonds’.169 Collateral policy relaxation continued with Ireland in March 2011170 and with Portugal in July 2011,171 using similar justifications. Furthermore, the Eurosystem exceptional three-year LTROs with unlimited amounts were linked to (or even motivated by) the situation in the sovereign debt markets.172 The most concrete measures and questions during the sovereign debt crisis related to the purchases of bonds issued by the euro area Member States. These will be discussed separately in the following sections.

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VI. The Securities Market Programme (SMP) The Eurosystem’s most controversial measure up to that point was the outright purchase of government bonds with the Securities Market Programme (SMP).173 It was announced on 10 May 2010 as part of a larger package to address severe tensions in the financial markets.174 In the weekend, the heads of state and government of the euro area and also the ECOFIN Council had held crisis meetings to agree upon measures to preserve financial stability in Europe with a direct message to the ECB that they ‘fully support the ECB in its action to ensure the stability of the euro area’. The quick change in heart was explained by an acute malfunctioning of some segments of the euro area bond markets in relation to the Greek situation.175 The exceptionality was added by some NCB officials apparently leaking information and questioning the stated reasons for the SMP.176 168 ECB Decision of 6 May 2010 on temporary measures relating to the eligibility of marketable debt instruments issued or guaranteed by the Greek Government (ECB/2010/3) [2010] OJ L117/102. 169 ECB, ‘Introductory statement with Q&A 6 May 2010’ (n 161). 170 ECB, ‘ECB announces the suspension of the rating threshold for debt instruments of the Irish government’ (Press Release, 31 March 2011) accessed 5 February 2020. 171 ECB, ‘ECB announces change in eligibility of debt instruments issued or guaranteed by the Portuguese government’ (Press Release, 7 July 2011) accessed 5 February 2020. This suspension will be maintained until further notice. 172 ECB, ‘ECB announces measures to support bank lending and money market activity’ (n 137). In addition, the ECB halved the reserve ratio from 2 per cent to 1 per cent and also relaxed collateral availability further by including for example bank loans on the list. 173 Formally the SMP was established by ECB Decision (2010/281/EU) of 14 May 2010 establishing a securities markets programme (ECB/2010/5) [2010] OJ L124/8. 174 The programme was a surprise, as just a few days earlier President Trichet had claimed that the ECB had not even discussed such a measure. ECB, ‘Introductory statement with Q&A’ (n 161). 175 Jean-Claude Trichet, ‘The ECB’s response to the recent tensions in financial markets’ (38th Economic Conference of the Oesterreichische Nationalbank, Vienna, 31 May 2010) accessed 5 February 2020 (hereafter Trichet, ‘The ECB’s response to the recent tensions in financial markets’). 176 In Börsen Zeitung on the following day, Bundesbank President Weber stated: ‘Der Ankauf von Staatsanleihen birgt erhebliche stabilitätspolitische Risiken’ and he also made known that he had opposed the decision. Apparently some other unnamed senior level bankers from the Bundesbank even raised the suspicion that Trichet was simply trying to save French banks from incurring large losses on Greek government debt; Wolfgang Reuter, ‘German Central Bankers Suspect French Intrigue’ (Spiegel Online, 31 May 2010) accessed 5 February 2020.

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The SMP contained ‘interventions in the euro area public and private debt securities markets to ensure depth and liquidity in those market segments which are dysfunctional. The objective of the programme was to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism’.177 The SMP formally assigned the Governing Council the power to instruct the NCBs to make interventions in the securities markets. It was clear that the programme was aimed at buying the government bonds of the troubled Member States. President Trichet explained that: ‘[B]‌ond spreads for several euro area countries widened beyond any reasonable level.’178 The countries included Greece, Ireland and Portugal and later also Spain and Italy, although the composition of the countries and amounts were revealed much later in a separate press release.179

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The Eurosystem referred to the exceptional circumstances in financial markets that were hampering monetary policy transmission mechanism, which the programme was expected to restore.180 The SMP was justified as part of Eurosystem monetary policy, addressing the specific malfunctions. Monetary policy stance was not to be affected by the programme and to this end, it was sterilized by absorbing the liquidity generated by the purchases.181 The purchases were to take place in the secondary markets in order not to directly breach Article 123 TFEU without specifying any safety margins to primary issues.182 The purchased assets needed to fulfil the asset eligibility criteria on monetary policy instruments and procedures of the Eurosystem.183 However, all Member State governments bonds were eligible, as the application of the eligibility criteria had been suspended.184

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The decision did not specify any risk-sharing structure within the Eurosystem. However, the purchases were fully instructed by the ECB, and hence without statements of the otherwise a full risk-sharing was to take place. It would also be problematic to force the NCB of the country in trouble to bear the risk of purchasing its own government bonds, when the reason for the purchases was the market’s distrust of the same Member State’s public finances.185

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The Eurosystem maintained full discretion whether or not to purchase bonds, and the actual purchases did not seem to react to any clear market situations, for example, government 177 ECB, ‘ECB decides on measures to address severe tensions in financial markets’ (Press Release, 10 May 2010) accessed 5 February  2020. 178 Trichet, ‘The ECB’s response to the recent tensions in financial markets’ (n 175). 179 ECB, ‘Details on securities holdings acquired under the Securities Markets Programme’ (Press Release, 21 February 2013) accessed 5 February 2020 (hereafter ECB, ‘Details on securities holdings acquired under the Securities Markets Programme’). 180 Preamble (2) and (3) ECB Decision (2010/281/EU) of 14 May 2010 establishing a securities markets programme (ECB/2010/5) [2010] OJ L124/8. 181 The Eurosystem re-absorbed the liquidity provided through the SMP by means of weekly liquidity-absorbing operations until June 2014. See accessed 5 February 2020. 182 Private purchases could also have taken place on primary markets. See Article 1 ECB Decision (2010/ 281/EU). 183 Article 2 ECB Decision (2010/281/EU). 184 ECB, ‘ECB announces change in eligibility of debt instruments issued or guaranteed by the Greek government’ (Press Release, 3 May 2010) accessed 5 February 2020 (hereafter ECB, ‘ECB announces change in eligibility of debt instruments issued or guaranteed by the Greek government’). 185 This was highlighted in the case of the PSPP programme, where the risk-sharing was deemed possible because of the very different aims. See Chapter 10.

The Securities Market Programme (SMP) 657 bond yields or spreads vis-à-vis German Bunds.186 The Eurosystem did not give an indication of the total volume of bonds to be purchased, but it provided weekly information on the amounts it sterilized. The programme started off immediately after the decision, and initially involved Greek, Irish and Portuguese government bonds. Over a period of two weeks, the Eurosystem bought 26.5 billion euro of bonds. The programme was halted in July 2010, and reactivated in August 2011 to include also Spanish and Italian government bonds. The last purchases took place in February 2012 and the amount peaked at 218 billion euro. When the ECB revealed its holdings, they mainly consisted of Italian (101 billion euro), Spanish (44 billion euro), and Greek (34 billion euro) government bonds.187 Legally, the SMP was based on the Eurosystem’s monetary policy mandate. The decision made an explicit reference to the first indent of Article 127(2) TFEU pointing to the task of defining and implementing monetary policy. In addition, the decision referred to the ESCB and ECB Statute, in particular the second subparagraph of Article 12.1 as well as Articles 3.1 and 18.1.188 The legal basis was hence the Union’s exclusive competence in monetary policy according to Article 3(1)(c) TEU. It neither referred to supporting the general economic policies in the Union, stated in Article 127(1) TFEU, nor to contributing to the smooth conduct of policies pursued by competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system, stated in Article 127(5) TFEU.

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A. The aims of the programme The main questions concerning the SMP concerns the underlying economic aims of the programme. How can a programme such as the SMP be interpreted as monetary policy? The Eurosystem argument was that severe tensions in certain market segments hampered monetary policy transmission mechanism and the effective conduct of monetary policy. A bond purchase programme could ‘address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism’.189 In other words, the bond yields of some Member States and particularly the spreads between euro area government bonds had reached levels that were considered excessive and detrimental to single monetary policy. The purchases could help to overcome these problems.190

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Normally, the Eurosystem steers the economy by setting policy rates, which directly influence money market interest rates, current and expected. These, in turn, affect other interest rates and defines the actual interest rates faced by households, companies and governments making their saving and investment decisions. The issue was the role of government bonds in this process that were claimed to affect other markets through three interlinked channels. First, the government bond yields were seen to act as reference rates for other

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186 However, a closer study on intra-day activities pointed to some reactions against yield and volatility peaks in the markets, perhaps stemming from the Eurosystem internal procedural guidelines, Eric Ghysels and others, ‘A high frequency assessment of the ECB Securities Markets Programme’ (2014) ECB Working Paper Series No 1642. 187 ECB, ‘Details on securities holdings acquired under the Securities Markets Programme’ (n 179). 188 ECB Decision (2010/281/EU). 189 Preamble (2) and (3) ECB Decision (2010/281/EU). 190 At the time, mainly the Greek bond yields were significantly elevated, although the Irish and Portuguese yields also started to edge higher. The Eurosystem provided less evidence on the impact of bond yields on retail bank interest rates.

658 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) yields. Other interest rates are defined by adding a risk compensation on top of the government bond yield.191 Second, government bonds are the most widely used collateral in the interbank markets and central banking operations,192 and thus government bond market malfunctioning can disrupt interbank markets and reduce interbank liquidity.193 This, in turn, can hamper bank lending to households and companies, hampering the transmission of monetary policy to the real economy. Third, the bond markets could affect the transmission of monetary policy Eurosystem also through banks’ balance sheets, if the losses stemming from government bonds reduce banks’ own capital and ability to lend.194 22.125

The Eurosystem argued that monetary policy impulses were not transmitted through financial markets and banks to the real economy, because the disruptions in the sovereign bond markets affected financial market pricing and the behaviour of banks. Critically, the SMP was to restore the monetary policy transmission mechanism by supporting the government bond markets of the troubled Member States. The line of argumentation might sound acceptable, but on a number of grounds it could be (and has been) questioned, even by the members of the ECB Governing Council.195 The complexity inherent to the assessment has been increased by the unique euro area institutional and economic structure, which limits the degree to which other theoretical and empirical research can be applied.196

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To begin with, the question, whether the SMP can be included in the core of traditional monetary policy is uncomplicated. The SMP was not part of the standard monetary policy. The purchase of some specific assets in some specific geographical areas in order to facilitate a pass-through of monetary policy impulses has not been part of the monetary policy tool-box of any central bank. Thus, following a narrow or even traditional definition of monetary policy, the SMP was not monetary policy. The Eurosystem has agreed with this conclusion.197

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However, whether the SMP could be seen as justified unconventional monetary policy depends on the question on the role of government bonds in monetary policy transmission and the likely impact of bond purchases. The argumentation relied on the idea that national government bond markets functioned as the basis for other re-nationalized financial markets. Generally, this was hardly the case, as the euro area financial markets remained

191 See, for example, Luca Giordano, Nadia Linciano, and Paola Soccorso, ‘The determinants of government yield spreads in the euro area’ (2012) CONSOB Working Papers No 71; Salvador Barrios and others, ‘Determinants of intra-euro area government bond spreads’ (2009) European Economy—Economic Papers 388. 192 As can be recalled, in many countries government bonds are the only asset that is accepted as collateral. 193 Liquidity in this case refers to the ability of the markets to satisfy the needs of banks with regard to supply or demand of interbank funding without excessive price movements. 194 Trichet, ‘The ECB’s response to the recent tensions in financial markets’ (n 175). 195 Most notably, German Bundesbank was vocal against the programme from the start and questioned the monetary policy transmission argument. Bundesbank president Weber also resigned unexpected in April 2011 apparently on the basis of his opposition to the policy, see James Shotter, ‘Weber agrees departure date in April’ Financial Times (Berlin, 11 February 2011) accessed 5 February 2020. In addition, at least the President of De Nederlandsche Bank Klaas Knot has been critical. See Gabi Thesing and Jana Randow, ‘ECB Seen Favoring Bond Buying Over Bank Loans’ (Bloomberg, 13 April 2012). See also Otmar Issing, ‘The wrong kind of union’ Financial Times (8 August 2011). 196 See the discussion on the principles of the European economic constitution and particularly on the national responsibilities. 197 It was labelled an unconventional monetary policy measure, and the Eurosystem communication has consistently referred to it as such.

The Securities Market Programme (SMP) 659 largely a uniform market even during the crisis, even if uniform pricing across sectors and countries was reduced from an exceptionally high level.198 The German Bund market could still be seen as the benchmark similar to the Treasury bond markets in the US,199 although German Bunds are not federal bonds of the euro area. Their pricing was linked to German factors in addition to the euro area factors. In addition, the Bunds even acted as safe haven asset, pushing their yields below what could be justified by the economic fundamentals in Germany. The need for public sector intervention in the bond markets needs to be assessed on the basis what it could realistically achieve. If fundamental factors explained the interest rate differentials between euro area sovereign bonds, there would have been no role for Eurosystem intervention. Such fundamental factors include credit risks, liquidity risks and general investor risk appetite, the risk premia. Potential non-fundamental factors could include a fear of contagion or of currency redenomination, leading to unnecessary or even self-fulfilling catastrophe scenarios barring a policy response. And these factors could call for a policy response from the Eurosystem, which could be considered a monetary policy measure. ‘Legitimate fear of contagion can cause policymakers to take actions that they would not normally consider.’200

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The exceptional circumstances in global financial markets and particularly in the euro area complicate the assessment. There was some evidence that the euro area government bond markets were more affected by banking risks than other countries. The EMU could have made bank problems worse for the Member States that were already facing other difficulties,201 which makes it difficult to determine what level of default risk is appropriate for each sovereign state. In addition to the traditional macroeconomic and financial parameters mentioned above, crisis situation might elevate new variables to the equation. For example, the default probability of a country can depend on factors that are outside the sphere of economics such as its ability and willingness to respect its obligations.202

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The contagion risk could be used to advocate early reactions in the vulnerable markets (countries) to reduce the risk of contagion affecting other countries. In situations of heightened risk-awareness or even panic, problems in one country can cause other countries with similar features to become contaminated by the default risk of the original problem country.203 Such a contagion risk or a currency redenomination risk (effectively a partial breakup of the euro) can advocate policy responses even when no market mispricing can be verified. In practice, if

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198 See, for example, ECB, Financial integration in Europe (ECB 2014) 29–30 (hereafter ECB, Financial integration in Europe). 199 For example, the spreads of the euro area sovereign bonds yields are generally expressed in relation to German Bunds although the euro area benchmark yield curve would formally be more correct. See, for example, ECB, ‘Monthly Bulletin May 2014’ (ECB 2014), ‘The determinants of euro area sovereign bond yield spreads during the crisis’. 200 Kristin Forbes, ‘The big C: Identifying Contagion’ (2012) NBER Working Paper No 18465 (hereafter Forbes, ‘The big C’). 201 See, for example, Stephan Dieckmann and Thomas Plank, ‘Default Risk of Advanced Economies’ (2012) 16 Review of Finance 903–34. 202 This could be signaled by making politically difficult decisions even including constitutional changes such as the Spanish constitutional change in August 2011 and the decisions by the Monti government in Italy in November 2011, which could have signalled countries political will to honour their debts. 203 See, for example, Huixin Bi and Nora Traum, ‘Estimating Sovereign Default Risk’ (2012) 102 American Economic Review 161–66.

660 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) the markets are pricing politically unacceptable risks such as a euro exit, the political system can indicate its determination by reacting against such pricing.204 For example, if there is a high probability of adverse events spreading to another country that should not happen on the basis of its economic fundamentals, there is a role for a policy action.205 The classification of this policy as monetary policy or some other economic policy is another matter. 22.131

Against this background, it could be assessed whether sovereign bond yields in some euro area Member States were not based on economic and financial fundamentals. Specifically, it could be asked whether the market reactions could have been explained by a contagion from one country to another that could have been mitigated by Eurosystem measures such as the SMP. The research on sovereign bond yields has found that the spreads have stemmed mainly from credit risk differentials explained by traditional factors related to public finances, such as government debt and deficit, interest expenditures and also by broader economic variables of economic sustainability (growth prospects, unemployment and even inflation).206 A new feature during the crisis was the risk of a banking shock.207 Unfortunately, the analyses of euro area sovereign bond yields has not provided firm conclusions. The ECB Monthly Bulletin mentioned that ‘[a]‌relatively robust finding of the literature on the determinants of sovereign bond spreads is that measures of a country’s creditworthiness, traditionally related to credit premia, have become more relevant to explain sovereign bond spreads since the start of the financial crisis and, to an even larger extent, since the sovereign debt crisis’.208 Although economic and financial stress can thus lead to increased awareness of risks and also to increased risk premia in general,209 it was not the case that economic fundamentals played a smaller role—quite the opposite.

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In the communication on bond purchases, the currency redenomination risk was highlighted to explain why the euro area financial markets could have been re-nationalized. Particularly international investors were claimed to have started to price-in the possibility that some Member States would either leave the euro voluntarily or would be forced to leave. In those circumstances, those Member State and their financial systems could face exaggerated risk pricing well above the levels justified by economic fundamentals.210 However, 204 See, for example, Forbes, ‘The big C’ (n 200) and also Adrian Alter and Andreas Beyer, ‘The Dynamics of Spillover Effects’ (2013) ECB Working Paper Series No 1558. 205 This could be described as a multiple equilibria situation, such as in Vítor Constâncio, ‘Contagion and the European debt crisis’ (2012) Financial Stability Review 109–21. 206 For the discussion, see for example, Lorenzo Codogno, Carlo Favero, and Alessandro Missale, ‘Yield spreads on EMU government bonds’ (2003) 18 Economic Policy 503–32; Alois Geyer, Stephan Kossmeier, and Stefan Pichler, ‘Measuring systematic risk’ (2004) 8 Review of Finance 171–97; Kerstin Bernoth, Jürgen von Hagen, and Ludger Schuknecht, ‘Sovereign risk premiums’ (2012) 31 Journal of International Money and Finance 975–95; Carlo Favero, Marco Pagano, and Ernst-Ludwig von Thadden, ‘How does liquidity affect government bond yields?’ (2010) 45 Journal of Financial and Quantitative Analysis 107–34; Stefan Gerlach, Alexander Schulz, and Guntram B Wolff, ‘Banking and sovereign risk’ (2010) CEPR Discussion Paper No DP7833; Jürgen von Hagen, Ludger Schuknecht, and Guido Wolswijk, ‘Government bond risk premiums in the EU revisited: The impact of the financial crisis’ (2011) 27 European Journal of Political Economy 36–43. 207 Maria Grazia Attinasi, Cristina Checherita-Westphal, and Christiane Nickel, ‘What explains the surge in euro area sovereign spreads during the financial crisis of 2007–2009?’ (2010) ECB Working Paper Series No 1131, 595–645. 208 ECB, ‘Monthly Bulletin May 2014’ (ECB 2014) 69, ‘The determinants of euro area sovereign bond yield spreads during the crisis’. 209 Antonello D’Agostino and Michael Ehrmann, ‘The pricing of G7 sovereign bond spreads’ (2013) ECB Working Paper Series No 1520. 210 This redominination argumentation gained in importance only later. It was not mentioned, when SMP was introduced.

The Securities Market Programme (SMP) 661 the link between a country default and its currency redenomination is not straightforward. A Member State’s default on government debt leads to losses to its creditors but not to a new currency. Currency redenomination takes place only if the country in trouble deems it necessary to abandon the euro in order to regain economic sustainability.211 In conclusion, considering all the uncertainties, it is difficult to claim with any certainty that the pricing of government bonds was out of line with economic fundamentals, although there is some evidence of malfunctioning and of currency redenomination risks in the euro area government bond markets. This could point to other motivations for the SMP, where one issue is the credibility of the economic reasoning and the other is its constitutional acceptability in the euro area context. In this regard, a difficult issue has been the relationship between the common monetary policy and the national banking sectors. The Eurosystem was not responsible for the functioning or the soundness of euro area banking, but still two banking related reasons were used to justify the SMP: the link between the government bond markets and liquidity, and the impact of government bond markets on the bank solvency.212

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The banks have remained very important and relatively national in the euro area. The bank funding became more fragmented, and led to more fragment lending costs for corporations during the crisis. Household funding costs remained similar across countries.213 One example of the pressures on euro area banking market emerged in the bank credit default swaps (CDS),214 which rose substantially from April-May 2010 onwards. This reduction in market assessment of the euro area banks’ creditworthiness correlated with the euro area sovereign debt markets. Banks in troubled countries faced higher CDSs. The opposite evidence was that public deposits continued to grow215 and euro area banks continued to make money market transactions predominantly with non-domestic counterparties.216 Also, for large euro area corporations, financing conditions showed small differentiation between countries, and the widening only occurred after the SMP was activated.217

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Against this background, the motivations provided by the Eurosystem can be critically assessed. The proper functioning of government bond markets could be relevant for the functioning of interbank markets. However, in the run-up to and during the crisis government bonds played a small and even declining role as collateral in central banking operations. Some initial evidence pointed towards increased need for collateral in the interbank markets already in 2007,218 but later a major theme was the drying-up of cross-border interbank lending mainly due to the lack of creditworthiness of banks in troubled countries. Against

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211 See for example, the Greek default in spring 2012. 212 Trichet, ‘The ECB’s response to the recent tensions in financial markets’ (n 175). 213 The CDS is a financial instrument that only measures the price that is put on the default probability of a given bank. See ECB, Financial integration in Europe (n 198) 29–30. 214 CDS refers to credit default swap which is credit derivate product that measures the compensation demanded for the risk a country defaults in a case of sovereign CDSs. A CDS can be seen as an insurance against non-payment that is defined by the markets. See for example accessed 5 February 2020. 215 William A Allen and Richhild Moessner, ‘The Liquidity Consequences of the Euro Area Sovereign Debt Crisis’ (2013) BIS Working Paper No 390, 3. 216 ECB, Financial integration in Europe (n 198) 16. 217 Ibid, 21. 218 See Florian Heider and Marie Hoerova, ‘Interbank Lending, Credit Risk Premia and Collateral’ (2009) ECB Working Paper Series No 1107.

662 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) this background, it could be claimed that the link between the SMP and the interbank liquidity situation was vague at best. 22.136

This leads to the final channel, the balance sheet channel. Could the Eurosystem have bought government bonds in order to reduce potential losses from those bonds? This is based on some strong assumptions: government bonds need to be mispriced, banks have these bonds in their balance sheets and face financial losses, and this hampers banks financial intermediation capability and consequently also the transmission of monetary policy. While this was plausible, it would have been solvency support to banks, particularly if bond pricing was in line with fundamentals. However, many central bank activities have some impact on banks’ balance sheets and profitability; sometimes these effects are taken into account when deciding on monetary policy measures, where the line between monetary policy and other policies could be drawn by the actual motivation of the measure.

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It can be concluded that it is difficult to confirm that the SMP was a conduct of monetary policy. There are less than convincing arguments that the situation in government bond markets amounted to genuine malfunctioning. The contagion and currency redenomination risks deserve the benefit of the doubt, although the link between the SMP and the currency redenomination risk appears to be weak. Using central bank money to improve banks’ balance sheets, directly or indirectly, is problematic in the EMU. Financial transfer to banks falls under other policy areas.

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It could be possible to assess, whether some other reasons could have motivated the decision. Two motivations have been critically mentioned, namely supporting government finances and supporting banks. It was claimed right from the outset that the SMP amounted to the prohibited monetary financing of governments.219 The most apparent link between the SMP and the financing of governments is the Greek case, where the SMP purchases took place after the changes in collateral rules,220 linked to the ECB’s participation in the Greek rescue package.221

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The other critical claim related to the SMP and the solvency of euro area banks. The difficult issue in spring of 2010 was the looming restructuring of the Greek debt. The postponing of 219 Hans- Werner Sinn, ’Verantwortung der Staaten und Notenbanken in der Eurokrise’ (2013) 66 ifo Schnelldienst  17–19. 220 ECB, ‘ECB announces change in eligibility of debt instruments issued or guaranteed by the Greek government’ (n 184); ECB, ‘Introductory statement with Q&A’ (n 161), Trichet: [W]‌e were unanimous in asking Greece to embark on a recovery programme. We were unanimous in forming a positive judgement on the recovery programme that has been negotiated by the European Commission, in liaison with us, and by the IMF. An overwhelming majority was of the opinion that we had to take the decision that was taken last Sunday, in order to be fully consistent. 221 Point made at the ECB, ‘Introductory Statement to the Press Conference’ (Press Conference, 3 February 2011) accessed 5 February 2020. Gabi Thesing, Jana Randow, and Simon Kennedy, ‘ECB to Intervene in Bond Market to Fight Euro Crisis’ (Bloomberg, 10 May 2010) accessed 5 February 2020. The decision was questioned beforehand by Bundesbank President Alex Weber, who pointed out that ‘measures that damage the fundamental principles of the currency union and the trust of the people would be mistaken and more expensive for the economy in the longer term’. See reference in John Blau, ‘ECB suffers credibility blow’ (Deutsche Welle, 12 May 2010) accessed 5 February 2020; and original source Jürgen Schaaf, ‘Interview mit Bundesbankpräsident Axel Weber “Kaufprogramm birgt erhebliche Risiken” ’ Börsen-Zeitung (11 May 2010).

The Securities Market Programme (SMP) 663 the (inevitable) default was criticized for protecting German and French banks that held large amounts of these bonds. Clearly, the euro area rescue measures were used for paying interest and capital on outstanding Greek bonds at full value.222 Between early 2010 and the eventual restructuring of the Greek debt in March 2012, the holdings of these bonds had changed from private to public hands, reducing losses for the banks (and their respective governments). In conclusion, if the main motivation for the SMP was either to support Member States government finances or to support banks, neither would classify the SMP as monetary policy.

B. Constitutional remarks on the SMP It is clear that the SMP was not part of the traditional conduct of monetary policy. That was never claimed by the Eurosystem, and nothing like the SMP can be found in the Eurosystem pre-crisis monetary policy strategy or its operational framework. Nevertheless, the Eurosystem insisted that the programme was legally based on its task to define and implement a common monetary policy, as stated in Article 127(2) TFEU, on the basis that it was needed to ensure the transmission of monetary policy across the euro area. This claim needs to be assessed, because it is part of drawing the line between the Eurosystem and the Member States competences.223

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The economic analysis provided limited evidence that monetary policy reasons would have required the buying of government bonds of the troubled Member States. The link between the proper functioning of national financial markets and domestic government bonds is not clear. Actually, the evidence did not seem to indicate any fundamental mispricing in the government bonds markets of the troubled Member States. However, the inconclusiveness of the economic evidence could support the Eurosystem’s claim that SMP was monetary policy.224 Legally, it could even be argued that if the Eurosystem were to define the SMP as monetary policy (Article 127(2) TFEU) and if the programme would be operationalized through Eurosystem financial market transactions, that is buying and selling securities outright as stated in Article 18.1 ESCB and ECB Statute, it could be viewed as part of the Eurosystem monetary policy competence,225 particularly if no formal prohibition was breached.226

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222 See Paul Blustein, Laid Low: Inside the Crisis That Overwhelmed Europe and the IMF (CIGI Press 2016). 223 The issue of boundaries is thoroughly discussed in BVerfG, Order of the Second Senate of 14 January 2014— 2 BvR 2728/13, paras 59–64. 224 See for example, Leon Helm, The ECB’s securities markets programme: An analysis of economics, law and central bank independence (College of Europe Natolin Campus 2012) 32–35 (hereafter Helm, The ECB’s securities markets programme). Here it could be pointed out that macroeconomic evidence is rarely very conclusive, and hence the question could actually be mostly on the burden of proof. 225 Peter Sester, ‘The ECB’s Controversial Securities Market Programme (SMP) and its role in relation to the modified EFSF and the future ESM’ (2012) 9 European Company and Financial Law Review 156–78. See also Peter Sester ‘The role of ECB in relation to the modified EFSF and the future ESM: a presentation’ accessed 5 February  2020. 226 Ansgar Belke, ‘Driven by the Markets? ECB sovereign bond purchases and the securities markets programme’ (2010) 45 Intereconomics 357–63. See also Laura Puccio, ‘The pressures inflicted by the financial crisis on the Euro area: de facto creating an EU economic government despite the status quo maintained in the Lisbon treaty?’ in Martin Trybus and Luca Rubini (eds), The treaty of Lisbon and the future of European law and policy (Edward Elgar Publishing 2012) 86.

664 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) 22.142

This classification of the measures as monetary policy or some other policy was complicated by the European Court of Justice (ECJ) in the later Pringle case, where it made a peculiar link between the Eurosystem’s other instruments, namely setting key interest rates and issuing currency, and the buying of governments bonds. If these monetary policy tools were available, then the buying of government bonds was also monetary policy.227 From this, it was concluded that the setting of the key interest rates and the issuance of currency as Eurosystem instruments qualify the SMP as monetary policy. The ECJ’s conclusion was not affected by the Eurosystem’s explicit denial of a link between the SMP and monetary control.

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The SMP makes some of the constitutional questions related to Articles 123 and 125 TFEU quite explicit. Before the crisis, the Eurosystem used government bonds in monetary policy operations only as collateral in its standard lending operation and payment systems. With purchases, the Eurosystem became a holder of a government bonds and thus became a creditor of some Member States. The SMP could be questioned purely on the basis of prohibition of public financing, stated in Article 123(1) TFEU. The use of government bonds was to be limited to strictly monetary policy purposes. The Eurosystem’s legitimate need to use government bonds in monetary policy operations does not extend to financing of governments. The argumentation that the SMP is part of monetary policy and used to correct malfunctions of the transmission mechanism deserved a fair assessment, but the test on the prohibition of public finances is a parallel one and needs to be passed regardless of whether the ultimate motivation was based on monetary policy.

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The use of government bonds in the SMP deviated from normal monetary policy operations, because bonds were kept to maturity. The fact that a monetary policy instrument, mostly related to the liquidity situation in the financial markets or to short-to medium- term signalling of the monetary policy stance, would be held to maturity was exceptional. It sounds like a financing of governments. The hold-to-maturity approach hints in the direction of the Eurosystem replacing private financiers with regard to some Member States.

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The demarcation line between primary market and secondary market purchases has received a great deal of attention. Later, the ECJ pointed to two relevant qualifications, namely that secondary market purchases should not take place ‘under conditions which would, in practice, mean that its action has an effect equivalent to that of a direct purchase of government bonds from the public authorities and bodies of the Member States, thereby undermining the effectiveness of the prohibition in Article 123(1) TFEU’.228 It is also necessary to take account of the objective of that provision229 with reference to the Council regulation stressing that secondary market purchases should not be used to circumvent the objective of the prohibition.230

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The opinions of legal scholars on Article 123 TFEU and the SMP have been quite mixed. Arguments supporting the SMP were largely based on the fact that purchases took place 227 Case C-370/12 Thomas Pringle v Government of Ireland [2012] ECLI:EU:C:2012:756, paras 95–96 (hereafter Pringle). 228 Case C-62/14 Peter Gauweiler and others v Deutscher Bundestag [2015] ECLI:EU:C:2015:400, para 97 (hereafter Gauweiler and others). 229 Gauweiler and others (n 228) para 98 and Pringle (n 227) para 133. 230 Gauweiler and others (n 228) paras 100–02.

THE OMT PROGRAMME 665 in the secondary markets.231 The circumvention arguments were pushed aside mostly by pointing to the limited amounts and timing differences between issuances and purchases. The purchases were seen as short-term interventions in the markets similar to fine-tuning operations.232 However, these assessments did not discuss the hold-to-maturity feature of the SMP purchases. For some legal scholars, the violation of Article 123 TFEU was clear.233 The Eurosystem’s aim to influence the financing conditions of the troubled Member States and the permanent use of the central bank balance sheet were indications of the prohibited motivations. The German Federal Constitutional Court (FCC) linked Article 123 TFEU to the national responsibility of sound public finances,234 preventing the Eurosystem from direct financial stabilization of Member States, either directly or indirectly.235 In the later Gauweiler case, the FCC warned against a situation in which ‘the Eurosystem would not only take over the function of a “bad bank” for the banks in the participating states; it would also indirectly contribute to the financing of their budgets’ or ‘to take large and unnecessary risks of losses’.236

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VII. The Outright Monetary Transactions Programme (OMT) The Eurosystem became ever more deeply engaged in the sovereign debt crisis when the fears rose over the survival of the EMU. Some earlier measures had already been criticized for overstepping the lines of monetary policy, but it was the Outright Monetary Transactions Programme (OMT) that focused EU constitutional discussions on the ECB. The OMT was subjected to legal review, first by the FCC’s initial judgment and then the ECJ reply to the request for a preliminary ruling.237 The ECJ judgment needs to be the starting point for constitutional discussion, even if it is open to criticism also in comparison to the FCC judgment. The discussion on the OMT starts from the actual economic events that led to the measure, continue to the specifics of the programme and concludes with some constitutional remarks.

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A. Events leading to the introduction of the OMT—fears move to Spain and Italy The first stage of the euro area sovereign debt crisis culminated in the rescue packages for Greece, Ireland and Portugal in 2010–11, and the worst fears concerning Ireland and Portugal started subsiding. The Greek situation remained chaotic, and Greek government 231 Jean-Victor Louis, ‘Guest Editorial: The No-bailout Clause and Rescue Packages’ (2010) 47 Common Market Law Review 971, 975. 232 See Christoph Herrmann, ‘EZB-Programm für die Kapitalmärkte verstößt nicht gegen die Verträge’ (2010) 21 Europäische Zeitschrift für Wirtschaftsrecht 645. 233 Matthias Ruffert, ‘The European Debt Crisis and European Union law’ (2011) 48 Common Market Law Review 1777, 1788. 234 BVerfG, Judgment of the Second Senate of 18 March 2014—2 BvR 1390/12, para 171. 235 Thomas Cottier and others, The Rule of Law in Monetary Affairs (CUP 2014) 251. 236 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 89. 237 BVerfG, Judgment of the Second Senate of 21 June 2016—2 BvR 2728/13.

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666 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) bond yields rose until the debt restructuring and the approval of the second rescue package in March 2012. Concerns over the fiscal situation in Italy and Spain started to gain ground during the summer of 2011, and the SMP was used to purchase Italian and Spanish government bonds from August 2011 onwards. In Spain the worries stemmed mostly from the banking sector, as the long real estate boom had ended abruptly. In Italy, credit ratings for government bonds were cut in September and October 2011 on the grounds of weak economic growth. Rising debt servicing costs contained a risk of self-enforcing negative developments.238 In addition, fears of a contagion from Greece related to its referendum on the second bailout package.239 22.150

As mentioned, the last Eurosystem measures during this first phase of the sovereign debt crisis included not only the SMP but also the three-year LTRO auctions in December 2011 and February 2012. As a brief sign of calmness, government bond auctions in early 2012 were successfully boosted by LTRO lending to banks.240 However, the feeling of relief was temporary. Although Ireland and Portugal saw declining bond yields, Spanish government bond yields increased from March 2012 and also Italian government bond yields edged higher although well below the level reached in late 2011. The Spanish worries related to the worsening banking problems, as the scale of the recapitalization increased dramatically241 and undermined the consolidation measures of the Spanish government. This culminated in the EFSF/ESM funding of recapitalization of Spanish banks in June 2012.242 As the Spanish and Italian government bond yields edged higher in the late spring 2012, worries over the sustainability of the euro area as a whole gained momentum. The size of Spanish and particularly Italian bond markets were such that they dwarfed the euro area rescue mechanisms (the EFSF and the ESM) with their outstanding public debt totalling more than 2,900 billion euro, four times the amount of the earlier troubled Member States.243

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At the same time, the calls for further Eurosystem measures intensified, as even the ESM alone was insufficient to handle the situation if both Spain and Italy could not finance themselves. Actually, the liabilities caused by the European rescue operations had added to the already vulnerable state of Italian and Spanish public finances. The three-year LTRO 238 See Jeffrey Donovan, ‘Italy Credit Rating Cut by S&P as Crisis Contagion Spreads’ (Bloomberg, 20 September 2011) accessed 5 February 2020 and also Catherine Hornby and Daniel Bases, ‘Moody’s slashes Italy credit rating’ (Reuters, 5 October 2011) accessed 5 February 2020. 239 See for example, Tuori and Tuori, The Eurozone Crisis (n 145). 240 There was also at least anecdotal evidence that governments encouraged banks to use LTRO money to buy government bonds and the early 2012 was a relatively calm period with generally declining government bond yields. See Michiel De Pooter and others, ‘Cheap Talk and the Efficacy of the ECB’s Securities Market Programme: Did Bond Purchases Matter?’ (2015) FRB International Finance Discussion Paper No 1139, particularly 49 and the list of market event 51–98 (hereafter De Pooter and others, ‘Cheap Talk and the Efficacy of the ECB’s Securities Market Programme’). 241 The nationalized Bankia was the third largest bank in Spain. Initially no government interventions were expected but in the course of spring 2012, the estimated amount of fresh public capital soared to tens of billions. See Miles Johnson, ‘Spain to spend billions on bank rescue’ Financial Times (Madrid, 7 May 2012). 242 Spain first received an informal commitment from the Eurogroup for 100 billion euro to finance its banking problems. See Eurogroup, ‘Eurogroup statement on Spain’ (9 June 2012) accessed 5 February 2020; on 25 June 2012, the Spanish government made an official request for financial assistance. On 3 December 2012 the Spanish government requested the first disbursement of nearly 40 billion euro for the recapitalization of its banking sector. 243 Charles Wyplosz, ‘ECB’s Outright Monetary Transactions’ (IP/A/ECON/NT/2012-05 PE 492.450, Brussels 2012) (hereafter Wyplosz, ‘ECB’s Outright Monetary Transactions’).

THE OMT PROGRAMME 667 auctions was initially positive, but it turned out to have negative implications as well. It became known that a substantial part of the three-year LTRO money was invested in the Spanish and Italian government bonds by local banks.244 Hence, LTRO lending had enforced the link between government finances and local banks particularly in Italy and Spain.245 Against this background, rising government bond yields in Spain and Italy were now more directly threatening the banks.246 The link between the sovereign debt crisis and financial market worries was found on numerous indicators. For example, the credit default swaps for the large banks had increased during the latter part of 2011 and then turned up again towards the summer of 2012 with euro area banks facing higher default risks than other major banks. Within the euro area, differences between banks became large,247 as the country-specific risks within the euro area became more important. At the same time, corporate bonds spread actually declined in the euro area. Only banks bonds spreads increased in tandem with increased worries over the sustainability of Spain and Italy.248

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B. The specifics of the OMT programme In the context of increased worries over Spain and Italy, and even over the breakup of the euro area, President Draghi gave a speech, pointing to the irreversible nature of the euro and claiming that measures have been taken to make it even more irreversible. However, the main headline of the speech was the sentence: ‘[W]‌ithin our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough’. This was further supported by his claim that ‘to the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate’. The message was that the Eurosystem would use its powers to influence sovereign bond yields in the euro area.249

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Surprisingly, the issue did not come up the in the July ECB regular press conference.250 Only in the August meeting had the Governing Council ‘discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries. Exceptionally high-risk premia are observed in government bond

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244 See various market sources, for example Simone Foxman, ‘Everything You Need To Know About Tomorrow’s Big ECB Operation That Everyone’s Watching’ (Business Insider, 20 December 2011) accessed 5 February 2020; Mary Watkins, ‘Lenders plot early LTRO repayments’ Financial Times (14 November 2012) accessed 5 February 2020, ‘Spanish and Italian banks were the biggest users of the December and February LTROs, using a chunk of the money to buy government debt’. 245 Persanna Gai and others, ‘Bank Funding and Financial Stability’ in Alexandra Heath Matthew Lilley, and Mark Manning (eds), Liquidity and Funding Markets (Reserve Bank of Australia 2013) 237–52. 246 Although this was not admitted by the Eurosystem, See ECB, ‘Financial Stability Review June 2012’ (ECB 2012) 10–11. 247 ECB, ‘Financial Stability Review June 2012’ (ECB 2012) 13. 248 ibid, 52. 249 Mario Draghi, ‘Verbatim of the remarks’ (Global Investment Conference, London, 26 July 2012) accessed 5 February  2020. 250 In fact, in the Q&A session, Draghi even pointed out that no new unconventional measures had been discussed, see ECB, ‘Introductory statement and Q&A’ (Press Conference, 5 July 2012) accessed 5 February 2020 (hereafter ECB ‘Introductory statement and Q&A 5 July 2012’).

668 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) prices in several countries and financial fragmentation hinders the effective working of monetary policy’. It was stressed that ‘[r]‌isk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible’.251 The Governing Council also insisted that the EFSF/ ESM should be activated for bond market interventions. In this context the Eurosystem ‘may undertake outright open market operations of a size adequate to reach its objective’. The modalities of the measure were designed in the coming weeks. President Draghi mentioned that the Bundesbank President had reservations about the Eurosystem buying government bonds.252 22.155

The official launch of the Outright Monetary Transaction programme (OMT) took the form of a press release titled Technical Features of Outright Monetary Transactions (6 September 2012). The programme aimed at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. The programme was described in the press release, but it did not include any legal documents, such as Eurosystem guidelines.253 A key element was its conditionality, which was to be guaranteed with a link to EFSF/ESM procedures,254 but the involvement of the IMF was not a formal condition. The programme could be used for future as well as for running EFSF/ESM programmes. In addition, the specific Eurosystem condition was that the purchases would be warranted from the monetary policy perspective and that the Eurosystem maintained full discretion. Transactions were to be focused on the shorter part of the yield curve, in particular bonds with a remaining maturity between one and three years. It was explicitly mentioned that no ex ante quantitative limits were to be set, and the liquidity created through the OMT was to be fully sterilized.255 Aggregate OMT holdings and their market values were to be published on a weekly basis, and additional monthly information would include the average duration of OMT holdings and their country breakdown. Importantly, the OMT legal documentation was to clarify that the Eurosystem accepted the same (pari passu) treatment as other creditors.256

C. Economic analysis of the OMT programme 22.156

The economic assessment of the OMT programme remains at an abstract level as it was never activated. Still, the economic analysis is the basis for a constitutional understanding. It starts with a comparison with of the two programmes. The main issue with the OMT programme is whether it was monetary policy or some other economic policy. The initial responses by financial market analysts and the press raised two interlinked concerns about its 251 ECB, ‘Introductory statement and Q&A’ (n 250). 252 ECB, ‘Introductory statement and Q&A’ (n 250). 253 It should be recalled that the ECB mostly relied on the NCBs to carry out financial market transactions. 254 Both a full EFSF/ESM macroeconomic adjustment programme as well as a precautionary programme (Enhanced Conditions Credit Line) were sufficient as long as they included the possibility of EFSF/ESM primary market purchases. 255 In effect, this was understood to be largely a formality as the Eurosystem was at the same time providing all the liquidity that was requested by banks. 256 ECB, ‘Technical features of Outright Monetary Transactions’ (Press Release, 6 September 2012) accessed 5 February  2020.

THE OMT PROGRAMME 669 underlying motivations, namely public finance concerns over Italy and Spain and the fear of a euro breakup.257 The SMP had been in operation from May 2010 until early 2012, but it was never considered a success. It failed to have a lasting impact on government bond markets. Some evidence suggested that it even contributed to a worsening of the situation.258 Hence, to the extent that the Eurosystem wished to continue intervening in the Member State’s government bond markets, it needed another approach without the deficiencies of the SMP. As President Draghi’s mentioned: ‘[I]‌t is an effort that, I would say, is very different from the previous Securities Market Programme and one that falls squarely within our mandate’.259

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One problem with the SMP was the insistence that Eurosystem bond holdings get a preferential treatment in the case of debt restructuring. The legal basis for this self-claimed seniority was unclear and it could actually have made the SMP detrimental for the bond market in question. The Eurosystem purchases of bonds increased the amount of senior debt, making other bondholders worse off. At the same time maturing interest payments and capital on bonds were paid out in full from the rescue packages that also had seniority. Hence, the approaches chosen actually might have made the government bond markets dysfunctional rather than the opposite.260 Hence, the OMT purchases were not to receive preferential status and the SMP was promised to be ended.

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The SMP did not have an announced intervention strategy. The actual purchases pointed to- 22.159 wards limited period interventions without clear market triggers. Hence, the bondholders or issuers could not count on Eurosystem interventions to function as an ultimate market- maker of the government bond markets.261 The OMT programme had a different approach. The Eurosystem was pictured as the ultimate buyer of government bonds stressing the unlimited nature of the purchases and ability to act as the lender of last resort to Member States if necessary.262 Also, the monetary policy transmission arguments fitted the OMT better than the SMP, as the OMT was restricted on bonds with the remaining maturity of between one and three years without any commitment to hold the purchased bonds until 257 For a collection of market analyst responses see Katie Martin, ‘Band Aid or Leap Forward? Reactions to ECB Plans’ The Wall Street Journal (6 September 2012) accessed 5 February  2020. 258 See Paul Dobson and Abigail Moses, ‘ECB Greek Plan May Hurt Bondholders While Triggering Debt Swaps’ (Bloomberg, 17 February 2012) accessed 5 February 2020. See also Mehreen Khan, ‘European Central Bank sued by 200 investors over Greek debt deal’ Telegraph (3 October 2015) accessed 5 February 2020. 259 ECB, ‘Introductory statement to the press conference (with Q&A)’ (Press Conference, 2 August 2012) accessed 5 February  2020. 260 The problems with programmes have been discussed in a number of places. See, for example, Lane, ‘The European Sovereign Debt Crisis’ (n 150) 49–68. 261 De Pooter and others, ‘Cheap Talk and the Efficacy of the ECB’s Securities Market Programme’ (n 240); and Willem H Buiter and Ebrahim Rahbari, ‘The ECB as Lender of Last Resort for Sovereigns in the Euro Area’ (2012) CEPR Discussion Paper No DP8974 (hereafter Buiter and Rahbari, ‘The ECB as Lender’). 262 See Gerhard Illing and Philipp König, ‘The European Central Bank as Lender of Last Resort’ (2014) 4 DIW Economic Bulletin 16–28. It could be pointed out that the lender of last resort function is generally related to the banking sector, not the governments. The concept was by and large transplanted from the banking context to the government finances without paying too much attention to the confusion created. At worst, it has been claimed that the lenders of last resort function with regard to governments is always part of central banking or even inherent in the very concept of central banking.

670 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) maturity. The targeted bond range was equivalent to the longest Eurosystem LTRO lending operations. The OMT programme was not explicit concerning the risk-sharing within the Eurosystem, but it was expected to have a full risk-sharing, which was confirmed in the ensuing communication.263 22.160

One key difference between the SMP and OMT programmes related to the euro area rescue mechanisms. The SMP was formally independent of the (other) rescue mechanisms and only Greece was part of rescue programme when the purchases started.264 In the OMT programme, a Member State’s participation in rescue operations (EFSF/ESM) was a condition for the activation of bond purchases. The OMT programme could only be activated if the Member State made a formal commitment in the form of an adjustments programme and if deemed appropriate by the Eurosystem. The Member State first committed to fiscal stability, then the Eurosystem could restore the functioning of its government bonds markets and indirectly the monetary policy transmission. With these conditions, the OMT had the potential of becoming substantially larger than the SMP if needed to ‘guarantee’ the functioning of the shorter-end of the government bond markets.265

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The link to the EFSF/ESM contained an additional political element that has rarely been noted. As the rescue programmes were generally agreed unanimously, and in all the cases require the approval of the large Member States, the Eurosystem indirectly gave a veto to Member States on the activation of the OMT programme.266

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The de jure content of the programme is relatively well understood, mostly based on its press release and other communications. The de facto content concerning amounts, its relationship with rescue programme, and actual triggers for purchases can only be guessed as it was never activated. Hence, the actual impact of the OMT programme is subject to considerable uncertainty. Theoretical approach analyses how the programme could have worked from the perspective of the monetary policy transmission. In addition, some empirical work has assessed the announcement impact.

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Theoretically, it is difficult to verify a malfunctioning monetary transmission in any Member States. Even the concept of malfunctioning bond markets has not been defined, except perhaps in the Eurosystem internal procedural guidelines. It appears that the threshold for the malfunctioning of the transmission mechanism was higher in the case of the OMT programme than with the SMP. Some elements of the OMT programme, such as the limited maturity spectrum and the lack of hold-to-maturity property, were more in line with the monetary transmission argument. The fact that the programme was only to be used for 263 See for example, Benoît Cœuré, ‘Outright Monetary Transactions’ (‘The ECB and its OMT programme’— Conference, Berlin, September 2013); ECB, ‘Introductory statement to the press conference (with Q&A)’ (Press Conference, 22 January 2015) accessed 5 February 2020 (hereafter ECB, ‘Introductory statement to the press conference (with Q&A)’). 264 Ireland and Portugal were only later forced to apply for help, and the Spanish banking rescue package took place after the purchases were halted. Hence the link if it exited run rather from the SMP purchases to rescue requests. 265 Wyplosz, ‘ECB’s Outright Monetary Transactions’ (n 243). 266 This has a number of repercussions that are difficult to judge thoroughly. For one thing, it could have rendered the use of the ESM programmes more difficult. If some countries were against Eurosystem bond purchases, they could see this as an argument against the rescue programmes or at least against incorporating a possibility of buying government bonds in rescue programmes. A totally separate issue is the concern that the Eurosystem had given some of the Eurosystem decision-making discretion away, thereby questioning its independence.

THE OMT PROGRAMME 671 countries receiving financial assistance, could also have supported the monetary policy content of the programme. When financial assistance was provided by non-monetary policy actors, monetary policy measures could in theory focus more strictly on monetary policy issues.267 The most unclear part of the OMT programme related to how it would have been operationalized. Would the Eurosystem, for example, have reacted to some maximum spreads on government bonds between euro area countries? This line of argumentation was promoted by those who saw that the euro area could have been trapped in a negative equilibrium or self-fulfilling prophecies that could be corrected by the Eurosystem as a lender of last resort to governments.268

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The announcement effect of the OMT programme could also have been relevant. For example, the ECB has often claimed that the announcement or even the earlier mentioned Draghi’s ‘whatever it takes’ speech were catalysts for the relative calming down of the euro area sovereign bonds markets. Communication is part of contemporary monetary policy. When the monetary policy stance is understood by the economic actors, it can become effective even without any central bank transactions. This is supported by the credibility of the central bank. With the OMT programme, it was claimed that its mere announcement was enough. A ECB study found a full two percentage point reduction in the Spanish and Italian government short-term bond yields stemming from the OMT programme.269 It was quite extreme, as it credited all the decline in the yields to the OMT announcement, neglecting other factors and that most market stress simply vanishes over time, as quite likely would have happened to the market nervousness over Spain and Italy. Also, other factors for the declining bond yields were present. The creditworthiness of Italy and Spain stopped deteriorating after the first-half of 2012.270 In Spain, the request for bank recapitalization assistance was a major turning point in summer 2012.271 All in all, the negative news flow with regard to Spain and Italy peaked in summer 2012. From thereon, negative news over economic growth and employment were balanced with some evidence of the consolidation measures turning the trend in fiscal deficit.272

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A critical element in the OMT is, how potential Eurosystem purchases of short to medium- 22.166 term bonds could permanently reduce interest rates in a country facing uncertainty. One explanation relies on the increased risk of currency redenomination. The likelihood of a euro breakup had increased, which could have made the Italian and Spanish bonds yields 267 This does not take a stance on the conditionality of these financial assistance procedures, as it only looks at the issue from the monetary policy perspective. 268 See Wyplosz, ‘ECB’s Outright Monetary Transactions’ (n 243) and André Sapir, ‘The SMP is dead. Long live the OMT’ (Bruegle, 6 September 2012) accessed 5 February 2020. 269 Carlo Altavilla, Domenico Giannone, and Michele Lenza, ‘The Financial and Macroeconomic Effects’ (2014) ECB Working Paper No 1707. 270 Moody’s rating dropped from Aa2 to Baa2, the second lowest investment grade status. S&P also cut Italian rating substantially in late 2011 and the first-half of 2012 to BBB. Crispian Balmer, ‘S&P ratings downgrades in 2011, 2012 surprised Italy’s economy minister’ (Reuters, 10 December 2015) accessed 5 February 2020. The S&P had one later downgrade to BBB-in December 2014. 271 accessed 5 February 2020. 272 See Eurostat statistics on public finances and also accessed 5 February 2020.

672 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) higher. This could have started a self-fulfilling spiral towards public sector debt default. A country’s interest rate can reach a level that, if sustained, increase its interest expenses beyond a sustainable level. In such a situation, the country could become excluded from the capital markets simply on the basis that its interest rates had reached a threshold level.273 A possible trigger for this interest rate increase could be currency redenomination risk. As hinted by President Draghi, the OMT might have made the euro less easily reversible and thereby reduced the currency denomination risk. The large-scale purchases of bonds of troubled Member States would have considerably increased the cost of euro breakup for all Member States. This element in Draghi’s speech has been largely omitted. If the aim of the programme was to increase the economic and hence also political cost of the euro area breakup, was the target only financial markets or also euro area policy-makers? 22.167

To prevent a Member State’s government bond interest rates reaching a level that would make fiscal position unsustainable, the OMT could have been an appropriate tool. It needs to be stressed, however, that high interest rates on government bonds do not lead to higher interest expenses immediately. Only when Member States actually tap money from the markets, increased interest rates become a fiscal burden. For that, the OMT could have guaranteed functioning markets and relatively low rates on short to medium-term bonds, and hence mitigated those risks. Naturally, this would have been equivalent to financing Member States regardless of whether it took place in the primary markets (presumably mostly by the ESM) or whether it ensured a sufficient liquidity and pricing in the secondary markets.

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However, if the economic fragmentation and the difficulty of prospering in the EMU were the primary causes for breakup pressures, the OMT would not have done anything to eradicate these factors.274 This apparently was among the concerns of the Bundesbank. By treating the symptoms of inappropriate national economic policies, the programme arguably did not increase the longer-term viability of the country in question nor the euro area as a whole.275

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It can be assumed that the announcement effect stemmed from the fact that the Eurosystem was seen to guarantee the functioning of the government bond market for the maturities of up to three years. And for that, the announcement needed to be credible, which was enhanced by the link to the EFSF/ESM programmes. These mechanisms were to provide a financial and to some extent political backbone for the Member State in question. A critical element of OMT credibility was whether the adjustment programmes would have been sufficient in ensuring the sustainability of the Member State’s finances. Without that, the OMT programme could have led to adverse situations. For example, had the OMT programme been available for Greece in 2010, all the arguments would probably have been

273 This links to traditional banking theory related to adverse selection and moral hazard. At a given level of interest rates only dishonest or excessively risky debtors would take the loan, and hence no rational creditor would grant a loan. See, for example, Dwight M Jaffee and Thomas Russell, ‘Imperfect Information, Uncertainty and Credit Rationing’ (1976) 90 The Quarterly Journal of Economics 651–66. 274 Tyler Durden, ‘The One Chart To Explain Why Draghi’s Blunt Tool Can’t Fix Europe’ (ZeroHedge, 9 June 2012) accessed 5 February 2020. 275 See also the Bundesbank’s statement on the FCC Gauweiler judgment. BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, paras 13–15.

THE OMT PROGRAMME 673 present to activate the OMT, even the monetary policy transmission argument. Most likely, the Eurosystem purchases would have been the only available source and the Eurosystem would have bought all the bonds up to three years maturity. This would not have solved the fiscal sustainability problems in Greece. Instead, it would have made them Eurosystem problems.

D. Constitutional issues The most critical question is whether the OMT programme was a monetary policy measure and hence part of the Union competence pursuant to Article 127(2) TFEU. The ECJ highlighted this assessment with reference to the principle of conferral laid down in Article 5(2) of the Treaty on European Union (TEU): the Eurosystem ‘must act within limits of the powers conferred upon it by primary law and it cannot therefore validly adopt and implement a programme which is outside the area assigned to monetary policy by primary law’.276 The monetary policy aspect was even more central in the FCC judgment, stating:

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the monetary policy is to be distinguished—and thereby further defined—according to the wording, structure, and purpose of the Treaties from (in particular) the economic policy, which primarily falls into the responsibility of the Member States.277

The Eurosystem used two concepts to argue for the OMT programme: singleness of monetary policy and monetary policy transmission. The content of the singleness remained somewhat open in both the ECB press release and the ECJ judgment. The ECJ even ruled out one plausible clarification by stating that the Treaty did not require that the Eurosystem operated by means of general measures applicable to all the states. Hence, singleness according to the ECJ did not mean a prohibition of multiple monetary policies in the euro area.278 The legal relevance of the terms ‘single’ and ‘singleness’ with regard to monetary policy hence remained unclear. The main argumentation for the including the OMT in monetary policy was the programme’s objective of safeguarding monetary policy transmission, which contributes to the primary objective of price stability. The fact that the programme could also have contributed to other objectives, such as the stability of the euro area did not change the conclusion.279 This was supported by the fact that the OMT programme would use the instruments that are part of the monetary policy instruments explicitly provided by the TFEU (and the ESCB and ECB Statute). The FCC imposed a further requirement that the measure should be considered as monetary policy against some more generally acceptable definitions.280

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The ECJ pointed out that the Eurosystem needs to be allowed a broad discretion in the preparing and implementing of open market operations that require technical choices and complex assessments.281 In this regard, the ECJ did not mention the qualifications related to

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276 Gauweiler and Others (n 228) para 41. 277 BVerfG, Judgment of the Second Senate of 21 June 2016—2 BvR 2728/13, para 63. 278 Gauweiler and Others (n 228) para 55. 279 Gauweiler and Others (n 228) paras 51 and 56. 280 BVerfG, Judgment of the Second Senate of 21 June 2016—2 BvR 2728/13, paras 63–64. 281 See Case C-343/09 Afton Chemical Limited v Secretary of State for Transport [2010] ECR I-7027 (hereafter Afton Chemical).

674 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) errors of appraisal and exceeding the limits of powers, which had been deployed in the ECJ’s earlier jurisprudence. 22.173

The ECJ analysis of the economic reasoning for the OMT programme stressed the currency redenomination risk. It referred to the ECB’s assessment that the interest rates, the spreads and the volatility of troubled countries’ government bonds could not be explained by country-specific factors, and hence they reflected euro breakup risks.282 The ECJ referred only to the ECB’s analysis on the issue.283 For example, the Bundesbank had questioned both the link to monetary transmission and the existence of severe mispricing in government bond markets.284 The ECJ seemed to push aside its own view that macroeconomics and monetary policy are subject to various views and uncertainty.285

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In conclusion the ECJ found that the OMT was monetary policy, but its judgment was somewhat limited and excluded any information from the FCC and other sources. The line between the monetary policy competence conferred to the EU and the economic policy still at the national responsibility was arguably drawn without much concern for the democracy principle that demanded that the mandate of the Eurosystem ‘must be shaped narrowly’ and it needs to be fully subjected to judicial review.286

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The other major test for the OMT programme related to the prohibition of the central bank financing clause included in Article 123 TFEU.287 The ECJ mentioned that the bond purchases could be made in secondary markets as long as they were not to have an effect equivalent to purchases in primary markets, which could undermine the effectiveness of the prohibition.288 However, the ECJ discussed the motivation of the prohibition, namely to ‘encourage the Member States to follow a sound budgetary policy, not allowing monetary financing of public deficits’. The critical element in the ECJ’s and Advocate General’s view,289 was that the Eurosystem purchases had sufficient procedural safeguards to ensure that the impact of secondary market purchases was not the same as of the primary market purchases.290

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The ECJ judgment did not cover all the questions raised by the FCC or even the Advocate General.291 These questions include the independence of the central bank, conformity with the principle of the market economy and the fiscal responsibility of the Member States. The FCC had stressed that the independence of the Eurosystem was an important part of the 282 Gauweiler and others (n 228) para 72. 283 It did not consider the opposite views that were referred to by the FCC. Particularly, the views of the German Bundesbank were explicitly stated and challenged the ECB views at the expert level, see, BVerfG, Judgment of the Second Senate of 21 June 2016—2 BvR 2728/13, paras 13–15. 284 BVerfG, Judgment of the Second Senate of 14 January 2014—2 BvR 2728/13, paras 13–14 and 71. 285 The remark that ‘questions of monetary policy are usually of a controversial nature’ in Gauweiler and others (n 228) para 75. 286 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 58. 287 Gauweiler and others (n 228) paras 94 and 95. 288 Gauweiler and others (n 228) para 97. 289 Case C-62/14 Gauweiler and others [2015] ECLI:EU:C:2015:7, Opinion of AG Cruz Villalón (hereafter Gauweiler and others Opinion of AG Cruz Villalón). 290 Gauweiler and others (n 228) paras 102 and 104. 291 See Daniel Sarmiento, ‘The Luxembourg “Double Look” The Advocate General’s Opinion and the Judgment in the Gauweiler Case’ (2016) 23 Maastricht Journal of European and Comparative Law 40–54 (hereafter Sarmiento, ‘The Luxembourg “Double Look” ’).

PUBLIC SECTOR PURCHASE PROGRAMME 675 FCC judgment on the Maastricht Treaty.292 In the Gauweiler case, the ECJ mentions independence mostly in relation to the ESM. The independence of the Eurosystem (mostly in Article 130 TFEU) require that the Eurosystem maintains full independence when it decides on its monetary policy measures. In the OMT programme, the Eurosystem decision was tied to the decisions of the ESM.293 The national responsibility for fiscal policy was a fundamental part of the EMU constitutional architecture. It provided the democratic foundations of the EMU together with the democratic decision to delegate the narrowly defined monetary policy to an independent expert body at the EU level. National responsibility included also the responsibility to limit the negative repercussions of those policies for the other Member States.294 This could also be jeopardized by the fiscal burden caused by the Eurosystem, for example, in the form of the OMT programme. The FCC pointed to the potential costs involved in the OMT programme, but the ECJ was less worried, also pointing to the fact that the Eurosystem measures can contain risks and its Statute has procedures to tackle losses.295

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In conclusion, according to the interpretation of the ECJ, the OMT programme was valid in the light of EU law, which constituted an ultimate institutional empowerment for the Eurosystem. The Eurosystem was given large discretion to define its own mandate, and it was also assigned a major role in defining economic policies in Member States that face economic problems.296 The main issue was the dividing line between the common monetary policy and other policies at the national level. It can be assumed that the ultimate reason for the OMT programme was a real threat of a euro area breakup. It was an exceptional measure falling between the traditional lines of monetary and fiscal policy. It could even be seen as the Eurosystem contributing to the economic policies in the EU, and as such mainly pushing the boundaries of prohibition of Article 123 TFEU.

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VIII. Public Sector Purchase Programme (PSPP)—the Eurosystem’s Quantitative Easing In autumn 2014, the euro area crisis moved into its seventh year. Many conventional and unconventional monetary policy measures had been used and even declared as successes, but the euro area economy remained fragile and inflation very slow. In this situation, the Eurosystem indicated new measures to expand its balance sheet and involvement in the economy. In practice, the Eurosystem was seen to hint at Eurosystem quantitative easing (QE).297

292 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 32 with a reference to BVerfG, Judgement of 12 October 1993—2 BvR 2134/92, 2 BvR 2159/92. 293 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 82. 294 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 71. 295 Gauweiler and others (n 228) para 125. 296 See Takis Tridimas and Napoleon Xanthoulis, ‘A Legal Analysis of the Gauweiler Case: Between Monetary Policy and Constitutional Conflict’ (2016) 23 Maastricht Journal of European and Comparative Law 17–39 (hereafter Tridimas and Xanthoulis, ‘A Legal Analysis of the Gauweiler Case’). 297 Mario Draghi, ‘Monetary policy in the euro area’ (Frankfurt European Banking Congress, November 2014).

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676 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) 22.180

The concrete measure was announced in January 2015. It was a QE programme labelled the Public Sector Purchase Programme (PSPP) to buy mainly government bonds at large pre-announced quantities for an initial time period of one and a half years and ‘in any case, be conducted until the Governing Council sees a sustained adjustment in the path of inflation’.298 Every month, 60 billion euro of mostly private sector holdings of government bonds were to be replaced with central bank money, which in turn was to increase asset prices and support bank lending, and ultimately growth and inflation.299 The decision was largely anticipated by the media, financial markets and even other central banks,300 and even ‘priced- in’ at least to some extent.301

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The analysis starts with an introduction to the PSPP including its key features and differences compared to other Eurosystem measures. The economic description contains both the Eurosystem’s economic justifications as well as a broader economic analysis of the quantitative easing, before turning to some constitutional remarks.

A. The key features and legal basis of the PSPP 22.182

The ECB Governing Council decision was formally presented as an extension to existing programmes, but the PSPP was a new measure with some unprecedented features in the Eurosystem context.302 It used fundamentally different assets, government bonds, and it specified an exact monthly amount to be purchased and a minimum running period from March 2015 until September 2016. The programme was prolonged several times, first to March 2017303 and ten to December 2017,304 later to September 2018,305 and finally with reduced monthly amounts until the end of 2018. The purchases were restarted in November 2019 at a monthly pace of €20 billion without a pre-set expiry date ‘for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.’306 298 Preamble (7) of ECB Decision (EU) 2015/774 of 4 March 2015 on a secondary markets public sector asset purchase programme (ECB/2015/10) [2015] OJ L121/20 (hereafter ECB Decision (EU) 2015/774). 299 ECB, ‘Monetary policy decisions’ (Press Release, 8 December 2016) accessed 5 February 2020 (hereafter ECB, ‘Monetary policy decisions’). 300 The decision by the Swiss National Bank (15 January 2015) to discontinue its minimum exchange rate policy vis-à-vis euro anticipated the ECB decision on quantitative easing even with a barely disguised hint in the decision that ‘divergences between the monetary policies of the major currency areas have increased significantly—a trend that is likely to become even more pronounced’. SNB, ‘Swiss National Bank discontinues minimum exchange rate and lowers interest rate to -0.75 per cent’ (Press Release, 15 January 2015) accessed 5 February 2020. In a similar but less dramatic action, Denmark’s Nationalbank, the Danish central bank, lowered its policy rate just before and after the ECB decision. 301 Mentioned by Mario Draghi in ECB, ‘ECB announces expanded asset purchase programme’ (Press Conference, 22 January 2015) accessed 5 February 2020 (hereafter ECB, ‘ECB announces expanded asset purchase programme’). 302 ECB, ‘ECB announces expanded asset purchase programme’ (n 301). An earlier much smaller programme consisted of asset-backed securities (ABSPP) and covered bonds (CBPP3) programmes. 303 Mario Draghi in ECB, ‘Introductory statement to the press conference (with Q&A)’ (Press Conference, 10 March 2016) accessed 5 February 2020 (hereafter ECB, ‘Introductory statement to the press conference (with Q&A)’). 304 ECB, ‘Monetary policy decisions’ (n 299). 305 ECB, ‘Monetary Policy Decisions’ (Press Release, 26 October 2017) accessed 5 February 2020. 306 ECB, ‘Monetary Policy Decisions’ (Press Release, 12 September 2019) accessed 5 February 2020.

PUBLIC SECTOR PURCHASE PROGRAMME 677 The main elements were announced after the January 2015 meeting, but the formal decision was taken in March 2015.307 The Eurosystem committed to buying debt securities (bonds) issued by euro area central governments, certain agencies established in the euro area as well as certain international or supranational institutions located in the euro area. The bonds needed to fulfil the ECB Guideline on collateral eligibility308 and have a first-best credit assessment of at least credit quality step 3 (CQS3) for the issuer or the guarantor, practically equivalent to a lowest investment grade rating.309 In addition, bonds could be included if they were issued under a financial assistance programme and the credit quality threshold was suspended.310 Hence, the programme could be used to buy basically any bonds deemed appropriate by the ECB Governing Council. It was left open what would happen to purchased bonds should they lose their eligibility in the programme. However, with the amounts involved, the Eurosystem could find it difficult to sell its holdings of downgraded bonds without causing a major market reaction.

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The PSPP set relative but not absolute limits on the specific bond issuer and specific bond issues by introducing a limit of 25 per cent of each bond issue, increased to 33 per cent in September 2015. A further limit was set at 33 per cent of each issuer’s outstanding debt refers to the outstanding debt that falls under the allowed maturity spectrum ranging from one up to 30 years of remaining maturity at the time of purchase.311 In order to avoid a blocking minority, the 25 per cent (33 per cent) threshold includes all the holdings of the Eurosystem,312 except for issues under the financial assistance programme313 where a blocking minority is irrelevant. The limits on international organizations and multilateral development banks were later increased from 33 per cent to 50 per cent.314

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The purchases were limited to secondary markets, thus recognizing the explicit prohib- 22.185 ition of Article 123 TFEU. Some guarantees were needed also for the secondary market purchases so that the prohibition was not openly circumvented.315 A so-called ‘black- out period’ around primary issues determined time and maturity limits before and after any bond issue during which purchases were not permitted, although the details were not published.316 Bonds issued by Member States under the financial assistance programme were subjected to other limitations, namely the successful implementation of the MoUs.317 307 ECB Decision (EU) 2015/774. 308 ECB Guideline 2011/817/EU. 309 This credit assessment refers to the Eurosystem credit assessment framework (ECAF) that supplements credit rating agencies with assessment by the national central banks of the Eurosystem and some other rating tools (see for more information accessed 5 February 2020). The Eurosystem credit quality step 3 is equivalent to the lowest level of investment grade rating from the rating agencies. 310 Article 3(2)(c) ECB Decision (EU) 2015/774. 311 Article 3(3) ECB Decision (EU) 2015/774. ECB, ‘ECB announces expanded asset purchase programme’ (n 301). 312 Other holdings could have resulted from the SMP as well as other investment holdings by the Eurosystem institutions. 313 Preamble (6), Article 5(1), and Article 2 ECB Decision (EU) 2015/774. 314 ECB, ‘Introductory statement to the press conference (with Q&A)’ (n 303). 315 The issue was discussed more thoroughly as part of the operation framework of the Eurosystem (see Section 6.4). 316 Article 4(1) ECB Decision (EU) 2015/774. 317 The purchases were to be conducted during a period of two months after a successful review: Article 4(2) ECB Decision (EU) 2015/774.

678 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) 22.186

The main feature of the programme was its size and length. Initially, the PSPP together with the two earlier programmes totalled 60 billion euro monthly, of which large majority on the PSPP.318 From April 2016 the total amount was increased to 80 billion euro and minimum length prolonged to March 2017.319 It was further prolonged to December 2017 with a monthly amount of 60 billion euro from April 2017, and in October 2017 an additional 30 billion euro monthly purchases were to take place between January and September 2018 and reduced 15 billion euro monthly until the end of 2018. The total amount was initially expected to reach 1.1 trillion euro, roughly one-tenth of the euro area GDP, and the extensions push it well above 2 trillion euro in public sector bonds and above 2.6 trillion euro in total. After the restart in November 2019, the total amount will increase further, but relatively modestly in relation to the GDP.

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The programme did not exclude purchases of bonds with negative yields, as long as yields were above the Eurosystem deposit facility rate,320 which at the time of the launch stood at -0.2 per cent. The threshold reflected some NCSs’ uneasiness concerning buying bonds at negative interest rates, effectively paying money to bond issuers. When the purchases were restarted, the deposit rate was also cut to –0.5 percent. The list of eligible counterparties for PSPP purchases was very broad. It included all the market participants that can participate in the Eurosystem’s monetary policy operations as well as other NCB counterparties.321

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A key new feature was the limited risk-sharing within the Eurosystem. Risk-sharing only accounts for 20 per cent of the total programme, and the remaining 80 per cent will be at the risk of each NCB (Member State). The 20 per cent risk-sharing included securities of European institutions and the ECB’s direct holdings.322 The remaining 80 per cent was allocated to the NCBs according to their share in the ECB capital key at their own risk. The reason for limited risk-sharing was to ‘mitigate the concerns that many participating countries in the euro area have about the unintended fiscal consequences of potential developments in the future’. It was a concession to the worries that the PSPP could turn into fiscal transfer mechanism between the Member States.323

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The PSPP found its legal form in an ECB Governing Council decision in March 2015,324 which referred to the first indent of Article 127(2) TFEU as well as Article 12.1 ESCB and ECB Statute in conjunction with the first indent of Article 3.1, and Article 18.1 ESCB and ECB Statute as its legal basis. It was based on the task to conduct the monetary policy, and specifically through open market and credit operations.325 The reference to Article 12.1 underlined that the ECB Governing Council can adopt guidelines as well as take decisions as a means to formulate monetary policy, under which the ECB Executive Board

318 No exact amounts have been communicated except informally. See David Goodman, Lucy Meakin, and Eshe Nelson, ‘The What and Why of ECB Bond Buying; For How, Watch This Space’ (Bloomberg, 22 January 2015) accessed 5 February 2020. 319 Mario Draghi in ECB, ‘Introductory statement to the press conference (with Q&A)’ (n 303). 320 Article 3(5) ECB Decision (EU) 2015/774. 321 Article 7 ECB Decision (EU) 2015/774 with a reference to Annex I Guideline ECB/2011/14. 322 ECB, ‘ECB announces expanded asset purchase programme’ (n 301). 323 At least mentioned by Mario Draghi in ECB, ‘Introductory statement to the press conference (with Q&A)’ (n 303); ECB, ‘ECB announces expanded asset purchase programme’ (n 301). 324 ECB Decision (EU) 2015/774. 325 Preamble (1) ECB Decision (EU) 2015/774.

PUBLIC SECTOR PURCHASE PROGRAMME 679 operationalizes monetary policy, for example, by giving binding instructions to NCBs. In the case of the PSPP, the decentralized implementation was to require constant monitoring by the Executive Board.326 The decision made explicit reference to the monetary financing prohibition by stating that it did not activate Article 123 TFEU simply because it did not involve primary market purchases without discussing the potential circumvention through secondary market purchases.327 The legal basis was the same as with the SMP and OMT programmes.328 However, compared to the SMP and OMT, there are clear differences starting from the respective aims of the programmes. In the earlier cases, the Eurosystem bought and was to buy bonds of the Member States in trouble to repair the assumed malfunctioning of the transmission mechanism of monetary policy in the Member States in question. This was not the case with the PSPP. Actually, the design of the PSPP also took into account the failures of the SMP. The discretionary and unclear nature of the SMP made it ineffective in signalling monetary policy commitment, and the Eurosystem’s insistence on a preferential creditor status in the SMP had been a problem.329 In the PSPP, the Eurosystem accepted an equal position with other bondholders.330

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Previously, the Eurosystem had been hesitant towards the QE due to institutional and legal considerations: ‘we should not try to circumvent the spirit of the Treaty. No matter what the legal trick is, I think what matters for the people and what matters for the confidence and credibility of the institution is the spirit of this provision of the Treaty’ and ‘I think any central bank is constrained by its institutional set-up. In the United States, as you know, the primary mandate of the Federal Reserve is completely different from ours. And the same is true of the Bank of England.’331

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B. The economics of the PSPP The PSPP was mainly argued on the grounds of achieving the Eurosystem’s price stability objective. The purchase of sovereign bonds was needed ‘in order to address the risks of a too prolonged period of low inflation’. The Eurosystem stated that most indicators of both actual and expected inflation had declined to historical lows, risking a broader deflationary development if these expectations were incorporated into wage-and price-setting behaviour. Traditional monetary policy measures, particularly official interest rates, had already been used to the full and that capacity utilization in the euro area remained below its potential.332 326 The decentralized nature of the programme also was possible on the basis of Article 12.1 Statute. 327 Council Regulation (EC) 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions referred to in Articles 104 and 104b(1) of the Treaty [1993] OJ L332/1. 328 As the latter has been reviewed in BVerfG, Judgment of the Second Senate of 21 June 2016—2 BvR 2728/13; Gauweiler and others (n 228). 329 The restructuring took place in March/April 2012, but the bonds and loans held by the official bodies and other Member States were not cut. See Zettelmeyer, Trebesch, and Gulati, ‘The Greek Debt Restructuring’ (n 148). 330 At the time the PSPP programme was launched, only Germany had the highest credit rating from all the major rating agencies. Close to the highest rating were also given to Austria, Finland and the Netherlands. See, for example accessed 5 February 2020. 331 Mario Draghi in ECB, ‘Introductory statement to the press conference (with Q&A) 8 December 2011’ (n 142). 332 ECB, ‘ECB announces expanded asset purchase programme’ (n 301).

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680 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) 22.193

The economic logic for the PSPP followed the idea that large-scale purchases of government bonds ease monetary and financial conditions, leading to cheaper terms of financing for firms and households, which in turn supports investment and consumption and finally contributes to higher inflation. A number of channels were mentioned through which the PSPP was to support growth and increase inflation. To begin with, the decision on the programme was expected to strengthen confidence and support inflation expectations. The programme was also to reduce government bond yields and increase the value of other securities and financial instruments such as bank loans, corporate loans and even equity. The PSPP was expected to increase asset prices through a reallocation of portfolios towards assets not purchased in the programme, supporting lending to the real economy, to firms and households.333 ‘Our purchases reduce returns on safer assets,’ ECB President Draghi said, and continued: this encourages investors to shift to riskier, higher-yielding assets. Pension funds, banks and other market participants that we buy securities from are likely to substitute these for other long-term assets, thereby eventually pushing up prices more broadly.334

He claimed that the mere decision on the PSPP had important positive effects, such as ‘borrowing conditions for firms and households have improved considerably’.335 22.194

In contrast, the Eurosystem did not mention the exchange rate channel as a potential source for increased inflationary pressures, and the exchange rate was not a target for the programme, although the exchange rate was important for both price stability and growth.336 However, after the PSPP was launched, Draghi mentioned that a significant impact on exchange rate had occurred.337

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The PSPP’s aims can be analysed to check whether it can in practice be considered a monetary policy measure. Unfortunately, the economics of quantitative easing (QE) programmes are notoriously ambiguous and inconclusive.338 The question whether PSPP is monetary policy can be divided into sub-questions. First, is there a sufficient link in economic theory between the PSPP and the monetary policy objectives of price stability? Second, is there empirical evidence that actual QE programmes have functioned as monetary policy? Third, have other major central banks generally considered QE programmes as monetary policy? Fourth, are there some other aims with the PSPP?

333 Mario Draghi, ‘Re: Your letter (QZ-21)’ (Letter from the ECB President to Mr Enrique Calvet Chambon, 10 March 2015, L/MD/15/139) (hereafter Draghi, ‘Re: Your letter (QZ-21)’). 334 President Draghi stressed this portfolio rebalancing effect as the primary means by which the programme was to influence financial markets, bank lending and finally the real economy. Matt Clinch and Annette Weisbach, ‘Draghi: ECB QE risks are contained’ (CNBC, 11 March 2015) accessed 5 February 2020. 335 Draghi, ‘Re: Your letter (QZ-21)’ (n 333). 336 Stating a decline in euro exchange rate as an explicit target could have been problematic due to competence issues. Article 219(1) TFEU gives the ECOFIN council the power to ‘conclude formal agreements on an exchange- rate system for the euro in relation to the currencies of third States’. That does not give the ECOFIN exclusive mandate on subjects related to exchange-rates, but it does point to the fact that exchange rate policy is not perceived as part of monetary policy either. 337 ‘ECB’s Draghi says bond buying impact on exchange rate strong’ (Reuters, 26 March 2015) accessed 5 February  2020. 338 To the point that the former Federal Reserve Governor Bernanke stated that ‘the problem with QE is that it works in practice, but it doesn’t work in theory’, Robin Harding, ‘US quantitative measures worked in defiance of theory’ Financial Times (Washington DC, 13 October 2014).

PUBLIC SECTOR PURCHASE PROGRAMME 681 The basic economics background of QE is not very convincing. The consumption patterns and prices should not be affected by the structure of the government’s liabilities.339 QE simply changes the term structure of government liabilities from longer-term bonds to shorter term liabilities, namely central bank money. A different theoretical approach was inspired by the situation in Japan since the mid-1990s, facing the constraint of zero interest rates when attempting to ease monetary policy during deflation.340 The question was whether central bank purchases of various assets, QE, could overcome the zero-bound interest rate constraint. It was found that a credible commitment by the central bank to a specific price-level target or a higher inflation when the worst was over could help to overcome the constraint.341

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Central bank commitment to higher inflation also once the economy has recovered is sometimes labelled ‘committing to being irresponsible’.342 Should this commitment lack credibility, the QE might again fail to have an impact. This background helps to explain why the PSPP decision was accompanied by a commitment to use it ‘in any case until . . . a sustained adjustment in the path of inflation’343 was achieved. President Draghi even tried to commit to higher inflation by stating that ‘if the inflation rate was for a long time below 2 per cent, it will be above two per cent for some time’.344 However, the overriding primary objective of price stability hampers any credible commitment to higher inflation.

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The latest studies have concentrated on financial instability. The argumentation goes that when asset prices are low due to financial instability or a banking crisis, central bank purchases can have broader positive effects. In normal times, central banks are not efficient in providing loans and hence their business lending does not enhance welfare. However, in financial crises, when private banks are constrained by capital or availability of market funding, central banks’ ability to get funding is a major benefit.345

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The main question in the empirical work on QE has centred around the impact that QE programmes have had on financial markets and on the economy. The direct effects of QE include a fall in yields on the securities in question and also their close substitutes. In addition, an increase in the monetary base can lead to increased asset prices more generally that could support consumption and investments. Empirical studies have focused on three areas: the central bank’s signalling of its commitment, the portfolio rebalancing effect, and

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339 Neil Wallace, ‘A Modigliani-Miller Theorem for Open-Market Operations’ (1981) 71 The American Economic Review 267–74. The article uses the basic Modigliani-Miller Theorem in government finances and shows that the same irrelevance also holds in that environment. 340 Paul R Krugman, ‘It’s Baaack! Japan’s Slump and the return of the Liquidity Trap’ (1998) 29 Brookings Papers on Economic Activity 137–206. 341 Gauti B Eggertsson and Michael Woodford, ‘The Zero Bound on Interest Rates and Optimal Monetary Policy’ (2003) 34 Brookings Papers on Economic Activity 139–235; and Ben S Bernanke and Vincent R Reinhart, ‘Conducting Monetary Policy at Very Low Short-Term Interest Rates’ (2004) 94 American Economic Review  85–90. 342 Gauti B Eggertsson, ‘The Deflation Bias and Committing to Being Irresponsible’ (2006) 38 Journal of Money, Credit and Banking 283–321. 343 Preamble (7) ECB Decision (EU) 2015/774. 344 Mario Draghi in ECB, ‘Introductory statement to the press conference (with Q&A)’ (n 303). 345 See, for example, Vasco Cúrdia and Michael Woodford, ‘The Central-bank Balance Sheet as an Instrument’ (2011) 58 Journal of Monetary Economics 54–79; Mark Gertler and Peter Karadi, ‘A Model of Unconventional Monetary Policy’ (2011) 58 Journal of Monetary Economics 17–34; Zhiguo He and Arvind Krishnamurthy, ‘Intermediary Asset Pricing’ (2013) 103 American Economic Review 732–70.

682 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) the liquidity effect.346 The results are very tentative.347 They provide some evidence that central bank communication can be used to affect expectations of future policy and also that large-scale asset purchases by central banks can have some effect on the interest rates involved.348 22.200

The studies on the first US programme revealed significant declines in interest rates of safe assets, such as government bonds and highly-rated corporate bonds. There was even some evidence that inflation expectations increased, supporting the signalling effect.349 However, less convincing impact was found on the second QE programme launched during more stable financial markets.350 The Bank of England’s QE was estimated to have a relatively large impact on government bonds but less on other assets.351

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Turning to the question of central banks’ own assessments of the QE, all recent programmes were activated when official interest rates were close to zero. In the US, decisions were made in the regular meetings of the Federal Open Market Committee, the body responsible for the conduct of monetary policy.352 The first programme was also linked to financial market conditions in addition to the overall economic situation.353 The second programme was argued purely on the basis of monetary policy needs.354 The announcement included a path of policy rates for nearly three years forward.355

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The first UK QE programme in 2009 had the dual aim of affecting specific credit market segments as well as relaxing the overall monetary policy stance. In this regard, it was the Ministry of Finance that announced the facility, although it was operationalized by the 346 Diana Hancock and Wayne Passmore, ‘How the Federal Reserve’s Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates’ (2014) FEDS Working Paper No 2014-12. 347 Some evidence was found that QE in Japan helped to support economic activity but less so on the impact on inflation. See Andrea Heuson, Wayne Passmore, and Roger Sparks, ‘Credit Scoring and Mortgage Securitization’ (2001) 23 The Journal of Real Estate Finance and Economics 337–63. 348 Ben S Bernanke, Vincent R Reinhart, and Brian P Sack, ‘Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment’ (2004) 35 Brookings Papers on Economic Activity 1; S Pelin Berkmen, ‘Bank of Japan’s Quantitative and Credit Easing: Are They Now More Effective?’(2012) IMF Working Paper 12/2. 349 Arvind Krishnamurthy and Annette Vissing-Jorgensen, ‘The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy’ (2011) 42 Brookings Papers on Economic Activity 215–87; Arvind Krishnamurthy and Annette Vissing-Jorgensen, ‘The Aggregate Demand for Treasury Debt’ (2012) 120 Journal of Political Economy 233–67; Stefania D’Amico and Thomas King, ‘Flow and stock effects of large-scale treasury purchases’ (2012) FEDS Working Paper No 2012-44; Joseph Gagnon and others, ‘Large-scale asset purchases by the Federal Reserve’ (2010) Federal Reserve Bank of New York Staff Reports No 441; Canlin Li and Min Wei, ‘Term structure modelling with supply factors’ (2012) 9 International Journal of Central Banking 3–39. 350 Brett W Fawley and Christopher J Neely, ‘Four Stories of Quantitative Easing’ (2013) 95 Federal Reserve Bank of St Louis Review (hereafter Fawley and Neely, ‘Four Stories of Quantitative Easing’). 351 It was found that the programme had a positive effect on economic growth and inflation, but the results were not very robust. See Michael A S Joyce and others, ‘The financial market impact of quantitative easing in the United Kingdom’ (2011) 7 International Journal of Central Banking 113–61; George Kapetanios and others, ‘Assessing the economy-wide effects of quantitative easing’ (2012) 122 The Economic Journal F316–F347. 352 In the US, the FOMC decides on the open market operations and the Board of Governors is responsible for the discount rate and reserve requirements. 353 FOMC, ‘Federal Reserve announces it will initiate a program to purchase the direct obligations of housing- related government- sponsored enterprises and mortgage- backed securities’ (Press Release, 25 November 2008) accessed 5 February 2020. 354 FOMC, ‘FOCM Statement’ (Press Release, 3 November 2010) for the QE2 accessed 5 February 2020. 355 FOMC, ‘Federal Reserve issues FOMC statement’ (Press Release, 13 September 2012) accessed 5 February 2020, ‘exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015’.

PUBLIC SECTOR PURCHASE PROGRAMME 683 Bank of England.356 Later, the decisions were made by the Bank of England’s Monetary Policy Committee (MPC), the body responsible for the UK monetary policy. The first QE was seen to boost the supply of money and credit, ‘in due course raising the rate of growth of nominal spending’.357 The Bank of Japan was explicit that it employed QE programmes to achieve the price stability target of 2 per cent, although it also referred to financial stability considerations as an additional objective for the programmes.358 The sizes of the QE programmes are fairly comparable. The Eurosystem asset purchased reached nearly one quarter, and the PSPP alone more than 20 per cent of the GDP. Before, the US QE was put on hold in October 2014, it had reached a very high level.359 The bond holdings peaked at 2,460 billion US dollars in government bonds and at 1,740 billion US dollars in the MBSs, which represented nearly one-quarter of the GDP.360 In Japan, holdings of government bonds have exceeded half of the GDP.361 In the UK, the QE has surpassed one-quarter of the GDP worth of government bonds.362

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The Eurosystem’s insists that PSPP was triggered by a decline in actual and expected inflation in the context of basically zero interest rates.363 Hence, the PSPP and the other asset purchase programmes were monetary policy in a strict sense. It was highlighted that this part of the decision was unanimous.364 The Eurosystem has also not given any other justification to the PSPP.365 Compared to other central banks, the Eurosystem analysis on its transmission to inflation was not very elaborate, ‘these asset purchase programmes

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356 Fawley and Neely, ‘Four Stories of Quantitative Easing’ (n 350). 357 Bank of England, ‘Bank of England Reduces Bank Rate by 0.5 Percentage Points to 0.5 per cent and Announces £75 Billion Asset Purchase Programme’ (Press Release, 5 March 2009); Bank of England, ‘Bank of England maintains Bank Rate at 0.5 per cent and increases size of Asset Purchase Programme by £50 billion to £375 billion’ (Press Release, 5 July 2012). 358 See, for example, Bank of Japan, ‘Statement on Monetary Policy’ (16 November 2011), which referred to financial stability and basically all the statements since October 2010 when the QEs were re-launched in Bank of Japan, ‘Statement on Monetary Policy’ (28 October 2010). 359 FOMC, ‘Federal Reserve issues FOMC statement’ (Press Release, 29 October 2014) accessed 5 February 2020; and FOMC, ‘Minutes of the Federal Open Market Committee October 28– 29, 2014’ accessed 5 February 2020. 360 Board of Governors of the Federal Reserve System, ‘All Federal Reserve Banks: Total Asset’ (FRED, Federal Reserve Bank of St Louis) accessed 5 February 2020. 361 Bank of Japan, ‘Statements on Monetary Policy: Expansion of the Quantitative and Qualitative Monetary Easing’ (31 October 2014); Andy Mukherjee, ‘Bank of Japan bond vault may resemble a black hole’ (Reuters Breakingview, 5 November 2014) accessed 5 February 2020; Bank of Japan, ‘Statement concerning the Bank’s Semiannual Report on Currency and Monetary Control before the Committee on Financial Affairs’ (12 May 2016). 362 For further comparison of the earlier programmes, see Fawley and Neely, ‘Four Stories of Quantitative Easing’ (n 350). 363 Preamble (3) ECB Decision (EU) 2015/774. 364 Although some specific features were not. Draghi in ECB, ‘Introductory statement to the press conference (with Q&A) (n 264). 365 Some discontented Governing Council members might have hinted in that direction. For example, in December 2014 Bundesbank President Weidmann claimed that: [T]‌here’s a whole row of economic reasons that speak against government-bond purchases, even before you consider the legal question of whether they’re compatible with the ban on monetary financing . . . a broad QE program can—bypassing parliaments and governments—lead to a redistribution of risks between taxpayers in the member countries, unless the purchases are limited to the countries with the highest credit rating or each central bank purchases bonds at the risk of its own country. President of the Oesterreichischen Nationalbank, Ewald Nowotny, echoed these worries, ‘to be honest I did not support this decision’ accessed 5 February 2020.

684 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) are aimed at . . . contributing to returning inflation rates to levels closer to 2 per cent’ by ‘enhancing the transmission of monetary policy, facilitating credit provision to the euro area economy, easing borrowing conditions of households and firms’. The main channel was to be the portfolio rebalancing effect that induced banks to increase loan supply.366 President Draghi mentioned that these measures can have fiscal consequences and ‘these fiscal implications are dealt with easily within a one-country framework, between the central bank and the treasury. But in the euro area, there is no European treasury, and each national treasury gives an implicit or explicit indemnity to its own central bank, but not the Eurosystem as a whole’.367 22.205

The speculative economic question is whether the PSPP had other aims that explain the decisions about its size, features or timing.368 An impact on the exchange rate and on asset prices were even more likely outcomes of the QE programmes than higher inflation,369 but they were not mentioned by the Eurosystem.370 One reason can be the locus of EU competence on issues related to the euro exchange rate, which lies with ECOFIN Council, not the Eurosystem. Financing of the Member States is naturally one of the key issues in assessing the PSPP.371 However, as Article 123 TFEU explicitly prohibits the central bank financing of governments, it was not an official argument for the PSPP. The PSPP aimed at facilitating government bonds markets and even at lowering the borrowing costs of the Member States. Making a difference between a monetary policy aim and a government financing aim is impossible on economics grounds, although limited risk-sharing somewhat reduced the government financing motivation.372

C. Constitutional issues 22.206

The PSPP was the last part of the unconventional monetary policy. Just as the economic and financial crisis of the severity witnessed in 2008–12 was not foreseen when the Maastricht Treaty was designed, neither was the need for anything resembling a QE programme taken into account in the monetary policy provisions.373 Hence, the constitutional interpretations related to the PSPP requires combining a constitutional approach with economic 366 Preamble (2) and (4) ECB Decision (EU) 2015/774. 367 Draghi in ECB, ‘Introductory statement to the press conference (with Q&A)’ (n 264). He also stressed that concerning the effectiveness of the PSPP limited risk-sharing could have a small negative effect and did not hide that he was against it. 368 Stefan Wagstyl and Chris Giles, ‘Critics fear ECB quantitative easing will lead to crisis’ Financial Times (Berlin/Davos, 22 January 2015); Birgit Jennen, ‘Ifo’s Sinn Says ECB Using Deflation Risk as Excuse for QE’ (Bloomberg, 12 January 2015) accessed 5 February  2020. 369 Also, in theoretical and empirical considerations, there is evidence of the effect on exchange rates and asset prices, see M Udara Peiris and Herakles Polemarchakis, ‘Quantitative easing in an open economy: prices, exchange rates and risk premia’ (2015) CRETA Online Discussion Paper Series 09; Michel Dupuy and Sylvie Lacueille, ‘The Effects of US and UK Quantitative Easing Policies on Exchange Rates’ (2013) 103 International Research Journal of Finance and Economics 61. 370 See, for example, Paul De Grauwe, ‘Quantitative easing and the euro zone: The sad consequences of the fear of QE’ The Economist (21 January 2015). 371 Paul De Grauwe, ‘The European Central Bank: Lender of Last Resort in the Government Bond Markets’ (2013) CESifo Working Paper Series 3569; as well as Buiter and Rahbari, ‘The ECB as Lender’ (n 261). 372 Article 123 TFEU does not differentiate between purchases by the ECB and by the NCBs. 373 In the late 1980s and early 1990s, quantitative easing was not part of the discussion on monetary policy, either in academia or in central banking practice.

PUBLIC SECTOR PURCHASE PROGRAMME 685 and institutional analysis. Fundamentally, the question is whether the PSPP was a monetary policy measure that can be resorted to in the specific EMU context. From EU constitutional law perspective, two issues could be elaborated: the classification of the programme as monetary policy (exclusive EU competence); and the constraints for the Eurosystem monetary policy such Article 123 TFEU. These questions have also been addressed by the ECJ in its preliminary ruling.374 The question of the monetary policy nature of the PSPP boils down to its underlying motivations. The economic analysis of QE including the examples of other major central banks support the idea that the PSPP could have aimed at price stability in specific circumstances. The economics evidence is relatively weak, but the PSPP was used only when other and more credible measures were in full use. Hence, PSPP could be understood to aim at influencing inflation and inflation expectations that are equivalent to the Eurosystem primary objective of price stability.375 It can be added that the PSPP was conducted with policy instruments available in the Statute, although the Statute defines these in very general terms.

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However, the proportionality of the PSPP is more difficult than its general definition as monetary policy. It needs to take into account the situation at the time of the decision to check whether the PSPP was a primarily used as a monetary policy measure. Was it a sensible policy measure to achieve the objectives, or conversely were there other more likely reasons for the measure that could question its monetary policy nature. In the case of the PSPP, the difficulty lies with the unclear link with the programme and its aims, and the ECJ did not insist on a particularly detailed or through explanations from the Eurosystem.376 The Eurosystem also tried to limit its influence by avoiding a blocking minority, applying black-out periods and the pari passu principle.377

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The constitutional review of the Eurosystem does not offer protection against poor policy choices as such, it can only try to avoid manifest errors of assessment.378 The latter could be the case if a measure clearly aims at something else than legitimate monetary policy aim and if this other aim was the primary reasons or even as contradictory to the monetary policy aims. This could then disqualify the PSPP from being a monetary policy measure. The ECJ again stressed that the Treaty does not contain a precise definition of monetary policy and that a measure can be deemed monetary policy if it has the objective of maintaining price stability.379

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One major economic question with the PSPP relates to asset prices. The PSPP was launched when financial asset values were close to their peaks, in contrast to other central banks. This can be relevant for the effectiveness of the programme but also for financial stability considerations. However, the discretion awarded to the expert organization, the Eurosystem, should most likely prevail. The ECJ even mentioned the impact on the balance sheets of commercial banks, but refuses to see it as a factor questioning the objective of the PSPP.380

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374 Case C-493/17 Heinrich Weiss and others [2018] ECLI:EU:C:2018:1000 (hereafter Weiss and others). 375 In the UK, the QE was clearly linked to the conventional monetary policy having reached its limits, and logically it is stated that the purchases will be unwound when the official interest rate has reached a level where it could also be properly cut if needed. See Bank of England, ‘Inflation Report February 2014’ (Bank of England 2014). 376 Weiss and others (n 374) paras 33–42. 377 Draghi in ECB, ‘Introductory statement to the press conference (with Q&A)’ (n 264). 378 Gauweiler and others (n 228) para 74. 379 Weiss and others (n 374) paras 50 and 53–54. 380 Weiss and others (n 374) para 58.

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The hints of other factors at play could be detected, particularly related to financial stability consideration over some euro area banks. Many problem banks had become major holders of the government debt of troubled Member States. The ECB made a comprehensive assessment of the banks, before it took them under its direct supervision in 2014. Thus, the ECB’s credibility could be questioned if banks failed just after its thorough assessment. It is even possible to see some of the PSPP peculiarities from this perspective. For example, other central banks purchased the lowest risk benchmark government bonds, but the Eurosystem purchased the bonds of all Member States with the exception of Greece,381 although the main monetary policy means could have been achieved by purchasing only the most liquid and creditworthy bonds.

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The main problem with Article 123 TFEU is the outcome of the PSPP, namely that the Eurosystem will hold a substantial amount of Member States government bonds for other than short-term monetary policy purposes. Through the PSPP the Eurosystem has replaced private investors as creditors of the Member States. In economic terms, the Eurosystem issued central bank money to become a major creditor of the Member States, which is clearly monetizing government debt, regardless of whether it takes place through primary or secondary purchases. A possible way around Article 123 TFEU can be through its ultimate telos, namely the concerns that an excessive supply of money leads to high inflation. Central bank financing of governments can lead to high inflation. In the PSPP case, this telos was turned around. The price stability objective required higher inflation, which could be operationalized by purchasing government bonds.

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Unsurprisingly, the opinion of the Advocate General on the PSPP does not find any substantial legal hurdles.382 It was thus not a surprise that the ECJ judgement continued the line of argumentation in the Gauweiler and to some extent Pringle cases, leaving the Eurosystem largely in charge of its own mandate. However, in the Weiss case, the ECJ also pointed to the exceptional circumstances ‘in the context of an economic crisis entailing a risk of deflation’ that can ‘represent an insurmountable obstacle to its accomplishing the task assigned to it by primary law.’383 This could be read as a slight hesitation to the institutional empowerment in the ECJ judgments. The lenience in the judicial review explicitly takes into account the exceptional circumstances.

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The Eurosystem engaged in a variety of unconventional monetary policy measures since the crisis started in 2007. These measures have redefined the common monetary policy, but they have also affected the borderlines of the exclusive Union competence in monetary policy. Some constitutional remarks were made in the description of each unconventional measure, but a more comprehensive constitutional assessment could provide a fuller picture of the

381 See changes and holdings at accessed 5 February 2020. 382 Case C‑493/17 Weiss and others [2018] ECLI:EU:C:2018:815, Opinion of the AG Wathelet. 383 Weiss and others (n 374) para 67.

Constitutional Elements of Monetary Policy 687 constitutional mutation at hand. When applicable, constitutional assessment takes the ECJ’s Gauweiler and Weiss cases as the starting points without neglecting their problems and limitations.384 The most important constitutional question concerning the Eurosystem involvement in crisis links to the definition of monetary policy. Could the measures still be classified predominantly as monetary policy? Some questions relate to the prohibition of public sector financing and the Member States fiscal responsibility. The Eurosystem’s independence also faced new threats with its deeper entanglement in economic policies in the euro area.

A. The redefined content of monetary policy The use of existing monetary policy measures in new ways and particularly the introduction of the new unconventional monetary policy measures has redefined the content of monetary policy. The first issues related to the extensive use of the Eurosystem operational framework, which was used to ensure sufficient liquidity in the euro are banking sector. The expansion of the list of eligible collateral and the extended medium-term funding for banks were formally based on the Eurosystem’s monetary policy competence. Eurosystem collateral policy was relaxed to the extent that questioned the applicability of the term ‘adequate collateral’ (Article 18.1 ESCB and ECB Statute). By and large, the relaxations were justified by the need to maintain the functioning of the euro area interbank markets. Some questions remain whether Eurosystem collateral policy reduced market discipline and even increased systemic risks. Particularly, the expansion of collateral in the direction of bank-created assets potentially exposed the Eurosystem to a moral hazard or even gamble for resurrection. Also, maintaining government bonds in the collateral list even when their credit ratings were cut below the Eurosystem guideline could be questioned.

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However, it has not been questioned that the lending operations to banks were monetary policy. Only the LTRO operations with three-year maturity could be assessed somewhat differently. The length was very unusual for monetary policy, also in international comparison. The Eurosystem based its argumentation on the facilitation of bank lending to companies and households,385 but in effect the LTROs were mainly used to purchase government bonds of the troubled countries, worsening or even creating the vicious link between banks and sovereigns. The ECJ ruled that ‘[t]‌he grant of financial assistance to a Member State however clearly does not fall within monetary policy’. In the operational framework the three-year LTRO operations could be the most suspicious on the grounds of providing financial assistance to banks and indirectly to Member State governments.

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The main constitutional issues have related to the purchase of government bond, particularly the selective purchase programmes (the SMP and OMT). The approaches on how to assess the monetary policy content of the measures differed between the ECJ and the FCC. The FCC directly tackled the issue by raising a number of elements of the OMT programme that either supported the view that it was monetary policy or more often questioned it.

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384 Gauweiler and others (n 228). 385 ECB, ‘ECB announces measures to support bank lending and money market activity’ (n 137). See also ECB, ‘Introductory statement to the press conference (with Q&A) 8 December 2011’ (n 142) and admission that the decision on the measures was not unanimous.

688 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) The FCC based the analysis of monetary policy on the wording, structure and purpose of the Treaties. The ECJ took a more formalistic approach. It insisted that the TFEU did not contain a precise definition of monetary policy as such. Only objectives and instruments of monetary policy were defined. However, the ECJ still claimed that the Eurosystem was characterized by a clear mandate that was even tightly drawn.386 The ECJ put the main emphasis on the primary objective of price stability as the ultimately factor defining a measure as monetary policy or something else.387 22.218

The Eurosystem has used two concepts to justify its bond purchases: singleness of monetary policy and monetary policy transmission. The actual content of the singleness remained somewhat open both in the ECB press release and the ECJ judgment. The judgment merely pointed to Article 119(2) TFEU that monetary policy must be ‘single’, without defining it. The ECJ even ruled out one plausible further clarification by stating that the Treaty did not require that the Eurosystem operated by means of general measures that would be applicable to all the Member States. Hence, singleness according to the ECJ did not mean a prohibition of multiple monetary policies in the euro area,388 as monetary policy impulses cannot be the same throughout the euro area.389 Hence, it is not obvious what the ECJ meant with ‘safeguarding the singleness of monetary policy contributes to achieving the objectives of that policy inasmuch as, under Article 119(2) TFEU, monetary policy must be “single” ’390 or that ‘the objective of safeguarding an appropriate transmission of monetary policy is likely to preserve the singleness of monetary policy’.391

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The main argument to include the OMT (and SMP) under monetary policy was based on the objective of safeguarding monetary policy transmission, which was to contribute to the primary objective of price stability. The fact that the programmes could also have contributed to other objectives, such as the stability of the euro area did not change the conclusion.392 Whether this was a sufficient condition or not was seen differently by the ECJ and the FCC. The latter demanded that the measure was seen as monetary policy also against some more generally acceptable definitions.393

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The ECJ analysis of the economic reasoning for the OMT programme stressed the currency redenomination risk, although it is difficult to judge the extent to which the OMT programme predominantly aimed at reducing the risk of currency redenomination. The ECJ refers to the ECB’s assessment that the interest rates, the spreads and the volatility of troubled countries’ government bonds could not be explained by country-specific factors, and hence they reflected euro breakup risks.394 The risk of redenomination also affected 386 Gauweiler and others (n 228) paras 42 and 44. 387 Gauweiler and others (n 228) paras 45 and 46. 388 Gauweiler and others (n 228) para 55. 389 On the classic discussion on the role of real interest rate see Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States 1867–1960 (Princeton UP 1963) and in the euro area context for example the Report of the Tommaso Padoa-Schioppa Group, ‘Completing the Euro: A road map towards fiscal union in Europe’ (26 June 2012). See also Christian Odendahl, ‘The Eurozone’s Real Interest Rate Problem’ (Centre for European Reform, 8 July 2014) accessed 5 February 2020. 390 Gauweiler and others (n 228) para 48. 391 Gauweiler and others (n 228) para 49. 392 Gauweiler and others (n 228) paras 51 and 56. 393 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, paras 63–64. 394 Gauweiler and Others (n 228) para 72.

Constitutional Elements of Monetary Policy 689 the financing conditions in the countries in question, caused fragmentation of the financial markets and undermined the monetary transmission mechanisms.395 Unfortunately, the ECJ relied only to the ECB’s view on the issue,396 although the determination of a country’s credit spread is at best uncertain estimation as the ECB’s failed assessment of the Greece’s creditworthiness had highlighted. On economic grounds, currency redenomination risk as such is hardly a sufficient condition. The purchase of bonds needs be a plausible remedy for the situation and even a better one than other available measures. If the underlying reason was a market overreaction that risked becoming a self-fulfilling fear, the market intervention could have been more directly linked to the risk itself.397 Also, if the reasons were structural, only structural remedies would have sufficed. For example, in the Greek case, early debt restructuring could have stabilized the situation,398 but market interventions such as those envisaged in the OMT (and SMP) programme could even have reduced incentives for longer-term solutions.399

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The main argument of the ECB on the monetary policy transmission mechanism specified that the link between the official rates, mostly the main refinancing rate, and the bank lending rates was disrupted.400 This link between the monetary policy rate and bank rates is clearly an element in monetary policy transmission,401 but the evidence on how the link was disrupted in troubled Member States and how the programmes would correct the problem were missing. In the euro area context, domestic bonds yields can be relevant for other interest rates in the country, but only as one factor among many.402 Even a high correlation between government bond spreads and bank interest rates in a Member State can be caused by a common factor, not a causality running from government bonds to bank loans.403

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Another link between monetary policy transmission and government bonds runs through the bank solvency. However, in that case, the origin of the problem is with bank capitalization rather than excessive bond spreads.404 The substantial increase in bank holdings of government bonds was a negative development that was enabled the Eurosystem’s LTROs. Furthermore, solvency support for banks is clearly not part of the Eurosystem’s mandate, which has been verified by the Eurosystem. Hence, the argument that the Eurosystem should purchase sovereign bonds in order to support bank solvency is problematic.

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395 Gauweiler and others (n 228) para 73. 396 It did not consider the opposite views that were referred to by the FCC. Particularly, the views of the German Bundesbank were explicitly stated and challenged the ECB views at the expert level See, BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, paras 13–15. 397 Louis-Vincent Gave, ‘Putting the ECB’s Money Where Its Mouth Is’ Wall Street Journal (17 September 2012). 398 See IMF, ‘Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement’ (Country Report No 13/156, June 2013). 399 See, BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, paras 13–14. 400 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 7. 401 See ECB, ‘The role of banks in the monetary policy transmission mechanism’ (Monthly Bulletin August 2008). 402 For example, in early 2012 when Greek government bond yields stood at more than 30 per cent, the bank interest rates on new housing loans in Greece declined and stood at below 4 per cent. See for example, Benoît Mojon, ‘Financial Structure and the Interest Rate Channel’ (2000) ECB Working Paper No 40; Bank of Greece, ‘Bank Deposit and Loan Interest Rates’ accessed 5 February 2020. 403 See also Stefano Neri, ‘The impact of the sovereign debt crisis on bank lending rates in the euro area’ (2013) Bank of Italy Occasional Paper No 170. 404 Edda Zoli, ‘Italian Sovereign Spreads: Their Determinants and Pass-through to Bank Funding Costs and Lending Conditions’ (2013) IMF Working Paper No 13/84.

690 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) 22.224

In addition, the ECJ mentioned the link between bonds and banks’ ability to obtain liquidity. However, the statistical facts pointed to a rather limited role for government bonds particularly in Eurosystem operations. And the Eurosystem liquidity provision had become the most important market funding to the banks in troubled countries, limiting the impact of interbank markets.405 Even the Bundesbank has questioned both the link to monetary transmission and the existence of severe mispricing in government bond markets.406

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The ECJ seemed to push aside its own view that macroeconomics and monetary policy are subject various views and uncertainty407 by claiming that: it is undisputed that interest rates for the government bonds of a given State play a decisive role in the setting of the interest rates applicable to the various economic actors in that State, in the value of the portfolios of financial institutions holding such bonds and in the ability of those institutions to obtain liquidity.408

The ECB argumentation similarly vested on the link between government bond markets and the monetary transmission mechanism. Interestingly, the areas the ECJ claimed to be undisputed, have been disputed in the euro area context. 22.226

It could be concluded that the ECJ judgment on the monetary policy content of the selective purchase programmes refused to consider the information available from the FCC. A more elaborate assessment might have been warranted taking into account that the judgment on the monetary policy content draws the line between the monetary policy competence conferred to the EU and the economic policy still at the national responsibility. The democracy principle could demand that the mandate of the Eurosystem ‘must be shaped narrowly’ and it is fully subjected to judicial review.409 The substantively narrow and biased assessment by the ECJ may have questioned this principle, even if a more balanced assessment might have had the same outcome. A possible escape from the limitations of the judicial review by the ECJ could be found from the preparatory nature of the OMT programme. Nevertheless, the ECJ judgment constituted an ultimate institutional empowerment for the Eurosystem. It could define its own mandate, and it was also assigned a major role in defining economic policies in Member States that face economic problems.410

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However, if the ultimate reason for the OMT (and even SMP) was a real threat of a euro area breakup, it could have been advisable to openly admit it, not to insist that the OMT was a monetary policy measure. Furthermore, making it explicit that the OMT was an exceptional measure falling between the traditional lines of monetary and fiscal policy, could even be seen as the Eurosystem contributing to the economic policies in the EU, and as such mainly pushing the boundaries of prohibition of Article 123 TFEU. In that case, the ESM decision on a Member States needing assistance could also be viewed as an explicit decision to formulate ‘economic policies in the EU’ leaving it open for the Eurosystem to contribute 405 Gauweiler and others (n 228) para 74. 406 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, paras 13–14 and 71. 407 The remark that ‘questions of monetary policy are usually of a controversial nature’ in Gauweiler and others (n 228) para 75. 408 Gauweiler and others (n 228) para 78. 409 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 58. 410 See Tridimas and Xanthoulis, ‘A Legal Analysis of the Gauweiler Case’ (n 296) 17–39.

Constitutional Elements of Monetary Policy 691 to it or not. The intrusion into national policy-making and the potential redistributive effects411 would have been made with the consent of the governments in question. The issues with the PSPP are somewhat different. The PSPP could be seen as a monetary 22.228 policy measure similar to the ones activated by other central banks earlier for the purpose of advancing their objectives (mostly growth and price stability). There are also some important differences between the PSPP and other programmes particularly concerning the prevailing economic and financial environment. Some questions could be problematic such as the aim of increasing asset prices in the euro area, which raises question whether the Eurosystem is employing a redistributive policy. Naturally, some redistributive effects result from conventional monetary policy as well, but with the PSPP these effects are the most explicit ones. The ECJ did address the question indirectly and saw it as part of monetary policy particularly in the exceptional circumstances of the crisis.412 In addition, the limited risk- sharing of the PSPP could be seen from the perspective of a potential euro area breakup. The full risk-sharing was an important part of the OMT, because it increased the cost of the euro area breakup. With the PSPP this was mostly absent. Each NCB was buying its own bonds at its own risk, and a breakup could be more easily tackled, which could be problematic for the unity of the monetary policy.

B. Or stepping in the area of Member State economic policy competence? To the extent that Eurosystem measures particularly during the sovereign debt crisis did not fall in its constitutional mandate of conducting monetary policy, they could be challenging the Member States’ area of competence. According to the ECJ, even the concept of monetary policy was not defined in the Treaty through its content or even its instruments but mainly through its objectives.413 This complicates the ultra vires issue at the heart of the principle of conferral explicated by Articles 4 and 5 TEU.414 However, the national responsibility for fiscal policy was a fundamental part of the EMU constitutional architecture. It provided the democratic foundations of the EMU together with the democratic decision to delegate a narrowly defined monetary policy to an independent expert, the Eurosystem. The relationship between common monetary policy and national fiscal policies was a key concern for the success of the EMU, and institutional and legal safeguards were built in to maintain national fiscal responsibility, to avoid moral hazard and to protect common monetary policy from reckless fiscal policies.

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National responsibility included both discretion on the substance of those policies as reflections of the national democratic process, but also the responsibility to limit the negative repercussions of those policies for the other Member States. National discretion came with national responsibility, which was in turn facilitated by a number of safeguards such as the

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411 On the notion of redistribute effects and their structural importance, see Mattias Wendel, ‘Exceeding Judicial Competence in the Name of Democracy’ (2014) 10 European Constitutional Law Review 263–307. 412 Weiss and others (n 374). 413 Pringle (n 227). 414 ‘Under the principle of conferral, the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein’: see Article 5(2) TEU.

692 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) prohibition of public sector financing by the Eurosystem, the excessive deficit procedure and the non-bailout clause of Article 125 TFEU. 22.231

The FCC used a term the independence of national budgets, which relied partly on market incentives to discipline the Member States. If this discipline was undermined by Eurosystem measures, the national budgetary independence could become questioned and even replaced by the adjustment programmes.415 However, the Eurosystem’s involvement in fiscal rescue packages was not based on any specific task assigned to it in the Treaty, but it could be seen in the light of Article 127(1) TFEU as the Eurosystem’s support of general economic policies in the Union.

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According to the Pringle case, the ESM is based on the Member States’ competence and thus arguably better equipped to tackle issues involving fiscal transfers between the Member States. The ESM Treaty did allocate the ECB some tasks with regard to the activation of financial assistance, including assessing requests for stability support (Article 13(1) ESM Treaty), their urgency (Article 4(4) ESM Treaty) negotiating the MoUs (conditionality), and monitoring (Articles 13(3) and 13(7) ESM Treaty). No link to monetary transmission was present and the tasks of the ECB were based on the task of supporting the general economic policies in the Union.416

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The ECJ saw no problems with these ESM tasks of the Eurosystem and its bond purchases.417 The ECJ held that the mere announced objectives of the OMT programme and the ESM were sufficient to make a difference between monetary policy and fiscal policy.418 This was a formal interpretation, but the ECJ had possibly driven itself into a corner in the Pringle judgment, in which it had insisted that the purchasing of government bonds was not monetary policy.419 The seemingly clever way out was to include bond purchases in both monetary policy and in the ESM’s non-Union tasks by emphasizing their different objectives.

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Another issue is the fiscal burden caused by the Eurosystem’s risk-taking, for example, in the form of the bond purchases. The FCC pointed to the potential costs involved in the OMT programme, but the ECJ was not particularly moved: [E]‌ven if it were established that that programme could expose the ECB to a significant risk of losses, that would in no way weaken the guarantees which are built into the programme in order to ensure that the Member States’ impetus to follow a sound budgetary policy is not lessened.420

The statement could be seen as an unintentionally ironic comment considering what happened in Greece that was a programme country. The ECJ added that the Eurosystem 415 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 71. 416 Treaty Establishing the European Stability Mechanism (T/ESM 2012/en 1). 417 The formalistic, literal, tautological and even doctrinal approach has been pointed out at least by Sarmiento, ‘The Luxembourg “Double Look” ’ (n 291) 49; as well as Stefania Baroncelli, ‘The Gauweiler Judgment in View of the Case Law of the European Court of Justice’ (2016) 23 Maastricht Journal of European and Comparative Law 79, 90 (hereafter Baroncelli, ‘The Gauweiler Judgment’); Christian Joerges, ‘Pereat Iustitia, Fiat Mundus: What is Left of the European Economic Constitution after the Gauweiler Litigation?’ (2016) 23 Maastricht Journal of European and Comparative Law 106. 418 Gauweiler and others (n 228). 419 Pringle (n 227) para 56. 420 Gauweiler and others (n 228) para 123.

Constitutional Elements of Monetary Policy 693 measures can contain risks and its Statute has procedures to tackle losses.421 The link to the potential limitations of the national democratic process raised by the FCC was thus ignored.

C. Prohibition of central bank financing (and non-bail out) The applicability of the non-bailout clause (Article 125 TFEU) to the Eurosystem has divided opinions. Article 125 has been argued as is the general provision, while Article 123 TFEU on prohibition of public finances is specifically assigned to the Eurosystem. Hence, a lex specialis derogat legi generali interpretation could exclude the more general Article 125 TFEU.422 In addition, it has been claimed that the teleological interpretation of Article 125 TFEU makes it unclear whether it applies to the Eurosystem or not,423 although these arguments are somewhat weak, as the teleological interpretations can be based on considerations such the spill-over effects and moral hazard considerations that could be applicable also to the Eurosystem. The Member States are also ultimately liable for the Eurosystem, and the exclusion of the applicability of the non-bailout clause for the Eurosystem would allow a circumvention of the provision. It would more defendable to read Articles 123 and 125 TFEU together in the case of the Eurosystem. The lex specialis interpretation could still be used if the articles contradict each other.

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It can be recalled that Article 123 TFEU did not prevent Eurosystem from buying government bonds for monetary policy purposes, but that this was an exception to the basic rule and the purchases needed to be made in secondary markets. Furthermore, even then the purchases were not to have an effect equivalent to purchases in primary markets, which could undermine the effectiveness of the prohibition.424

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The most explicit questions concerning the prohibition of central bank financing were raised by the Eurosystem bond purchase programmes. The question of relevance for the SMP are the same as for the OMT. The measures need to be seen as monetary policy tools, as explained earlier and should not contain the motivations of financing Member States. In the Gauweiler case, the ECJ only assessed the prohibition of the central bank financing clause but not the non-bailout clause. The ECJ reading of Article 123(1) TFEU was that it prohibits the Eurosystem from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Union and of Member States and from purchasing directly from them their debt instruments. In effect, the provision should prohibit financial assistance from the Eurosystem to a Member State.425 However, the ECJ went beyond the wording of the prohibition and discussed its motivation, which was to ‘encourage the Member States to follow a sound budgetary policy, not allowing monetary financing of public deficits’.426 In this reading, it was part of the protection of sound public

22.237

421 Gauweiler and others (n 228) para 125. 422 See Ulrich Häde in Christian Calliess and Matthias Ruffert (eds), EUV/AEUV-Kommentar (5th edn, CH Beck 2011) Article 123 TFEU. 423 Helm, The ECB’s securities markets programme (n 224) 39. 424 Gauweiler and others (n 228) para 97. 425 Gauweiler and others (n 228) paras 94 and 95. 426 Gauweiler and others (n 228) para 100.

694 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) finances in the EMU alongside the excessive deficit procedure and even the entry criteria related to the public finances. The ECJ did not mention the motivation of maintaining market discipline427 nor was the issue of central bank independence discussed in relation to Article 123 TFEU. 22.238

In the ECJ’s and Advocate General’s view, the permissibility of the Eurosystem purchases merely requires sufficient procedural safeguards to ensure that the impact of secondary market purchases is not the same as of the primary market purchases. The ECJ’s qualification for these safeguards consists of preventing potential primary market investors from knowing with certainty that the Eurosystem would purchase these bonds within a short time period.428 Thus the legal bar was set very high. Economically, the fact that the Eurosystem was seen to secure market pricing and liquidity could have been a sufficient condition rather than insisting that there is certainty that the Eurosystem would buy any specific bonds. Hence, the ECJ extensively limited the scope of Article 123 TFEU prohibition.

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Also the PSPP raised some specific issues concerning the Treaty prohibition of public financing. The problems with the SMP and the OMT programmes with regard to Article 123 TFEU were more fundamental not least because of their selective nature. The ECJ provided its view on the applicability of Article 123 TFEU for the OMT programme, by referring to the assumed telos of the Article, namely the protection of sound public finances. In the Gauweiler case this would have taken place through the conditionality criteria. As pointed out before, the ECJ argumentation has deserved a fair amount of criticism, even concerning the telos of Article 123 TFEU. Furthermore, the conditionality argument does not apply to the PSPP, although it could be defended on the grounds that its monetary policy content is less dubious and that there are some safeguards to limit its impact on the primary markets. The Weiss case noted that the PSPP could have the effect that it facilitated the financing conditions of the Member States, but it was not sufficient to breach Article 123 TFEU as long as the test of the Gauweiler case was met. The intervention does not have an effect equivalent to that of a direct purchase of bonds from the Member States, and that the programme does not reduce the incentives of the Member States to follow a sound budgetary policy. How the latter test was passed was perhaps not the strongest part of the judgment. Furthermore, the fact remains that the body that was not allowed to finance governments has become their largest creditor.

D. Central bank independence 22.240

The Eurosystem independence means that it should be in a position to make its decisions solely based on relevant information for monetary policy and that it would never need to jeopardize its primary objective. This was also confirmed by the ECJ: Article 130 TFEU is intended to shield the ESCB from all political pressure in order to enable it effectively to pursue the objectives attributed to its tasks, through the

427

428

As discussed earlier, this was already raised by the Delors Committee. Gauweiler and others (n 228) paras 102 and 104.

Constitutional Elements of Monetary Policy 695 independent exercise of the specific powers conferred on it for that purpose by primary law.429

Earlier, in the OLAF case the ECJ had been more restrictive, and the ECB’s independence was defined in a functional manner to serve the fulfilment of its objectives and tasks.430 It was still limited by the values and other objectives of the EU.431 The FCC also pointed out that the independence of the Eurosystem was an important part of the FCC decision on the Maastricht Treaty.432 The extensive independence both limited the measures available for the Eurosystem, but it was also needed to guarantee the deeper aims of the monetary union, such as a liberal society with individual freedoms. Yet, ‘[t]‌he constitutional justification of the independence of the European Central Bank is . . . limited to a primarily stability- oriented monetary policy and cannot be transferred to other policy areas’.433 The crisis put Eurosystem independence to a major test. It was placed within a multifaceted situation, in which other key policy-makers seemed to lack the ability or willingness to act decisively, and the actual economic effects of various measures became blurred. The SMP was problematic for Eurosystem independence in a number of ways. The actual decision concerning the programme was a surprise, as the Eurosystem had excluded any buying of government bonds only a few days earlier. During these days, the EU leaders had decided upon the extensive plans and mechanisms to take responsibility for the rescue of Member States.434 The Eurosystem’s change in heart was seen to relate to the idea that the Eurosystem could take on buying bonds immediately while ‘more correct’ institutional arrangements took some time to become operational. This was seen to sacrifice the Eurosystem’s independence by giving in to political pressure.435

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The question of the SMP and Eurosystem independence cannot definitely answered, because the motivations and events cannot be verified. If the SMP was purely monetary policy, the independence could have been theoretically unharmed. However, if the SMP was based on supporting Member States or their banks, it is difficult to insist that the Eurosystem was not under pressure.436 It was perhaps also related to Eurosystem’s other participation

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429 Gauweiler and others (n 228) para 40. 430 Case C-11/00 Commission of the European Communities v the European Central Bank [2003] ECR I-7147, where the Commission challenged the validity of the ECB Decision 1999/726/EC of 7 October 1999 on fraud prevention (ECB/1999/5) [1999] OJ L291/36. 431 Stefania Baroncelli, ‘EMU model and its Aftermath’ in Stefania Baroncelli, Carlo Spagnolo, and Leila Simona Talani (eds), Back to Maastricht: Obstacles to Constitutional Reform within the EU Treaty (1991–2007) (Cambridge Scholars Publishing 2008) 136–37. 432 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 32 with a reference to BVerfG, Judgment of 12 October 1993—2 BvR 2134/92, 2 BvR 2159/92. 433 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 59. 434 Tuori, The Eurosystem and the European economic constitution (n 1) 298–99. 435 These concerns over independence were echoed by some Bundesbank managers. They considered the SMP problematic and a cause of concern for central bank independence. See for example, Guntram B Wolff and others, ‘Changing of the Guard Monetary Dialogue October 2011’ (IP/A/ECON/NT/2011-03). See also ‘Europe’s monetary opposition’ The Economist (6 October 2012) accessed 5 February 2020; and Franz-Josef Meiers, Germany’s Role in the Euro Crisis (Springer 2015) 41–42. 436 An ECB Executive Board member Jürgen Stark, who later resigned on account of policy disagreements, considered that the SMP had blurred the line between fiscal and monetary policy and hence was detrimental to Eurosystem independence, which linked to the expectations of Eurosystem rescues that were created by the programme. Marietta Kurm-Engels, Gabor Steingart, and Christian Vits, ‘Jürgen Stark—Das Vertrauen in die EZB geht verloren’ Handelsblatt (25 March 2012) accessed 5 February  2020.

696 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) in rescue programmes, which was highlighted by President Trichet when he said that the fiscal consolidation programmes were necessary commitments that allowed the SMP to continue.437 The participation in the rescue packages and verbal interventions could also be seen as questioning the independence of their own right. For example, being part of the Troika and negotiating with Member States on the adjustment packages could have imposed constraints on the Eurosystem measures in the monetary policy fields, such as collateral policy. 22.243

In addition, Eurosystem involvement that includes demanding some measures from Member State governments, could hamper its independence. The ECB letters showed how the SMP and emergency liquidity assistance could have been used as pressure tools against governments, although no legal measures were available for the Eurosystem to activate against the Member States in question.

22.244

Surprisingly, the ECJ did not really address the question of Eurosystem independence in the Gauweiler case, even though the FCC and also Advocate General had raised it. The issue of the Eurosystem’s mandate is inevitably linked to its independence, as the mandate draws the borderlines of the independence.438 The ECJ mentioned independence mostly in relation to the ESM. However, had the OMT being used, the Eurosystem could have ended up purchasing a substantial part of a Member State’s government bonds that would have tied it to the fiscal situation of this debtor Member State. Such dependence on the fiscal situation of the debtor country could have questioned its independence.439

22.245

The independence of the Eurosystem requires that it maintains full independence when it decides on its monetary policy measures. In the OMT programme, the Eurosystem decision was tied to the decisions by the ESM (and the EFSF).440 Although the Eurosystem claimed that it retained full discretion on its bonds purchases, it actually did make them explicitly conditional on ESM decisions, in addition to the fact that the ECB influenced the ESM decisions as a member of the Troika. This was hardly unproblematic for the Eurosystem’s independence. Even the Advocate General stressed that the Eurosystem was to be ‘kept away from the political debate’.441 It is difficult to see fiercer political debates than those that are related to Member States’ adjustment programmes.

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In conclusion, the measures during the crisis contained many issues with relation to the Eurosystem independence. Many questions remain inconclusive, as it cannot be verified that the Eurosystem was influenced to the extent that it would be considered a violation of Article 130 TFEU. However, there are ample indications that the Eurosystem was drawn to the rescue package for Greece and that it had less than full discretion to decide whether its participation in the procedures was indeed appropriate. Furthermore, both the SMP and increased lending to euro area banking partly using government bonds as collateral could have made the Eurosystem financially vulnerable towards defaults of some Member States. 437 Trichet, ‘The ECB’s response to the recent tensions in financial markets’ (n 175). 438 This was also pointed out in Baroncelli, ‘The Gauweiler Judgment’ (n 417) 79–98. 439 The situation would be best described by the famous quote by Jean Paul Getty, ‘If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that's the bank’s problem’. 440 BVerfG, Order of the Second Senate of 14 January 2014—2 BvR 2728/13, para 82. 441 Gauweiler and others Opinion of AG Cruz Villalón (n 289) para 109.

Constitutional Elements of Monetary Policy 697 Fortunately, the OMT was never activated as it could have contained the most pronounced risks for the Eurosystem independence. The independence of the Eurosystem is linked to the definition of monetary policy borderlines, because only that area is protected by its independence. The FCC emphasized the link between a narrow and externally justifiable definition of monetary policy and the extensive independence of the Eurosystem. Only a limited central banking model could be given to an independent Eurosystem.442 This link is perhaps sometimes misunderstood, when the FCC is seen critical towards the Eurosystem’s use of independence.443 The narrow central bank model was perceived to be best suited for maintaining price stability and also as the model that could be given extensive independence. All the elements are interlinked.

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E. Conformity with the market mechanism The excessive liquidity provision via standard auctions and special auctions could have hampered the or even replaced the market mechanism by Eurosystem measures, which could be problematic against the principle of the market economy the Eurosystem should protect in its operations. The provision of liquidity is a traditional central bank function, but it could be argued that these liquidity-creating operations reached the levels that could question their compatibility with the market economy. Nevertheless, this could be considered proportionate in the face of the destabilizing forces arising from the financial markets, and relying more on the market mechanism could have been considered too great a risk for the euro area economy. Similarly, the broad set of counterparties could also be seen from this perspective. The disintegration of euro area financial markets resulted primarily from events outside the control of the Eurosystem, and measures to reduce the recourse to the Eurosystem facilities could have been destabilizing.444 Nevertheless, the fact that the interbank market is largely replaced by the Eurosystem framework is hardly a comfortable situation. For example, it could be questioned whether there exists proper short-term market interest rates in the euro area that provide reliable basis for many contracts that use them as reference rates.

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The principle of a market economy was a fundamental issue with the bond purchases, albeit for somewhat different reasons. Both the SMP and the OMT programme were based on the claim that market pricing of some government bonds could malfunction. The FCC and the Bundesbank disagreed with the notion that the Eurosystem could know with any certainty that a given market interest rates of a government bond was wrong. Clearly, the idea that the Eurosystem would selectively react to some market prices in the euro area could question the perspective of maintaining the conduct of monetary policy in line with the open market economy with free competition. This was only indirectly addressed by the ECJ, but it did not question the Eurosystem’s ability to react to market prices in a correct manner. Similarly, the

22.249

442 See particularly BVerfG, Judgment of 12 October 1993—2 BvR 2134/92, 2 BvR 2159/92. 443 See Marijn van der Sluis, ‘Maastricht revisited economic constitutionalism the ECB and the Bundesbank’ in Maurice Adams, Federico Fabberini, and Pierre Larouche (eds), The Constitutionalization of European Budgetary Constraints (Hart Publishing 2014) 105, 108. 444 See, for example, ECB, ‘Euro Money Market Survey 2011’ (ECB 2011) and ECB, ‘Euro Money Market Study 2012’ (ECB 2012).

698 MONETARY POLICY (OBJECTIVES AND INSTRUMENTS) PSPP has affected the euro area longer-term interest rates in a profound manner that could be problematic for the market mechanism.

F. Other issues—the discretion allowed and the principle of democracy 22.250

The ECJ referred to broad discretion and to manifest errors in the Gauweiler and Weiss cases. It stated that the Eurosystem needs to be allowed a broad discretion in the preparing and implementing of open market operations requiring technical choices and complex assessments. Monetary policy does entail making choices of a technical nature and undertaking forecasts and complex assessments. However, it is not obvious that these technical elements automatically make monetary policy as a whole, similar to complex scientific and technical facts that were present in the ECJ’s earlier cases.445 It could be argued that most monetary policy decisions are not particularly technical, but can actually be close to value judgements with many links to the society at large.446 Furthermore, the earlier cases referred to ‘a manifest error of appraisal or a misuse of powers, or whether the legislature has manifestly exceeded the limits of its discretion’.447 The qualifications that included errors of appraisal and exceeding the limits of powers could call for a judicial review also from an ex post perspective.

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Rather than raising the applicability level to such heights, the ECJ could have worked more on the concept of the stability of the euro area as a whole. As has been demonstrated elsewhere,448 the stability of the euro area could have become a new constitutional principle that could be balanced against some other constitutional principles. For example, what is the difference between safeguarding the stability of the euro area and safeguarding the singleness of monetary policy if for both were threatened by the euro area breakup? And could the appropriate policy tool for both have been a large-scale purchases of government bonds of selected Member States? This could hint to the fact that the underlying objectives were not very different after all.

445 Gauweiler and others (n 228) para 68 and Weiss and others (n 374) para 91. 446 Klaus Tuori, ‘Expert, Stakeholder or Just Politician? New Roles of European Central Bank’ (2013) 14 COLLeGIUM: Studies across Disciplines in the Humanities and Social Sciences 143–64. 447 Afton Chemical (n 281). 448 See for example, Tuori and Tuori, The Eurozone Crisis (n 165).

23

FOREIGN-E XCHANGE OPERATIONS OF THE ECB AND EXCHANGE-R ATE  POLICY Alexander Thiele

I. Foreign-Exchange Operations within the Mandate of the ECB

A. The term ‘foreign-exchange operations’ and the normative framework for the ESCB B. Foreign-exchange operations and price stability

II. The Exchange Rate Mechanism II III. The Competences of the Council and the Commission

23.1 23.2 23.7 23.10

A. The provisions of Article 219 TFEU B. Formal agreements on an exchange rate system (Article 219(1) TFEU) C. General orientations for the exchange rate policy (Article 219(2) TFEU) D. Arrangements concerning monetary or foreign-exchange regime matters (Article 219(3) TFEU)

IV. Summary

23.12 23.14 23.17 23.20 23.22

23.12

I. Foreign-Exchange Operations within the Mandate of the ECB According to Article 127(1) TFEU, it is the core purpose1 of the European System of Central Banks (ESCB) (with the European Central Bank (ECB) at the top) to maintain price-stability within the European Monetary Union (EMU). It is this task that is usually referred to, where the ‘monetary mandate’ or the ‘monetary policy’ of the ECB is mentioned. However, though this monetary mandate is not only the most prominent but most certainly also the most disputed task of the ESCB—especially since the financial and euro crisis—it is by no means the only task transferred onto the ESCB (respectively the ECB) by the Member States. According to Article 127(2) TFEU, the basic tasks to be carried out by the ESCB in actual fact include the conduct of foreign-exchange operations and thus the ‘foreign policy’ relations of the euro area and the euro with other currency areas (mainly states) and currencies. When creating the EMU, however, it was highly disputed whether the ECB or the Council should be the competent authority to conduct or rather to decide on such operations. While monetarists wanted the competence to be transferred exclusively on the ECB 1 Charles AE Goodhart, ‘Central Banks’ function to maintain financial stability: an uncompleted task’ in Charles AE Goodhart (ed), The Regulatory Response to the Financial Crisis (Edward Elgar Publishing 2009) 34. See also Alexander Thiele, Die Europäische Zentralbank (Mohr Siebeck 2019) 67ff (hereafter Thiele, Die Europäische Zentralbank) for an overview of the monetary mandate of the ECB. Alexander Thiele, 23 Foreign-Exchange Operations of the ECB and Exchange-Rate Policy In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0028

23.1

700 FOREIGN-EXCHANGE OPERATIONS OF THE ECB in order to avoid possible conflicts with its main monetary objective, others pointed to the fact that foreign-exchange operations could not only have a huge political impact2 but could also be used to pursue other (economic or political) goals and thus preferred a competence of the (political) Council. The wording of Article 127 TFEU can therefore be interpreted as a compromise between these two conflicting philosophies: On the one hand, the ECB is generally competent to conduct foreign-exchange operations by itself, yet on the other hand, the ECB has to act consistently with the provisions of Article 219 TFEU, an article giving the Council various possibilities to influence and to limit the ECB’s actions in this specific area, while having to do so either in an ‘endeavour to reach a consensus consistent with the objective of price stability’ (Article 219(1) TFEU) or even ‘without prejudice to the primary objective of the ESCB to maintain price stability’. This specific ‘separation of powers’ thus enables the political level to take all structural relevant decisions3 while not only leaving the day to day challenges to the ECB but also ensuring that the ECB is generally able to fulfil its core monetary mandate independently.4 Certain possible conflicts remain, however, especially in cases where the Council concludes formal exchange-rate systems according to Article 219(1) TFEU (see below in paragraph 23.14).5

A. The term ‘foreign-exchange operations’ and the normative framework for the ESCB 23.2

The term ‘foreign-exchange operations’ is not substantiated further within the European Treaties themselves but in the Statute of the ESCB and the ECB.6 Article 23 of the Statute thereby states that the ECB and national central banks may not only establish relations with central banks and financial institutions in other countries as well as international organizations but also may acquire and sell spot and forward all types of foreign exchange assets and precious metals, hold and manage the assets referred to in Article 23 of the Statute and conduct all types of banking transactions in relations with third countries and international organizations, including borrowing and lending operations. The term ‘foreign exchange operations’ is thus normatively defined in a very broad way, though buying and selling foreign currencies clearly dominates the ECB’s foreign-exchange practice.7 Possible restrictions for the actions taken by the ECB in other words do not follow from normative

2 Interfering with the external value of a currency might, for instance, be used to gain economic advantages in comparison to other currency areas or states—a policy obviously not welcomed by other states. Accusations of artificially manipulating the external value of the currency (‘currency war’) have come up on a regular basis concerning China for instance, but were just recently also raised by the American President Donald Trump with respect to the euro area. See also Bernhard Kempen in Rudolf Streinz (ed), EUV/AEUV (3rd edn, CH Beck 2018) Article 219 TFEU, para 3 (hereafter Kempen in Streinz (ed), EUV/AEUV). 3 Stefan Kadelbach in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 219 TFEU, para 7 (hereafter Kadelbach in Siekmann (ed), EWU). 4 See also Ulrich Häde in Christian Calliess and Matthias Ruffert (eds), EUV/AEUV (5th edn, CH Beck 2016) Article 219 TFEU, para 1 (‘distinct leeway’ for the ECB) (hereafter Häde in Calliess and Ruffert (eds), EUV/AEUV). 5 Cornelia Manger- Nestler in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (Mohr Siebeck 2017) Article 127 TFEU, para 27; Christian Waldhoff in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 127 TFEU, para 48. 6 The Statute is part of primary European Law. 7 Kempen in Streinz (ed), EUV/AEUV (n 2) Article 127 TFEU, para 13.

Foreign-Exchange Operations 701 instrumental limitations but practically only from possible decisions taken by the Council according to Article 219 TFEU. As long as the Council does not formally interfere, the ECB is thus more or less free to conduct any foreign-exchange operation it believes necessary to fulfil its (monetary) mandate. Other general normative restrictions, however, continue to apply to the ECB when conducting such operations. This especially relates to Article 123 TFEU that can thus not be circumvented by simply switching to a foreign currency. The EU can therefore not be interpreted as being an international organization in the sense of Article 23 of the Statute in relation to the ECB.8 According to Article 23 of the Statute, the ECB and the national central banks may acquire and sell spot and forward all types of foreign exchange asset. This term explicitly includes securities and all other assets in the currency of any country or units of account and in whatever form held. Precious metals include gold, silver, and platinum, with gold (still) being the most relevant in international (monetary) affairs.

23.3

As regards the possible legal transactions the ECB may conduct, the wording of Article 23 of the Statute makes clear that the ECB faces hardly any restrictions—according to the norm it can undertake ‘all types of banking transactions’. This includes not only outright purchases or sales of foreign currencies or securities denominated in foreign currencies but also the granting or taking of credit in foreign currencies respective non-cash loans of precious metals or (credit) swaps as well as other forward transactions. The ECB in this respect may also take all necessary (legal) steps to perform such banking transactions, for instance opening bank and securities accounts in the relevant jurisdictions.9 Unlike Article 18 of the Statute concerning open market and credit operations, Article 23 of the Statute introduces no further requirements for foreign-exchange operations of the ECB or the national central banks. Especially foreign credit operations can thus be performed without having to demand adequate collateral or other securities. Regarding their external relations central banks historically indeed mainly worked with explicit limits instead of formal collateral, particularly in relation to other central banks. The collateral requirements of Article 18 of the Statute should therefore not be applied analogously to foreign-exchange operations according to Article 23 of the Statute.10 However, that does obviously not mean that the ECB or national central banks are normatively prohibited to demand such collateral in their transactions. This question is simply left to the ECB (or the national central banks, respectively) to decide, depending on the circumstances of the individual case.

23.4

According to Article 23 of the Statute, possible counterparties of such foreign-exchange operations can be central banks and financial institutions in other countries and international organizations. However, the ECB also assumes transactions with central banks of EU Member States outside the euro area as being covered by Article 23 of the Statute.11 This interpretation is supported by the fact that not only the formal ‘Exchange Rate

23.5

8 Christoph Keller in Helmut Siekmann (ed), EWU –Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 23 ESCB/ECB Statute, para 31 (hereafter Keller in Siekmann (ed), EWU). 9 Keller in Siekmann (ed), EWU (n 8) Article 23 ESCB/ECB Statute, para 43. 10 Ibid, para 44. Other opinion René Smits, The European Central Bank (Kluwer Law International 1997) 313 (hereafter Smits, The European Central Bank). 11 See Article 1 ECB Guideline of the of 7 April 2006 on the Eurosystem’s provision of reserve management services in euro to central banks and countries located outside the euro area and to international organisations (ECB/ 2006/4) [2006] OJ L107/54 (‘any central bank or monetary authority located outside the euro area’).

702 FOREIGN-EXCHANGE OPERATIONS OF THE ECB Mechanism II’12 necessarily requires intensive relationships of the ECB with these central banks. As such transactions can therefore not be prohibited, it seems sensible to see them covered by Article 23 of the Statute. Moreover, transactions between national central banks and domestic financial institutions may also be interpreted as foreign-exchange operations in the sense of Article 23 of the Statute to the extent that they are conducted in foreign currencies. The term ‘international organizations’ covers all organizations established by or under the authority of an international treaty other than EU institutions or bodies—most relevant in this sense are the IMF and the Bank for International Settlements (BIS) as the ‘central bank of central banks’. 23.6

Which foreign-exchange operations to conduct under which circumstances is for the ECB and the national central banks to decide. They hence enjoy a wide margin of discretion (always consistent with the provisions of Article 219 TFEU). National central banks, however, additionally have to consider that they are an integral part of the ESCB. Any of their actions therefore has to be compatible with the legal requirements mentioned in the Treaties and the Statute. Though foreign-exchange operations do not fall in the exclusive competence of the ECB—national central banks indeed continued to uphold their individual relationships to other central banks even after the introduction of the euro—the Governing Council may decide in individual cases by a majority of two thirds that specific foreign-exchange operations interfere with the objectives and tasks of the ESCB according to Article 14 of the Statute. The respective national central bank is then prohibited from conducting such operations in the future and has to stop ongoing operations.13 The General Council of the ECB, however, will usually not be able to adopt guidelines or to take decisions in order to generally harmonize the foreign-exchange operations conducted by the national central banks based on Article 12 of the Statute. This would only be possible if such guidelines or decisions were necessary to ensure the performance of the tasks entrusted to the ESCB under the Treaties and the Statute—as empirical evidence reveals, a requirement simply not fulfilled in practice. According to Article 31 of the Statute national central banks are explicitly allowed to perform transactions in fulfilment of their obligations towards international organizations. Other operations in foreign reserve assets remaining with the national central banks after the transfers referred to in Article 30 of the Statute are possible up to a certain limit and otherwise need the approval of the ECB in order to ensure consistency with the exchange rate and monetary policies of the Union.

B. Foreign-exchange operations and price stability 23.7

The core monetary purpose of the ESCB is to maintain price stability, with the term price stability relating to the internal value of the euro.14 Foreign-exchange operations, however, will usually only have a direct effect on the external value of the euro. As these operations therefore have no direct relevance for the monetary mandate of the ECB, it comes as no surprise that they do not belong to the regular instruments the ECB reverts to when trying 12 For details on the Exchange Rate Mechanism II, see below in para 23.10. 13 Subject to judicial control according to Article 35 of the Statute (Article 263 TFEU). 14 See in detail Alexander Thiele, Das Mandat der EZB und die Krise des Euro (Mohr Siebeck 2013) 24ff; and Thiele, Die Europäische Zentralbank (n 1) 69ff.

Foreign-Exchange Operations 703 to fight possible dangers for the internal value of the euro.15 However, internal and external value can obviously not be separated from each other completely, as the development of the external value can have at least indirect consequences for the development of the internal value (and vice versa). A low external value, for instance, usually helps export orientated economic areas, as the prices for export-products fall relatively to the respective foreign currency, making such products more attractive on the world market. This will then generally contribute to a growing internal economy and—in the long run—could lead to rising internal prices (inflation). Devaluating the external value of a currency by conducting foreign-exchange operations (especially selling the internal currency to other market participants) can thus serve as an additional way for a central bank to raise inflation in order to reach its respective internal inflation target. Due to the political implications of such a policy, the ECB has not yet reverted to such instruments. However, though no formal foreign-exchange operation, the ECB’s massive quantitative easing programs undertaken since the Eurocrisis as well as its low interest rate policy have indeed had similar devaluating effects on the external value of the euro—forming the background of the manipulation accusations by the President of the United States mentioned above.16 Yet these indirect effects on the exchange-rate were not the reason for the ECB to undertake this kind of ‘expansive’ monetary policy that was actually founded in the low (internal) inflation rate. Generally, however, it is important to note that the indirect relation between the external and the internal value of a currency is nothing that would present a problem for a central bank (ie the ECB) in order to fulfil its monetary mandate. In this respect it merely offers additional options for (monetary) action (that might be wise or unwise to use from a political perspective). Situations can be highly problematic, however, where a central bank is not only responsible for maintaining price stability but also for securing a certain external value of the respective currency, that is where the exchange rate is (politically) more or less fixed between two or more currency areas.17 The central banks of the involved countries will then—depending on the arrangement of the respective exchange rate mechanism—be normatively obliged to conduct automatic interventions in form of foreign-exchange operations as soon as the external value of the currency falls out of the margin agreed upon in relation to a certain central rate.18 Apart from the fact that the problem of determining the economically ‘right’ exchange rate has not been solved (neither theoretically nor empirically),19 such automatic interventions can present a danger for the internal inflation target and—depending on the internal economic situation—might thus force the respective central bank to 15 The ECB has never intended to follow an exchange rate target in relation to any other country as part of its monetary strategy. Such an exchange rate target can be sensible for small currency areas, yet will always lead to some sort of dependency from the monetary policy of the external central bank and thus a loss of monetary autonomy. 16 As the devaluation of the euro was not directly intended by the ECB, it appears unconvincing to accuse the ECB of ‘manipulating’ the external value and even more so where the US President addresses the EU or the governments of the Member States—the ECB is independent. However, it is just as unconvincing to deny the positive effects this form of monetary policy has had for the economy of many Member States (especially Germany’s). 17 Usually in form of an international contract. This indeed was the main concern of the monetarists when creating the European Monetary Union. 18 The external value of the currency will thereby usually be allowed to fluctuate within a certain margin in relation to the exchange rate aspired. The central bank will then be obliged to intervene only where the exchange rate falls out of this margin. 19 Egon Görgens, Karlheinz Ruckriegel, and Franz Seitz, Europäische Geldpolitik (6th edn, UTB 2013) 421.

23.8

704 FOREIGN-EXCHANGE OPERATIONS OF THE ECB initiate internal monetary measures it otherwise would not have taken. In extreme cases maintaining price stability might even become impossible—at least for a certain period of time,20 leading to massive conflicts of interests on the side of the central banks that in the end might neither be able to fulfill their obligations as regards the external or the internal value of the currency. Fixed exchange rates will therefore always lead to a loss of monetary autonomy and should thus be a rare exception in any currency regime that focuses on price stability or should at least solve the conflict of interest by linking the obligations to intervene to their compatibility with the respective internal monetary policy’s inflation target.21 Within the Eurosystem Article 219 TFEU theoretically allows the Council to conclude formal agreements on an exchange-rate system—yet due to the mentioned implications, no such agreement has been concluded so far and will probably not be in the near future (see below in paragraph 23.14). 23.9

Foreign-exchange operations conducted by national central banks may also interfere with the general monetary mandate of the ECB. Such conflicts might arise, for instance, in cases where national central banks allow central banks of third countries to open and maintain interest bearing deposits within the Eurosystem.22 In these cases, however, Article 14 of the Statute allows the Governing Council of the ECB to immediately end such foreign- exchange operations.

II. The Exchange Rate Mechanism II 23.10

In 1996, it became clear that not all Member States would be able to participate in the third stage of the EMU beginning in 1999. Yet, as all Member States are obliged to introduce the euro as their currency in the long run23—the only exceptions being Denmark and Great Britain (until it left the European Union on 31 January 2020) that were granted individual opt-out possibilities—the European Council decided to introduce the so-called ‘Exchange Rate Mechanism II’ (ERM II) in a Resolution passed in 1997.24 The ERM II replaced the already existing European Monetary System and was supposed to link the currencies of Member States outside the euro area to the euro in order to prepare them for full membership in the (near) future by ensuring that Member States outside the euro area participating in the ERM II orient their policies to stability, foster convergence, and help them in their efforts to adopt the Euro. The European Council itself thereby only agreed on the main features of the ERM II. These included especially the standard fluctuation band of plus or minus 15 per cent around the central rate and the condition that interventions at the margins should in principle be automatic and unlimited, giving the involved central banks the possibility, however, to suspend intervention if this were to conflict with their primary objective (that is maintaining price stability). Moreover, the European Council also introduced a special procedure for decisions on central rates and the standard fluctuation band 20 Kadelbach in Siekmann (ed), EWU (n 3) Article 219 TFEU, para 17. 21 This is the case for instance with the existing Exchange Rate Mechanism II (see below in para 23.10ff). 22 Keller in Siekmann (ed), EWU (n 8) Article 23 ESCB/ECB Statute, para 20. 23 The respective Member States were called ‘pre-ins’. 24 European Council Resolution of 16 June 1997 on the establishment of an exchange-rate mechanism in the third stage of the economic and monetary union [1997] OJ C236/5.

The Exchange Rate Mechanism II 705 that were to be taken by mutual agreement of the ministers of the euro area Member States, the ECB and the ministers and central bank governors of the non-euro area Member States participating in the ERM II. On a case-by-case basis, formally agreed fluctuation bands narrower than the standard one and backed up in principle by automatic intervention and financing should be possible at the request of the non-euro area Member States. Respecting these conditions, the concrete operating procedures of the ERM II were laid down in an agreement between the ECB and the national central banks of the Member States outside the euro area. In the following years, this first agreement was amended altogether three times before it was finally replaced by a completely new and still valid agreement in 200625 ‘in the interest of clarity and transparency’. Participation in the ERM II thereby is formally voluntary for non-euro area Member States. However, as can be inferred from Article 140 TFEU, participation is obligatory at least in the last two years before fully entering the euro area in order to be able to monitor the compliance with the necessary convergence criteria. At present, only Denmark participates in the ERM II after the former member Lithuania introduced the Euro in 2015. Croatia has announced to participate as of 2020. According to Article 1 of the agreement, the ECB and the participating non-euro area National Central Banks (NCBs) establish, by common accord, the bilateral upper and lower rates between the euro and the participating non-euro area currencies for automatic interventions in accordance with the fluctuation bands fixed pursuant to the European Council’s Resolution. The fluctuation band agreed upon with the Lithuanian central bank currently stands at plus or minus 15 per cent of the central rate (that is the standard fluctuation), the agreement with the Danish central bank sets the margin at plus or minus 2.25 per cent. Following the requirements set in the Resolution, interventions at these margins shall in principle be automatic and unlimited and effected in euro and the participating non-euro area currencies. In order to avoid the above mentioned possible dangers for the ECB’s primary goal of maintaining price stability, the ECB and the participating non-euro area NCBs are allowed to suspend automatic intervention if this were to conflict with this primary objective. However, as the wording makes clear, there is no obligation to suspend the automatic intervention in such a case. In the end it is thus for the ECB and the NCBs to decide whether to suspend or not. The agreement, however, explicitly obliges the ECB and the NCBs to take due account of all relevant factors, including the credible functioning of the ERM II as well as possible conclusions that may have been reached by other competent bodies when taking this decision. Though the decision to suspend (or not to suspend) automatic interventions is (at least theoretically) subject to judicial control by the ECJ, the ECB enjoys a wide margin of discretion in this respect. Judicial procedures will thus only be successful where the decision taken by the ECB appears to be more or less indefensible—which will obviously be the case very rarely (if at all). The ECB, however, is in any case obliged to give sufficient reasoning for its decision in order to enable such judicial review. Article 4 of the agreement additionally allows the ECB and participating non-euro area NCBs to agree to coordinated intra-marginal intervention. Furthermore, all parties to the agreement have the right to initiate a confidential 25 ECB Agreement of 16 March 2006 between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union [2006] OJ C73/21.

23.11

706 FOREIGN-EXCHANGE OPERATIONS OF THE ECB procedure aimed at reconsidering central rates (so-called ‘realignment’). Such a realignment appears sensible where—due to generally changing economic parameters—the existing central rate has proven to be either far too low or far too high, forcing the involved central banks to constantly intervene in order to keep the currency in the margin agreed upon. As an alternative it is also possible to adjust the margins agreed upon in cases where these should be narrower than the standard one.

III. The Competences of the Council and the Commission A. The provisions of Article 219 TFEU 23.12

Article 219 TFEU includes the competences of the Council and thereby ensures that this political body is able to take all necessary structural decisions as regards the foreign-exchange operations of the Eurosystem.26 Altogether three different competences of the Council have to be distinguished: – the competence of the Council to conclude formal agreements on an exchange rate system for the euro in relation to the currencies of third states (Article 219(1) TFEU) (see above in paragraph 23.14); – the competence of the Council to formulate general orientations for exchange-rate policy in relation to these countries in the absence of a formal exchange-rate system (Article 219(2) TFEU); – the competence of the Council to conclude monetary or foreign-exchange regimes not covered by Article 219(1) TFEU (Article 219(3) TFEU).

23.13

Article 219(4) TFEU finally covers the remaining competences of the Member States. During the negotiations of the Maastricht Treaty the exact wording of the former Article 109 EC—the predecessor of Article 219 TFEU—was highly disputed between the then twelve Member States. While one side (led by Germany) generally argued for strict stability goals (in order to ensure price stability) that should be extensively safeguarded by the (politically) independent ECB, the other side and especially France believed in the political nature of foreign-exchange operations that went beyond the general mandate of the ECB and thus wanted the Council to be involved. The final compromise (see above in paragraph 23.1) was then transferred into the following treaties with only minor modifications. In practice, however, Article 219 TFEU plays no vital role. The Council has neither concluded a formal exchange-rate mechanism according to Article 219(1) TFEU27 nor has it so far formulated general orientations according to Article 219(2) TFEU.28 At least a few agreements according to Article 219(3) TFEU were concluded;29 these mainly concerned the introduction of the euro in smaller non-EU states, and thus clearly have no major impact on the monetary policy of the ECB. 26 For the reasons, see above in para 23.1. 27 Ludwig Gramlich in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar EUV/GRC/AEUV (Mohr Siebeck 2017) Article 219 TFEU, para 7 (hereafter Gramlich in Pechstein, Nowak and Häde (eds), Frankfurter Kommentar). 28 Kadelbach in Siekmann (ed), EWU (n 3) Article 219 TFEU, para 50. 29 Ibid, para 59ff.

Competences of the Council and the Commission 707

B. Formal agreements on an exchange rate system (Article 219(1) TFEU) Article 219(1) TFEU first of all allows the Council to conclude formal agreements (meaning 23.14 international treaties) on an exchange-rate system with third countries. Such an exchange- rate system is a system that either establishes a fixed exchange-rate or a central rate with the central banks of the participating states having to ensure (by reverting to foreign-exchange operations) that the actual rate stays within a certain fluctuation band agreed upon by the respective parties.30 The term ‘third states’ thereby includes all states outside the EU, yet does not revert to EU Member States outside the euro area.31 When concluding such agreements, the Council has to act in an ‘endeavour to reach a consensus consistent with the objective of price stability’. The Council thus does not have to ensure that there are no dangers of inflation at all but at least has to try to limit these as far as possible, for instance by introducing relatively wide margins or by allowing the involved central banks to stop automatic interventions in cases where these might endanger price stability. However, the degree to which the Council has to limit dangers of inflation in this respect also depends on the importance of the other (economic) goals the Council hopes to support with such an agreement. After all, Article 3 TFEU, listing the EU’s main aims, not only mentions price-stability but also balanced economic growth and a highly competitive social market economy, aiming at full employment and social progress (among others). From the perspective of the Council price-stability thus does not necessarily and always prevail in this context32—and in contrast to Article 219(2) TFEU—Article 219(1) TFEU does indeed not speak of price stability as being the ‘primary objective’. When deciding on the concrete emphasis of these possibly contradicting aims, the Council thereby enjoys a relatively wide margin of discretion. An agreement concluded by the Council will therefore only be incompatible with this requirement (and unlawful) if the Council subordinates price stability indefensibly in relation to such other aims.

23.15

As regards the procedure, Article 219(1) TFEU states that the Council unanimously decides to conclude formal agreements after consulting the European Parliament (EP) by way of derogation of Article 218 TFEU either on a recommendation of the ECB or on a recommendation from the Commission after consulting the ECB unanimously, in accordance with the procedure provided for in Article 219(3) TFEU. These formal requirements and especially the requirement of unanimity, however, only relate to the final decision of the Council to conclude the respective agreement. Before that, the Council has to decide to initiate treaty negotiations and to appoint the negotiator. These decisions are taken by qualified majority (Article 16(3) TEU) according to Article 219(3) TFEU,33 that is by recommendation of the Commission after consulting the ECB. If the Commission should not be mandated to lead the negotiations it in any case has to be fully associated with the negotiations. When the negotiations have ended it is either the ECB or the Commission (after consulting the ECB) that recommends the conclusion of the negotiated treaty. At this stage (at the latest),

23.16

30 Kempen in Streinz (ed), EUV/AEUV (n 2) Article 219 TFEU, para 5. 31 Ibid, para 6; Kadelbach in Siekmann (ed), EWU (n 3) Article 219 TFEU, para 18. 32 See also Häde in Calliess and Ruffert (eds), EUV/AEUV (n 4) Article 219 TFEU, para 9. 33 Daniel-Erasmus Khan in Rudolf Geiger, Daniel-Erasmus Khan, and Markus Kotzur (eds), EUV/AEUV (6th edn, CH Beck 2016) Article 219 TFEU, para 4 (hereafter Khan in Geiger, Khan, and Kotzur (eds), EUV/AEUV).

708 FOREIGN-EXCHANGE OPERATIONS OF THE ECB the ECB will usually bring forward possible concerns as regards its monetary mandate. If the Commission issued a recommendation to conclude the agreement, the Council, however, may in the end decide to conclude the treaty despite the concerns of the ECB—it is hardly likely, however, that the Council will reach the necessary unanimity in such a scenario. Where a formal agreement in the sense of Article 219(1) TFEU already exists, Article 219(1) TFEU allows the Council either on a recommendation from the ECB or on a recommendation from the Commission after consulting the ECB to adopt, adjust, or abandon the central rates within the exchange-rate system by qualified majority. However, this obviously only relates to the internal procedure of modifying the central rate. Usually, such changes will also require the respective treaty partner (or partners) to give her (their) consent.34

C. General orientations for the exchange rate policy (Article 219(2) TFEU) 23.17

The possibility of the Council to formulate general orientations for the exchange-rate policy of the euro area according to Article 219(2) TFEU can (at least potentially) have a massive impact on the monetary mandate of the ECB and—depending on the intensity of such ‘orientations’ and despite the fact that foreign-exchange operations will usually only have an indirect effect on the internal value of the euro—even threaten the ECB’s independence when taking the necessary measures to maintain price-stability. Some scholars have therefore argued that such orientations would have to be interpreted as being not formally binding for the ECB.35 However, the procedural requirements mentioned in Article 219(2) TFEU—very untypical for unbinding measures—as well as the fact that Article 127(2) TFEU allows the ECB only to conclude foreign-exchange operations ‘consistent with the provisions of Article 219 TFEU’ let this opinion seem hardly convincing.36 Above that, such an interpretation of the legal nature of the orientations is not necessary to avoid possible dangers for the monetary mandate as Article 219(2) TFEU itself states that such general orientations shall be ‘without prejudice to the primary objective of the ESCB to maintain price stability’. In contrast to Article 219(1) TFEU thus makes clear that orientations formulated by the Council may not interfere with this primary objective of the ESCB; as far as they do, they would thus have to be interpreted as being illegal. Such an illegal infringement would, however, have to be determined formally by the ECJ (in an action for annulment according to Article 263(3) TFEU initiated by the ECB). When deciding in such a case, the ECJ would thereby have to respect the wide margin of discretion of the ECB (not the Council); the respective orientation would thus have to be interpreted as being unjustified as soon as the ECB was able to defensibly claim a conflict with its monetary policy in the future if it were bound to this orientation. In practice, the Council has so far reverted from formulating such orientations—not only due to the mentioned possible conflict with the 34 Kempen in Streinz (ed), EUV/AEUV (n 2) Article 219 TFEU, para 7. 35 Smits, The European Central Bank (n 10) 398ff; Barbara Dutzler, The European System of Central Banks: An Autonomous Actor? (Springer 2004) 54ff; Khan in Geiger, Khan, and Kotzur (eds), EUV/AEUV (n 33) Article 219 TFEU, para 9; Chiara Zilioli and Martin Selmayr, ‘The external relations of the Euro area: legal aspects’ (1999) 36 Common Market Law Review 273, 308 (hereafter Zilioli and Selmayr, ‘The external relations of the Euro area’). Gramlich in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar (n 27) Article 219 TFEU, para 13 (‘legally relevant yet not formally binding’). 36 Kadelbach in Siekmann (ed), EWU (n 3) Article 219 TFEU, para 44.

Competences of the Council and the Commission 709 ECB’s monetary mandate but also in order to avoid any international accusations of trying to manipulate the external value of the euro. It has made clear, however, that it might formulate such orientations for exchange-rate policy in relation to non-EC currencies ‘in exceptional circumstances, for example in the case of a clear misalignment’.37 The Council may only formulate ‘general orientations’. This includes the definition of a central rate with sufficient margins yet not the setting of a fixed exchange rate (which is thus only possible in a formal exchange-rate system according to Article 219(1) TFEU). The Council can also not instruct the ECB to intervene in an individual case, but could introduce certain procedural and general requirements for the ECB to respect when conducting such interventions.38

23.18

The recommendation to formulate such orientations must come from the Commission or the ECB, the Council then decides by qualified majority (after consulting the ECB where the recommendation should have come from the Commission).

23.19

D. Arrangements concerning monetary or foreign-exchange regime matters (Article 219(3) TFEU) Article 219(3) TFEU introduces specific procedural requirements as regards agreements 23.20 concerning monetary or foreign-exchange regime matters that, compared with the general requirements laid down in Article 218 TFEU, expand the powers of the Council at the expense of the Commission.39 Accordingly, the arrangements for the negotiation and for the conclusion of such agreements shall be decided by the Council on a recommendation from the Commission and after consulting the ECB; the Council thereby decides by qualified majority. The content of such agreements is defined rather broadly (‘monetary or foreign- exchange regime matters’),40 however, formal agreements on an exchange-rate system fall exclusively under Article 219(1),41 with the Council having to decide unanimously. Article 219(3) TFEU allows the Council to conduct such arrangements with third countries42 as well as international organizations (for instance the IMF or the OECD), yet formally only where such matters ‘need to be negotiated by the Union’. Such a ‘need’ therefore is a formal legal requirement for the Council to commence negotiations and to finally conclude such an agreement and can only be assumed where the Council is able to satisfy the subsidiarity test according to Article 5(3) TEU—the external competence in Article 219(3) TFEU is not an exclusive but a concurrent competence of the Union43—and above that is able to justify why an agreement concluded by the ECB alone would not suffice.44 However, at 37 European Council Resolution of 13 December 1997 on economic policy coordination in stage 3 of EMU and on Treaty Articles 109 and 109b of the EC Treaty [1998] OJ C35/1, no 8. 38 Kadelbach in Siekmann (ed), EWU (n 3) Article 219 TFEU, para 47. 39 Gramlich in Pechstein, Nowak, and Häde (eds), Frankfurter Kommentar (n 27) Article 219 TFEU, para 14. 40 The exact range of matters covered is nonetheless disputed, see Zilioli and Selmayr, ‘The external relations of the Euro area’ (n 35) 299ff. 41 Khan in Geiger, Khan, and Kotzur (eds), EUV/AEUV (n 33) Article 219 TFEU, para 10; Häde in Calliess and Ruffert (eds), EUV/AEUV (n 4) Article 219 TFEU, para 16. 42 As in Article 219(1) TFEU, the term ‘third countries’ only covers countries outside the EU and not Member States of the EU outside the euro area. 43 Zilioli and Selmayr, ‘The external relations of the Euro area’ (n 35) 297. 44 Ibid, 297ff.

710 FOREIGN-EXCHANGE OPERATIONS OF THE ECB least as regards the latter, one will have to assume a wide margin of discretion on the side of the Council. 23.21

In practice, the Council has concluded several such agreements with smaller countries regarding the possibility and modalities of introducing the euro as their formal currency.45

IV. Summary 23.22

Within the EMU, the competences as regards foreign-exchange operations are divided between the ECB and the Council. According to Article 23 of the Statute, the ECB is relatively free to conduct any form of foreign-exchange operation it deems necessary to fulfil its mandate. The Council theoretically has the possibility to bind the ECB in this ‘foreign- area’ either by concluding formal exchange-rate systems or other monetary agreements or by giving general orientations. Yet, in order to avoid possible conflicts with the ESCB’s primary objective to maintain price stability as well as the independent status of the ECB, the Council has so far refrained from doing so (apart from minor agreements with smaller non-EU states regarding the introduction of the euro). This ‘political restraint’ will in all likelihood not change in the near future. In practice, foreign-exchange operations are thus left entirely to the independent (and theoretically unpolitical) ECB that to date has not seen them as a necessary and important instrument for its monetary policy. Allegations recently formulated by the US President Donald Trump according to which the European Union has in the past tried to ‘manipulate’ the external value of the euro in order to gain unjustified economic advantages are thus hardly convincible, or—in the President’s own words—simply ‘fake news’. What is true, however, is the fact that monetary operations— especially quantitative easing operations—can and usually will also have an impact on the external value of the Euro. Yet, the goal of such operations undertaken by the ECB since the Eurocrisis is to influence the inflation rate in order to reach its inflation target and not to manipulate the exchange-rate.

45

Häde in Calliess and Ruffert (eds), EUV/AEUV (n 4) Article 219 TFEU, para 17.

24

PAYMENT SYSTEMS Phoebus L Athanassiou

I. Introduction II. Payments, Payment Systems, and Central Banks

A. Key concepts in the area of market infrastructures for payments B. Major sources of risk in payment systems C. Central bank interest in payments and payment systems

III. Payment Systems-Specific Institutional and Legal Framework in the EU and EMU A. Primary legal framework B. Secondary legal framework

IV. The Triple Role of the ECB and the NCBs in the Context of Payments and Payment Systems

24.1 24.6 24.7 24.9 24.12

24.15 24.15 24.18

A. The ECB as owner and operator of payment systems—the case of TARGET2 B. The ECB and the NCBs as overseers of payment systems—introduction to oversight C. The ECB as catalyst—the case of SEPA

V. Recent Developments and Future Prospects

A. Instant payments B. Virtual currencies, stablecoins, and their use in payments C. Concluding remarks on technological innovation in payments

24.27 24.36 24.42 24.46 24.48 24.52 24.57

24.26

I. Introduction Payment systems matter: they provide the basis for the processing and execution of the multifarious value-transfer transactions, wholesale and retail alike, that are crucial for the operation of modern, free-market economies. Less obvious—but no less pivotal—is the role that payment systems play for monetary policy and its transmission, not least in the sui generis context of the Economic and Monetary Union (EMU).1 The launch, in January 1999, of the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) system, the precursor of TARGET2,2 simultaneously with the launch of the euro, testifies to the centrality of payment systems for the implementation of the single monetary policy, and for the consolidation of the euro area money market.

24.1

Given that virtually every major transaction (including those entered into by central banks with their counterparties) requires a transfer of monetary value through the payment

24.2

1 Payments-related market infrastructures in the European Union (EU) underwent considerable changes both in the run-up to, and subsequent to the introduction of the euro. For an early account of their evolution, in response to the demands of EMU, see CPSS, ‘Payment Systems in the Euro-area’ in CPSS (ed), Red Book—Payment and settlement systems in selected countries (BIS 2003) 72–105. 2 The reference is to the EU-wide Real Time Gross Settlement system currently in use for the settlement of domestic and cross-border interbank transfers, other large-value euro payments and central bank operations. For an account of TARGET2, see Section IV.A. Phoebus L Athanassiou, 24 Payment Systems In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0029

712 PAYMENT SYSTEMS system, central banks have an obvious interest in harmonized, sound and efficient payments and in their supporting market infrastructures. In recent decades, payment systems have attracted increased scrutiny, first because of the gradual rise in the volume of the fund- transfers they process (with a corresponding rise in settlement risks),3 second because of the perception that payment systems are inefficient (especially in their cross-border dimension),4 and third because of the remarkable advances in information, communication and digital technology, and the impact of those advances on the efficiency and security of payments processing.5 24.3

This chapter aims to provide as comprehensive an overview of payments, and their supporting legal and technical infrastructure in the context of EMU, as space constraints will allow. While the emphasis of this chapter is on the nature and details of the interest and role of the European Central Bank (ECB) and the national central banks (NCBs) of the European System of Central Banks (ESCB)6 in ensuring the soundness, efficiency and integrity of payments and payment systems, most of the core concepts, and several of the legal, organisational and policy issues touched on in its pages are of relevance to payments- related market infrastructures at large, including those operating outside EMU.

24.4

A few words are apposite on two issues not covered in this chapter, except incidentally, namely, the concept of ‘money’, and the link between payment systems and securities settlement systems (SSSs). A grasp of the nature and features of ‘money’, the core settlement asset used for the processing of payments, and of the rights and obligations arising from its transfer, is essential for an understanding of the mechanics of payment systems, the risks associated with their operation, and the institutional interest of central banks in payments and payment systems. Despite the importance of money for the operation of payment systems, defining ‘money’ can be something of a challenge.7 It suffices to note here that the two main types of ‘money’ relevant to the operation of payment systems are ‘central bank money’ (CeBM) and ‘commercial bank money’ (CoBM). CeBM denotes central bank-emitted credit money, deposited in accounts held with the central bank, and used as a settlement asset (mostly for interbank transactions), while CoBM denotes credit money created on the basis of commercial bank deposits, and used as an alternative settlement asset. Legally, CeBM represents a claim on the central bank that has issued the currency in which a payment is denominated, whereas CoBM represents a claim on a non-central bank 3 Settlement risks are not theoretical, as demonstrated by the failure of Bankhaus Herstatt (1974), the collapse of the Drexel Burnham Lambert Group (1990), the failure of BCCI (1991), the Barings Bank crisis (1995), and more recently, the collapse of Lehman Brothers (2008). 4 The cross-border payments system—which consists of an intricate web of (correspondent) bank and non- bank intermediaries involved in the clearing and settlement of international payment transactions—is notoriously ‘slow, inconvenient, [and] costly’ (Federal Reserve System, ‘Strategies for Improving the U.S. Payment System’ (January 2015) 25, fn 35 accessed 22 January 2020). 5 Technological advances have rendered possible the instantaneous, electronic transfer of cash, from the buyer’s to the seller’s bank account, facilitating payment-processing and trade, both domestically and internationally. But technology can also be the source of operational vulnerabilities, apt to disrupt payments, by exposing payment systems and their participants to novel risks. For an account of some the opportunities and challenges of digital technology for payments, see Section V. 6 Article 282(1) of the Treaty on the Functioning of the European Union (TFEU) (ex Article 245 of the Treaty Establishing the European Community (TEC)), first sentence, defines ‘ESCB’ as the sum total of the ‘European Central Bank, together with the national central banks’. 7 For an account of the concept of money, see Charles Proctor, Mann on the Legal Aspect of Money (7th edn, OUP 2011) 5–63; Colin Bamford, Principles of International Financial Law (OUP 2011) 7–40.

Introduction 713 deposit-taking institution. Although a payment in either CeBM or CoBM will have the effect of discharging the payor from their legal obligations vis-à-vis the payee, only payments in CeBM are default-free, as central banks have the exclusive privilege of creating money and, unlike commercial banks, they cannot default.8 The practical relevance of the distinction between them is, ultimately, linked to their degree of default risk (rather than to their degree of finality)9 when used as settlement assets. The policy preference is for settlement in CeBM, especially for large value transactions.10 Turning to the link between payment systems and SSSs, suffice it to make here the following 24.5 observations. The monetary policy and intraday credit operations of the Eurosystem11 are to be collateralized, to mitigate the risk of financial loss to the liquidity-providing central bank in the event of counterparty default.12 The ability of central bank counterparties to access central bank liquidity through the payment system goes hand in hand with their ability to provide collateral to their central bank in the form of book-entry securities. As the provision of central bank liquidity depends on the mobilisation of collateral, the soundness and efficiency of SSSs is of the essence to central banks, which conduct their liquidity-providing operations through the payment system. The recognition of the interaction between payments and SSSs for the smooth execution of collateralized, liquidity-providing central bank operations prompted the Eurosystem to devote substantial resources to improve the efficiency of book-entry securities settlement through the launch, in June 2015, of TARGET2- Securities (T2S). The latter is a Eurosystem-owned and operated technical platform offering delivery-versus-payment securities settlement services in CeBM to participating central securities depositories (CSDs), as well as liquidity and collateral management services, through dedicated cash accounts (DCAs) held in TARGET2.13 SSSs and their link to payment systems (including those settling transactions in CeBM) will only be addressed in this chapter tangentially, to the extent necessary to enhance the reader’s understanding of the interest of the ECB and the NCBs in payment systems as vehicles for the execution of their liquidity-providing operations. 8 As long as money is deposited with a commercial bank, customers’ balances are not a claim on the central bank. A commercial bank’s solvency will inevitably determine its ability to satisfy depositor withdrawal requests. 9 On the concept of finality, see Section II.A. 10 CPSS/IOSCO, Principles for Financial Market Infrastructures (BIS 2012) 67, Principle 9 ‘[CeBM should be used in settlement] where practical and available’. On the use of CeBM as settlement asset for the settlement of payments see also, generally, ICMA, ‘The interconnectivity of central and commercial bank money in the clearing and settlement of the European repo market’ (14 September 2011); CPSS, The role of central bank money in payment systems (BIS 2003). The policy preference for settlement in CeBM has been elevated into a legal requirement by the SIPS Regulation (see infra), with Article 10(1) thereof stating that,‘[A]‌SIPS operator settling one-sided payments in euro shall ensure that final settlement takes place in central bank money’. 11 Article 282(1) TFEU, second sentence, defines ‘Eurosystem’ as the aggregate of the ‘European Central Bank, together with the national central banks of the Member States whose currency is the euro’. The Eurosystem’s mission is to ‘conduct the monetary policy of the Union’. However, the term ‘Eurosystem’ only appears once in the TFEU, which otherwise refers to the ‘ESCB’, to denote both the Eurosystem and the ESCB, leaving it to the reader to differentiate between the two depending on the context. The Treaties were drawn up on the premise that all EU Member States will eventually adopt the euro, whereupon the distinction between the two terms will lose its relevance. 12 The Eurosystem NCBs’ duty to collateralize their credit operations is derived from Article 18.1, second indent, of the Statute. 13 For details on T2S, the reader is referred to the ECB website accessed 22 January 2020. For an account of the Eurosystem’s legal competence to launch T2S, see accessed 22 January 2020; and Phoebus L Athanassiou, ‘T2 Securities: an Overview of the Eurosystem’s Αims and Competence’ (2008) 23 Journal of International Banking Law and Regulation 585–94.

714 PAYMENT SYSTEMS

II. Payments, Payment Systems, and Central Banks 24.6

By way of introduction to our account of the role of the ECB and the NCBs in the field of payments and payment systems, a few words are apposite on some of the key concepts used throughout this chapter, on the major sources of risk in payment systems, and on the interest of central banks in payments and payment systems.

A. Key concepts in the area of market infrastructures for payments 24.7

Legally, a ‘payment’ can be defined as the transfer of an item of value (typically, money) from one party to another, so as to fulfil a pecuniary obligation and/or to finally discharge a debt.14 For its part, a payment system has been variously described as any mechanism the aim of which is to ‘enable the transfer of monetary value’,15 as ‘a set of instruments, procedures and rules for the transfer of funds from one bank to another’,16 or as a ‘funds transfer system with formal and standardised arrangements and common rules for the processing, clearing and/or settlement of payment transactions’, to name but some of the extant definitions.17 There are several ways to categorize payment systems, whether on the basis of their ownership (public or private), the value of the payments they process (large value or retail), their settlement asset (CeBM or CoBM), or their operational characteristics (mainly, their settlement methods). In terms of settlement methods, most payment systems will qualify either as ‘net’ or as ‘gross-settlement’ systems.18 Net settlement payment systems (technically known as ‘Designated-Time Net Settlement (DTNS) systems’) are those where the final settlement of funds occurs on a net basis, at a designated time of the day (typically, end-of-day) or in one of several intra-day settlement cycles.19 Real-Time Gross Settlement (RTGS) systems are those where the settlement of funds occurs on a gross basis (meaning that payment instructions are processed on a one-by-one basis, without netting), with final settlement occurring real-time, to guarantee immediate finality of payments. By achieving finality earlier, RTGS payment systems are superior to DTNS systems in terms of settlement risk,20 despite typically being more costly for users.21 14 Maria Chiara Malaguti, The Payments System in the European Union—Law and Practice (Sweet & Maxwell 1997) 16. 15 Stephen Millard and Victoria Saporta, ‘Central Banks and Payment Systems—Past, Present and Future’ in Andrew G Haldane, Stephen Millard, and Victoria Sapporta (eds), The Future of Payment Systems (Routledge 2008) 15. 16 CPSS, The role of central bank money in payment systems (BIS 2003) 2. 17 See Article 4(6) of European Parliament and Council Directive 2007/64/EC of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC [2007] OJ L319/1 (hereafter Payment Services Directive/PSD). 18 There can also be hybrid payment systems, which combine features of DTNS and RTGS systems. In a hybrid system, net settlements occur at regular intervals, with the transfer of funds becoming final upon settlement (hence, earlier compared to a traditional DTNS system). 19 The net position of each participating bank corresponds to the value of all the fund-transfers it has received up to the designated, cut-off moment minus the value of all fund-transfers it has sent. 20 On the definition of ‘settlement risk’, see Section II.B. 21 RTGS payment systems dominate the world. According to the World Bank, in December 2010, at least one RTGS system operated in no less than 116 countries, meaning that RTGS are the de facto global standard in payment systems, see World Bank, Payment Systems Worldwide—A Snapshot (World Bank 2011) 14. The spread of RTGS systems in the EU was largely attributable to the introduction of TARGET: as only RTGS systems were eligible to become linked to TARGET, the existence of a national RTGS system was, effectively, a prerequisite for EMU membership.

Payments, Payment Systems, and Central Banks 715 Another two concepts relevant to payments and payment systems are ‘finality’ and ‘netting’. ‘Finality’ denotes the moment when a payment processed through the payment system is deemed to be ‘complete’ (ie irrevocable), even if one of the parties to it, typically the payor or its paying institution, have become insolvent after issuing the relevant transfer order.22 Finality is a crucial assurance for participants in payment but, also, securities clearing and settlement systems: without a clear and unequivocal legal definition of finality, receiving institutions would, in theory, continue to be subject to credit and liquidity risks23 even after a transfer order has been entered into the system and processed. Recognizing the pivotal role of settlement finality for payment systems, the EU legislator adopted, already in 1998, Directive 98/26/EC (Settlement Finality Directive or SFD),24 inter alia with a view to reducing systemic risks,25 and protecting payment system participants from the consequences of the opening of insolvency proceedings against other participants by disapplying to ‘systems’, within the meaning of the SFD, national insolvency laws. For its part, ‘netting’ denotes both an arrangement under the terms of which the mutual obligations of participants in a payment system are offset (ie reduced to a netted amount) and the actual process of their offsetting, which involves the calculation of net settlement positions, and their legal reduction to a net amount.26 Netting can be bilateral, where the mutual obligations of only two parties are netted, or multilateral, where the obligations of multiple parties are netted, mostly through a clearing house or central counterparty (CCP). To cater for a default or insolvency scenario, financial institutions will often make use of so-called ‘close-out’ netting arrangements, so as to determine the net obligations of the defaulting party, before terminating that party’s remaining contractual obligations. While netting can contribute to mitigating credit and liquidity risks within the payment system, it can also increase systemic risk by obfuscating the levels of mutual exposure of payment system participants. The SFD recognizes the legal validity and enforceability, erga omnes, of netting arrangements, notwithstanding the opening of insolvency proceedings.27

24.8

B. Major sources of risk in payment systems Default of the parties to a payment transaction is amongst the major sources of risk in a payment environment. Default may be the consequence of a temporary shortage of liquidity (liquidity risk),28 or of a more permanent and pervasive failure, typically, counterparty 22 The CPSS has defined finality as ‘a concept that defines when payment, settlement and related obligations are discharged’: see CPSS, Central Bank Payment and Settlement Services with Respect to Cross-border and Multi- currency Transactions (BIS 1993) 9. 23 On the concepts of credit and liquidity risk, see Section II.B. 24 European Parliament and Council Directive 98/26/EC of 19 May 1998 on settlement finality in payment and securities settlement systems [1998] OJ L166/45, as amended (hereafter SFD). For an account of the SFD, see Section III.B.1. 25 On the concept and implications of systemic risks in the context of payment systems, see Section II.B. 26 Article 2(k) SFD defines ‘netting’ as ‘the conversion into one net claim or one net obligation of claims and obligations resulting from transfer orders which a participant or participants either issue to, or receive from, one or more other participants with the result that only a net claim can be demanded or a net obligation be owed’. 27 See Articles 3(1) and (2) SFD. 28 Defined as the risk that a counterparty will not settle a pecuniary obligation (in full) when it becomes due, on account of a (temporary) lack of funds, see CPSS, A glossary of terms used in payment and settlement systems (BIS 2003) 29 (hereafter CPSS, A glossary of terms used in payment and settlement systems).

24.9

716 PAYMENT SYSTEMS insolvency (credit risk).29 Both liquidity and credit risk are instances of settlement risk, defined as the risk that settlement will not take place as the parties to a payment transaction had expected, on account of the failure of a payment system participant to settle its (net) obligations. 24.10

Liquidity and credit risk may also lead to systemic risk, defined as any risk with an adverse effect on the safety, soundness and efficient operation of the payment system as a whole. To illustrate the point, we revert to our account of the different types of payment systems. Where transactions are settled on a real-time gross basis, the effects of a cash shortfall or a participant’s default are limited to the individual transaction to which the defaulting participant is a party. Where liquidity or credit risks materialize in a netting environment, every single of the parties to the netting arrangement could be at risk, and the same could be true of their counterparties in other, unrelated, payment transactions, processed through the payment system. This threat of contagion, ie the risk that a failure in one part of the payment system could spread to another, and disrupt its operation, lies at the heart of systemic risk.30

24.11

Other types of risk relevant to the operation of payment systems include operational risk, defined as the risk of financial or other loss for payment system participants resulting from inadequate internal process management, human and system errors (including technical malfunctions) or external events (such as force majeure or fraud), security risk, defined as the risk arising from intentional acts (including fraud, sabotage, hacking or other forms of cyber-attacks), and legal/regulatory risk, denoting the sum total of gaps in the legal and regulatory framework relevant to the operation of the payment system that are apt to generate uncertainty with regard to the legal enforceability, both inter se and erga omnes, of the rights and obligations of payment system participants, inter alia with regard to the finality of payments.

C. Central bank interest in payments and payment systems 24.12

A basic grasp of the pivotal role of payment systems for the operation of contemporary market economies, and of the consequences of an eventual break-down in the timely and efficient processing of payments is necessary for an understanding of the interest of central banks in the proper design, sound legal basis, and smooth operation of payment systems.

24.13

By serving as the safe channels through which the buyers and the sellers of products and services (financial and non-financial alike) can arrange for the discharge of the cash leg of their commercial transactions, payment systems are nothing short of an indispensable component of the national and global financial systems: unless they are sound, in terms of their design and legal basis, and efficient, in terms of their actual operation, payment systems can become sources of systemic risk for central banks, as issuers and providers of CeBM (the ultimate settlement asset for commercial transactions), for commercial banks 29 Defined as the risk that a counterparty will not settle the value of a pecuniary obligation (in full), neither when it falls due, nor at any time thereafter, see CPSS, A glossary of terms used in payment and settlement systems (n 28) 29. 30 The above is not to say that RTGS payment systems cannot give rise to systemic risk, which is why, as explained later in this chapter, they are also eligible for designation under the SFD, in common to netting systems.

Payments, Payment Systems, and Central Banks 717 (as borrowers, lenders and key payment service-providers), for economic actors (eg as recipients of payment services), and for national economies at large. Central banks have a dual interest in the integrity of payment systems, and this interest is largely attributable to the role that their counterparties—commercial banks—play in the transmission of monetary policy, in financial intermediation, and in the provision of payment services. Commercial banks are, simultaneously, monetary policy counterparties (ie borrowers of central bank liquidity,31 for the financing of their intermediation activities), and supervised entities. As suggested earlier in this chapter, the involvement of commercial banks in the provision of payment services exposes them to the risks of insolvency and/or illiquidity of other financial intermediaries, with an impact on financial and, ultimately, systemic stability. Central banks have a natural (and, often, also a statutory) interest in the preservation of financial stability,32 which underlies their interest in the integrity and efficiency of payment systems. Financial stability considerations aside, basic monetary policy considerations also account for a large share of the institutional interest of central banks in payment systems and the payments they process.33 The monopolistic creation of fiat money,34 the control of its supply and, through it, the preservation of its value (price stability), are amongst the core tasks of central banks, which have a natural interest to ensure that money continues to serve as a trusted medium of exchange. If the efficient circulation of money were to be thwarted by an unsound and unreliable payment system, the ability of money to fulfil its core purpose would suffer, and so would public trust in it. Besides, should public trust in money be eroded, the quest for substitutes would be bound to intensify, subverting the position of central banks as monopolistic issuers of legal tender, and undermining their ability to control the supply of money in the economy (a condition precedent for the achievement of price stability). It follows that the interest of central banks in the integrity of payments and payment systems is closely associated, on the one hand, with their interest in the preservation of the ability of money to serve the purpose of its issuance as an established and trusted settlement asset for financial obligations, and, on the other, with the central role that money plays for the conduct of monetary policy, and its transmission to the real economy.35 It is for these reasons that, as explained below, the ECB and the NCBs will 31 The reference is to regular monetary policy liquidity, on the one hand, and emergency liquidity assistance/ lender of last resort funding, on the other. 32 At the time of writing, this was, for instance, true of the ECB (see Article 3.3 of the Statute, according to which, ‘in accordance with Article 127(5) TFEU, the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system’), the Bank of England (see Section 238(2A) Banking Act 2009 which, inter alia, provides that, ‘an objective of the Bank shall be to protect and enhance the stability of the financial system of the United Kingdom (the “Financial Stability Objective”)’), and the New York Federal Reserve Bank (see Section 2A Federal Reserve Act pursuant to which, ‘the Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates’). 33 The complementarity of financial stability, on the one hand, and price stability, on the other, is well established in the literature. See, eg, Charles A E Goodhart, ‘Wither Central Banking?’ in David E Altig and Bruce D Smith (eds), Evolution and Procedures in Central Banking (CUP 2003) 65–81, especially 76ff. 34 While central banks enjoy the statutory monopoly of issuing and putting paper money in circulation, they are not the exclusive creators of money. The bulk of the money in an economy is, in fact, created by commercial banks, whenever they extend loans to their customers, and exists in the form of deposits held with commercial banks, see Michael McLeay, Amar Radia, and Ryland Thomas, ‘Money creation in the modern economy’ (2014) Bank of England Quarterly Bulletin 2014/Q1 14–27, especially 15–16. 35 It is through the payment system that central bank funds are transferred to the accounts of monetary policy counterparties, and it is through the payment system that funds due to the NCBs by their own counterparties

24.14

718 PAYMENT SYSTEMS often own and operate payment systems, oversee them, and serve as catalysts for improvements in the processing of payments.

III. Payment Systems-Specific Institutional and Legal Framework in the EU and EMU A. Primary legal framework 24.15

The following legal provisions in the Treaty on the Functioning of the European Union (the Treaty or TFEU) and in the Statute of the ESCB and the ECB (the Statute) are of particular relevance to payment and settlement systems in the context of EMU: – Article 127(2), fourth indent TFEU (as reiterated in Article 3.1 of the Statute36), which identifies the promotion of ‘the smooth operation of payment systems’ as one of the basic tasks of the Eurosystem; – Article 22 of the Statute, which states that, ‘the ECB and the national central banks37 may provide facilities, and the ECB may make regulations, to ensure efficient and sound clearing and payments systems within the Union and with other countries’.

24.16

As explained earlier in this work, the Treaty assigns to the ECB the power to adopt the legal acts necessary to implement the basic tasks of the Eurosystem. The scope of the ECB’s regulatory powers in the field of payments, and the definition of the terms ‘payment systems’, and ‘clearing and payment systems’ were at the heart of the General Court’s judgment in Case T- 496/11 (the so-called ‘CCP location policy case’).38 To assess the validity of the Eurosystem’s offshore CCP location policy, as part of the Eurosystem Oversight Policy Framework,39 the General Court interpreted the term ‘clearing and payment systems’ as used in Article 22 of the Statute. The General Court opted for a narrow interpretation of Article 22: having drawn a distinction between payment systems and other infrastructures involved in the clearing of securities (as distinct from funds),40 the General Court ruled that, ‘clearing systems must be read in conjunction with payment systems’.41 For its (when inter-bank lending operations mature) are credited to them. It is therefore essential that the payment system allows for the safe transfer of funds to and from the NCBs, for the purposes of their monetary policy-related transactions. 36 The Statute is annexed to the Treaty as a Protocol and thus forms an integral part of the Treaty. 37 Pursuant to Article 43.4 of the Statute, the term ‘national central banks’ in Article 22 of the Statute shall be read as ‘central banks of Member States without a derogation’. 38 Case T-496/11 United Kingdom of Great Britain and Northern Ireland v ECB [2015] ECLI:EU:T:2015:133 (hereafter ‘CCP location policy case’). For an account of this case see, amongst others, Benedikt Wolfers and Thomas Voland, ‘The almighty ECB?: limits to the ECB’s competencies according to the judgment of the General Court of March 4, 2015 on the location policy for financial market infrastructures’ (2015) 30 Journal of International Banking Law and Regulation 670–77; Heikki Marjosola, ‘Missing pieces in the patchwork of EU financial stability regime? The case of central counterparties’ (2015) 52 Common Market Law Review 1491–1527; Evangelos Ananiadis-Bassias, ‘The ECB’s “Location Policy” for Central Counterparties: Is the General Court Drawing a Line, or Taking One Step Back to Take Two Steps Forward?’ (2016) 41 European Law Review 122–30. 39 The version of the Eurosystem Oversight Policy Framework applicable at the time of writing is available at accessed 22 January 2020. 40 CCP location policy case (n 38) para 85. 41 Ibid, para 90.

PAYMENT SYSTEMS IN THE EU AND EMU 719 definition of ‘payment systems’ and ‘clearing and payment systems’, the Court drew on the definition, in Directive 2007/64/EC (Payment Services Directive or PSD),42 of the term ‘payment system’,43 and on its own jurisprudence on the free movement of capital, where the term ‘payment system’ was deemed to fall ‘within the field of the transfer of funds (emphasis is ours)’. The General Court’s conclusion was that the basic task of promoting ‘the smooth operation of payment systems’, as per Article 3.1 of the Statute, first indent, did not extend to ‘all clearing systems including those relating to transactions in securities’, but was limited to the cash leg of clearing operations.44 Consequently, the term ‘clearing and payment systems’, as used in Article 22 of the Statute, was intended to emphasize the ECB’s power to adopt regulations to ensure efficient and sound payment systems, including those capturing a clearing phase, rather than to entrust the ECB with an autonomous regulatory competence over all clearing systems.45 At one point, the ECB had presented a recommendation46 for an amendment to Article 22 of the Statute, to include an explicit reference in it to the Eurosystem’s competences over securities clearing systems.47 This recommendation was, eventually, withdrawn, as the Governing Council of the ECB was, unanimously, of the opinion that the draft amended text of Article 22 under discussion no longer met the policy objectives that had informed the ECB’s initial recommendation.48 In terms of the geographical scope of application of the ECB’s regulatory powers under Article 22 of the Statute, the latter refers to the adoption of ECB regulations to ensure efficient and sound clearing and payment systems ‘within the Union and with other countries’.49 This is not to say that the ECB’s regulatory powers under Article 22 of the Statute stretch beyond the euro area: it follows from Article 42.1 of the Statute that Article 22 cannot confer rights nor impose obligations on Member States with a derogation.50

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B. Secondary legal framework 1. The Settlement Finality Directive Legal certainty on the effectiveness of transfers of funds and securities is key to the efficient and smooth functioning of payment systems. Of crucial importance in the context 42 Payment Services Directive (n 17). 43 Article 4(7) PSD2 defines a ‘payment system’ as ‘a funds transfer system with formal and standardised arrangements and common rules for the processing, clearing and/or settlement of payment transactions’. 44 CCP location policy case (n 38) para 97. 45 Ibid, para 101. This is despite the fact that the General Court acknowledged the existence of ‘close links between clearing and payment systems and CCPs’, and the EU legislator’s wish to involve the members of the Eurosystem as overseers in the regulatory and supervisory process for CCPs, see CCP location policy case (n 38) para 102. 46 See ECB, ‘ECB recommends amending Article 22 of its Statute’ (Press Release, 23 June 2017) accessed 22 January  2020. 47 In annulling the Eurosystem’s CCP location policy, the General Court had declared such an amendment essential, to give the ECB the competence necessary to regulate the activities of securities clearing systems, see CCP location policy case (n 38) paras 88, 89, 97–101, and 110. 48 See ECB, ‘ECB withdraws initiative on conferral of powers in relation to central counterparties (CCPs)’ (Press Release, 20 March 2019) accessed 22 January 2020. 49 On the regulatory powers of the ECB, as an EU Institution, also see Articles 132(1) and 288 TFEU. 50 This is confirmed by Protocols No 15 (on the UK) and 16 (on Denmark). In the event of an exit of the UK from the EU, this exemption would only apply to Denmark.

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720 PAYMENT SYSTEMS of payment and securities settlement systems is the concept of finality.51 The SFD created an EU-wide legal framework to reduce systemic risk in payment, clearing and settlement systems (including SSSs) caused by the opening of insolvency proceedings against a ‘participant’ in an eligible ‘system’. The three main objectives of the SFD are to: (i) reduce the systemic risk52 to which payment and securities settlement systems, net or gross, are subject in the event of the failure of a participant or participants to meet their obligations;53 (ii) protect the settlement of value transfer orders and netting processes (bilateral and multi-lateral) entered into ‘systems’, as well as their ‘participants’ against the risk of the insolvency of a participant (or the operator of an interoperable system); and (iii) provide certainty on the law defining the rights and obligations arising from, or in connection with, the participation of an insolvent ‘participant’ in a ‘system’. In terms of its scope of application, the provisions of the SFD apply to payment, clearing and settlement systems, participants in them, and to collateral provided in connection with participation in a ‘system’.54 24.19

Although a transfer of funds will only be final once the payee has irrevocable access to the transferred funds, the SFD provides no own-definition of ‘finality’. The finality of transfer orders is ensured by a combination of three distinct elements. First, provided they have been entered into a system before the opening of insolvency proceedings, transfer orders and netting become legally enforceable and binding.55 Second, the SFD abolishes so-called ‘zero-hour’ rules (the reference is to pre-SFD national law rules that retroactively rendered void all transfer orders issued by a participant on the day of its insolvency).56 Third, the SFD lays down a requirement for the rules of a system to define the last possible point at which the issuer of a transfer order may revoke it.57

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The SFD defines a ‘system’ as a formal arrangement between three [or, exceptionally two] or more participants, excluding the system operator . . . , a . . . settlement agent, a . . . central counterparty, a . . . clearing house or a[n]‌ . . . indirect participant, with common rules and . . . arrangements for the clearing . . . or execution of transfer orders between the participants . . . governed by the law of a Member State . . . , and designated . . . as a system . . . by the Member State whose law is applicable, after that Member State is satisfied as to the adequacy of the rules of the system.58

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Thus, the SFD only applies to eligible, notified and designated EU payment and SSSs (and their participants).59 Only payment, clearing and SSSs that are governed by the 51 On the concept of settlement finality see, generally, Klaus M Löber, ‘The developing EU legal framework for clearing and settlement of financial instruments’ (2006) ECB Legal Working Papers Series 1; Tom Kokkola, The Payment System (ECB 2010) 144–45 (hereafter Kokkola, The Payment System). 52 The reference is to the risk linked to a participant’s insolvency in the context of the operation of payments and securities settlement systems. 53 Kokkola, The Payment System (n 51) 146. 54 See Article 1 as well as Article 9 SFD, which creates a privilege for the benefit of collateral holders in the event of the opening of insolvency proceedings. 55 Article 3(1) para 1 SFD. 56 Article 7 SFD. 57 Article 5 SFD. 58 Article 2(a) SFD. 59 Article 10(1) SFD. Since 2014, and the adoption of European Parliament and Council Regulation (EU) 909/2014 of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) 236/2012 [2014] OJ L257/1.

PAYMENT SYSTEMS IN THE EU AND EMU 721 law of a Member State may be designated by Member States, and only designated systems can benefit from the SFD’s finality protections. The SFD’s definition of ‘participant’ encompasses credit institutions (eg commercial banks but not E-money institutions)60 or investment firms, settlement agents, CCPs/clearing houses, and system operators (eg CSDs).61 The core strength of the SFD lies in the creation of a harmonized, systemic stability- 24.22 driven, creditor-friendly regime, to guarantee transaction finality and systemic stability by derogating from the application of national insolvency laws. Its main weaknesses are its narrow personal scope of application,62 the lack of a harmonized definition of finality, and the SFD’s narrow conception of finality, which is limited to the protection of settlement or transfer orders and netting arrangements against the opening of insolvency proceedings, but does not cover underlying transactions.63

2. The Payment Services Directives Adopted in 2007, the PSD sought to establish a modern and coherent, EU-wide legal framework for payment services, both within and outside the euro area,64 laying down the rights and obligations of payment service providers and users, simplifying payments and their processing across the EU, and providing the legal platform for the Single Euro Payments Area (SEPA). The introduction of Directive 2015/2366 (Payment Services Directive 2 or PSD2),65 which repealed the PSD as of the date of its application (13 January 2018), signalled the EU Institutions’ recognition of the substantial technical innovations that retail payment markets had undergone since the enactment of the PSD, and the novel electronic and mobile payment channels and service providers that these had ushered in. These and other developments called for regulatory changes to ensure that new actors are brought within the regulatory fold, and to guarantee effective and secure digital payment services across the EU.

Member States are to notify their systems to the European Securities and Markets Authority (rather than the European Commission (the Commission), as the case had been under the original version of the SFD). 60 Article 20(1) of European Parliament and Council Directive 2009/110/EC of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/ 60/EC and 2006/48/EC and repealing Directive 2000/46/EC [2009] OJ L267/7 removed ELMIs from the definition of ‘credit institutions’, under Article 4(1) of European Parliament and Council Directive 2006/48/EC of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast) [2006] OJ L177/1, reclassifying them as ‘financial institutions’, in accordance with Article 4(5) thereof. 61 Article 2(f) SFD. 62 Non-EU participants in EU systems are covered by the SFD, but the same is not true of EU participants in third country systems, unless a Member State has activated the option provided for in Recital 7. 63 Recital 13 SFD. For an account of some of the weaknesses of the SFD, including in terms of its implementation, see Phoebus L Athanassiou, ‘The Settlement Finality Directive and the case for its reform’ (2018) 33 Butterworth’s Journal of International Banking and Financial Law 23–5. 64 ‘A robust and secure payments system requires a consistent and reliable legal framework specifying in particular when a payment transaction is completed and can no longer be reversed, as well as distributing risks between parties involved in a payment transaction’ (Agnieszka Janczuk-Gorywoda, ‘Evolution of EU Retail Payments Law’ (2015) 40 European Law Review 858, 868). 65 European Parliament and Council Directive (EU) 2015/2366 of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC [2015] OJ L337/35.

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722 PAYMENT SYSTEMS 24.25

The scope of application of PSD2 extends to payments in all currencies, where the payment service provider is located in the EU or in the European Economic Area (EEA). In common with PSD, PSD2 captures ‘one leg’ transactions (denoting those where the payor or the payee or their respective payment service providers (PSPs) are located outside of the EU) but, also, ‘two leg’ transactions (denoting transactions where both payment processors are located outside the EU). Furthermore, PSD2 requires payment service providers operating within the EU to provide information and to ensure transparency on the charges and conditions applicable to domestic and cross-border payments, while at the same time imposing upon them a liability regime for failed payments. With a view to enhancing consumer protection, PSD2 introduced strict security requirements for electronic payments and robust consumer financial data protection guarantees, including reduced liability for non-authorized payments from 150 euro to 50 euro, and an unconditional refund right for direct debits in euro.66 To enhance competition, increase consumer choice and factor-in the growth in e-commerce activities, the increasing popularity of internet and mobile payments, and the growing trend towards customer relationships with multiple account providers, PSD2 has expanded the regulatory payment services universe to include ‘third party providers’, namely ‘payment initiation service providers’ and ‘account information service providers’.67 Finally, to help achieve improved economies of scale and to complement SEPA, PSD2 harmonized the law governing retail payments throughout the internal market without regard to their currency (on SEPA, see Section IV).

IV. The Triple Role of the ECB and the NCBs in the Context of Payments and Payment Systems 24.26

The ECB and the NCBs are involved in payment and payment systems in three ways: (i) as owners/operators of, and participants in, systems operating in CeBM; (ii) as catalysts for attaining public objectives, primarily through market-driven solutions with an application to payments; and (iii) as overseers of systems. We examine, below, each of these three roles of the ECB and the NCBs in the context of payments and payment systems.

A. The ECB as owner and operator of payment systems—the case of TARGET2 24.27

Before the introduction of the euro, payment systems focused mainly on domestic markets,68 and cross-border payments within the EU were mostly achieved through correspondent banking arrangements. In preparing for the introduction of the single currency, it was acknowledged that the implementation of a single monetary policy and the creation of an integrated, well-functioning money market could only be ensured if funds could be moved from one central bank account to another within the single currency 66 Articles 73, 76, and 77 PSD2. 67 Jane K Winn, ‘Reengineering European Payment Law’ in Edward A Morse (ed), Electronic Payments in the 21st Century (American Bar Association 2017). 68 Traditionally, each country had its own domestic clearing and settlement systems for payment, with a large value payment system being at the core of each jurisdiction’s payment infrastructure.

THE TRIPLE ROLE OF THE ECB AND THE NCBS 723 area.69 A harmonized cross-border payment service for large-value payments in euro did not exist until the introduction of TARGET, the single currency area-wide RTGS. TARGET and its successor, TARGET2, have since formed the backbone of the infrastructure facilitating wholesale payments in euro.70 TARGET was decentralized: its national RTGS component systems, as well as the ECB payment mechanism (the ECB’s RTGS system), were only harmonized to the extent necessary to ensure the implementation of the ECB’s monetary policy, and the creation of a cross-border level playing-field in terms of access to payments, operating times and days, the provision of intraday credit, cross-border pricing, security and minimum performance requirements.71 Despite having achieved its policy objectives, TARGET could not, on account of its decentralized structure, adapt to constantly changing market needs, nor to the demands likely to be placed upon it by future euro area enlargements.

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TARGET2—the successor of TARGET, that went live in November 2007—was designed with the aim of further facilitating the implementation of the Eurosystem’s monetary policy, and the functioning of the euro area money market. In this spirit, TARGET2 was to operate on the basis of a ‘Single Shared Platform’ (SSP), developed by three Eurosystem NCBs (the Banca d’Italia, the Banque de France, and the Deutsche Bundesbank). Despite its centralized structure, TARGET2 remains decentralized, in legal terms, in the sense that each NCB operates its own TARGET2 component system, duly notified and designated under Article 10(1) SFD, to ensure that TARGET2, as a whole, benefits from the SFD protections.72 TARGET2 is legally structured as a multiplicity of payment systems, where the ECB and each of the participating and connected NCB own their own TARGET2 component and operate it under the law of their Member State, subject to rules implementing the Harmonised Conditions for participation in TARGET2, annexed to the TARGET2 Guideline.73,74 By being a single-platform system, TARGET2 can offer a ‘harmonised state of art payment service’75 to all participants, ensuring a level playing-field in terms of access to wholesale payments. At the time of writing, twenty-four NCBs and their respective national user communities use TARGET2’s single shared platform for the real-time settlement of their payments in euro namely, the nineteen euro area NCBs, the ECB, and four non-euro area, EU Member State NCBs.76

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69 See Kestutis Laurinavičius and others, ‘Legal aspects of TARGET2’ (2008) 23 Journal of International Banking Law and Regulation 15–21 (hereafter Laurinavičius and others, ‘Legal aspects of TARGET2’). In order to control systemic risks associated with netting in largevalue payment systems, it was recommended that, as soon as feasible, Member States should have in place an RTGS system to facilitate large-value payments related to inter-bank operations, see Kokkola, The Payment System (n 51) 246. 70 Without TARGET and TARGET2, the euro area money market would be fragmented, interest rates would differ across market sectors, and the Eurosystem would not have an efficient mechanism for the transmission of its single monetary policy, see Laurinavičius and others, ‘Legal aspects of TARGET2’ (n 70) 15. 71 Kokkola, The Payment System (n 51) 247. 72 Also see Laurinavičius and others, ‘Legal aspects of TARGET2’ (n 70) 16. 73 ECB Guideline of 26 April 2007 on a Trans-European Automated Real-time Gross settlement Express Transfer system (TARGET2) (ECB/2007/2) [2007] OJ L237/1. 74 See Recital (3) and Articles 1(2), 3(1), and 8 of the TARGET2 Guideline. The Harmonised Conditions for the Opening and Operation of a PM account, a T2S DCA and a TIPS DCA in TARGET2 are laid out in Annexes II, IIa, and IIb, respectively, of the TARGET2 Guideline. It bears noting that deviations are only allowed where implementing the TARGET2 Guideline is not possible on account of national law constraints, but not for discretionary purposes (Article 8(4) TARGET2 Guideline). 75 Kokkola, The Payment System (n 51) 248. 76 At the time of writing, the reference was to the NCBs of Bulgaria, Denmark, Poland, and Romania.

724 PAYMENT SYSTEMS 24.30

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In terms of the value of the payments it processes, TARGET2 is amongst the three largest wholesale payment systems worldwide, alongside Fedwire, in the US, and Continuous Linked Settlement (CLS), the international clearing and settlement system for foreign exchange transactions.77 In 2016, TARGET2 processed a daily average of 342,008 payments, with an average transaction value of five million euro.78 Together with the payments processed on T2S DCAs, the overall TARGET2 turnover in 2018 stood at approximately 524 trillion euro, corresponding to a daily average of 2.3 trillion euro.79

1. Legal framework and governance of TARGET2 Despite the fact that a TARGET2 participant’s contractual relationship is exclusively with its own NCB, the Governing Council of the ECB decided that the rules of the TARGET2 component systems (ie the terms and conditions subject to which TARGET2 offers its services) were to be harmonized to the greatest extent possible. This was achieved by way of the TARGET2 Guideline, adopted by the Governing Council of the ECB on 26 April 2007, which, as it is the case with all ECB Guidelines, is binding on all euro area NCBs. The NCBs of non-euro area EU Member States may also connect to TARGET2, subject to fulfilling certain additional conditions identified by the Governing Council of the ECB, and subject to the latter’s approval.80 Non-euro area EU Member State NCBs wishing to operate a TARGET2 component system have to adhere to the rules of the TARGET2 Guideline by way of an agreement (the TARGET2 Agreement).81 The common governance structure of TARGET2 relies on three distinct levels:82 first, the Governing Council of the ECB, which is responsible for the direction, management and control of TARGET2 (Level 1); second, the ESCB’s Market Infrastructure and Payments Committee, which, alongside the Market Infrastructure Board are to advise and assist the Governing Council of the ECB in all TARGET2-related matters (Level 2); and third, the three Eurosystem NCBs, which have developed and are mandated to operate the SSP on the Eurosystem’s behalf (Level 3).

2. Participation in TARGET2 The TARGET2 access rules cater for two modes of participation, direct and indirect. Only certain entities are eligible for direct participation in TARGET2 namely, credit institutions, either established in the EEA or acting through a branch established in the EEA, and central banks of the EU Members States and the ECB.83 Other entities, such as the treasury departments of EU Member State central or regional governments, public sector bodies of Member States, authorized and supervised investment firms established in the Union or 77 Kokkola, The Payment System (n 51) 245. 78 See accessed 22 January  2020. 79 See ECB, ‘TARGET2 Annual Report 2018’ (May 2019) accessed 20 January 2020. 80 Those conditions were set out by the Governing Council of the ECB in July 1998. Non-euro area NCBs were allowed to offer limited amounts of intraday liquidity to their credit institutions in euro on the basis of a deposit in euro held with the Eurosystem. Safeguards were established to ensure that non-euro area credit institutions would always be in a position to repay that intraday credit on time, thereby avoiding any need for overnight central bank credit in euro. In this regard, also see Kokkola, The Payment System (n 51) 248. 81 Articles 2(19) and 4 TARGET2 Guideline. 82 Article 7 TARGET2 Guideline. 83 Annex II, Article 4(1) TARGET2 Guideline.

THE TRIPLE ROLE OF THE ECB AND THE NCBS 725 the EEA and entities managing ancillary systems84 and acting in that capacity may also participate in TARGET2, at the discretion of their NCB.85 Only credit institutions established in the EEA can be indirect participants.86 Indirect participation entails that payment orders are to be sent to/received via a direct participant, with payments being settled through the direct participant’s main TARGET2 account. EEA branches and other credit institutions belonging to the same group as a direct participant can channel payments through the direct participant’s main TARGET2 account without the involvement of the direct participant.87 Other entities (correspondents or branches worldwide) that hold a Bank Identifier Code may send and receive payment orders to/from the system via a direct participant, with their payments being settled through the direct participant’s TARGET2 account.88

3. Types of payment orders processed, and accounts held in, TARGET2 TARGET2 mandatorily processes all payments resulting from, or made in connection 24.34 with, Eurosystem monetary policy operations. TARGET2 is also used for the processing of interbank and other large value commercial payments that are to be settled in real- time, using CeBM.89 Payments are settled in CeBM on accounts that participants maintain with the relevant central banks (so-called ‘Payments Module’ or ‘PM’ accounts) immediately or, at the latest, by the end of the business day on which they were accepted.90 Since the launch of T2S and, more recently, of the TARGET instant payment settlement (TIPS) service (on TIPS, see paragraph 24.51), TARGET2 also settles the cash-leg of securities transactions processed through T2S as well as instant payments, through the corresponding DCAs. The ECB’s consultative report on TARGET2, issued in 2002, provided that all accounts holding CeBM and processing real-time payments should, eventually, be brought within the perimeter of TARGET2.91 For the purposes of TARGET2, accounts holding CeBM and processing (settling) real-time payments include both PM accounts and DCAs. The latter are settlement accounts holding CeBM in TARGET2 and supporting the real-time settlement of the cash leg of T2S-related transactions. DCAs have been part of the TARGET2 legal framework since April 2015, when the Governing Council of the ECB adopted Guideline ECB/2015/15,92 amending the TARGET2 Guideline. One of the purposes of the amending Guideline was, precisely, to bring all real-time settlement accounts holding CeBM, including DCAs, within the scope of TARGET2. To this aim, a new Annex IIa to 84 The TARGET2 Guideline defines these, in Article 1, as ‘system(s) managed by an entity established in the Union or the EEA that is subject to supervision and/or oversight by a competent authority and complies with the oversight requirements for the location of infrastructures offering services in euro, as amended from time to time and published on the ECB’s website, in which payments and/or financial instruments are exchanged and/or cleared or recorded with (a) the monetary obligations settled in TARGET2 and/or (b) funds held in TARGET2, in accordance with this Guideline and a bilateral arrangement between the ancillary system and the relevant Eurosystem CB’. 85 Annex II, Article 4(2) TARGET2 Guideline. 86 Annex II, Article 6 TARGET2 Guideline. 87 Annex II, Article 5(4) TARGET2 Guideline. 88 Article 2(12) TARGET2 Guideline. 89 Annex II, Article 3(2) TARGET2 Guideline. 90 Annex II, Article 20 TARGET2 Guideline. 91 ECB, ‘Public Consultation on TARGET2: Principles and Structure’ (16 December 2002) accessed 22 January  2020. 92 ECB Guideline (EU) 2015/930 of 2 April 2015 amending Guideline ECB/2012/27 on a Trans-European Automated Real-time Gross settlement Express Transfer system (TARGET2) (ECB/2015/15) [2015] OJ L155/38.

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726 PAYMENT SYSTEMS the TARGET2 Guideline has, since, set out the harmonized terms and conditions for the opening and operation of T2S DCAs. Since the go-live of the TARGET instant payment settlement (TIPS) service, in November 2018 (on TIPS, see paragraph 24.51), also TIPS DCAs have been introduced, and these are regulated in a new Annex IIb to the TARGET2 Guideline.

B. The ECB and the NCBs as overseers of payment systems— introduction to oversight 24.36

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As stated earlier in this chapter, payment, as well as clearing and settlement systems are essential for the proper functioning of the financial sector and the euro area economy as a whole, but, also, for the implementation of the single monetary policy. Through their oversight function, the ECB and the Eurosystem NCBs aim to ensure the stability and efficiency of payment systems and other financial market infrastructures operating in euro.93

1. Legal basis for the Eurosystem’s oversight competences ‘Oversight’ denotes a typical central bank function, the aim of which is to promote the objectives of safety and efficiency by monitoring existing and planned systems and the bridges that link them, assessing them against the applicable standards and principles and, where necessary, fostering/inducing change. Applied to the ESCB, this concept—which does not appear explicitly in the TFEU—designates a set of activities intended to ‘promote the safety and efficiency of FMIs and to protect the financial system from possible “domino effects” which may occur when one or more participants in the market infrastructure incur credit or liquidity problems’.94 In the practice of the ESCB, the Eurosystem’s oversight function has developed beyond the mere monitoring, evaluation and inducement of changes in the rules of financial market infrastructures (FMIs), to include an assessment of the role of the ESCB in FMIs, including TARGET2 and T2S, and its interest in SSSs when used in monetary policy operations. The ESCB’s competence to oversee FMIs is premised on the fourth indent of Article 127(2) TFEU, as mirrored in Article 3.1 of the Statute, as well as on Article 22 thereof. Following the judgment of the General Court in the CCP location policy case (see paragraph 24.16), it is clear that the Eurosystem has both regulatory and oversight competences over payment systems and clearing systems for payments. However, except to the extent that the Eurosystem’s oversight policy with regard to CSDs, SSSs, and CCPs could be given effect to through the channel of their payment component, the ECB would, de lege lata, need to resort to the non-legally binding recommendations and opinions of Article 34.1 third indent of the Statute, to cooperation with other regulators (including cooperative oversight, such as EMIR Colleges for CCPs or the assessment of SSSs used or monetary policy operations) and EU rule-making, to avert the risk of legal challenges to the exercise of its oversight function over them.

93 Kokkola, The Payment System (n 51) 271. 94 This definition captures the features of the definition of ‘oversight’ and ‘oversight of payment systems’ contained in CPSS, A glossary of terms used in payment systems and securities settlement systems (BIS 2003) 37.

THE TRIPLE ROLE OF THE ECB AND THE NCBS 727 The ESCB carries out its oversight activities in accordance with Article 12.1 of the Statute, with the ECB having largely opted for a soft law approach as regards the exercise of its oversight competences over FMIs. The one notable exception, to date, was the enactment of Regulation ECB/2014/28 of 3 July 2014 on oversight requirements for systemically important payment systems (the ‘SIPS Regulation’).95 To ensure their efficiency and soundness as SIPS, the ECB has implemented the ‘Principles for Financial Market Infrastructures’ (PFMIs)96 in the form of the SIPS Regulation, which defines the criteria for qualifying a payment system as systemically important, and lays down requirements to ensure the sound management of legal, credit, liquidity, operational, general business, custody, investment and other risks to which they are subject, as well as objective criteria for access to them. The SIPS Regulation captures both large-value and retail payment systems in euro, whether operated by Eurosystem NCBs or private entities, that form the backbone of the euro area’s market infrastructure. Following the adoption of the SIPS Regulation, four key payment systems have been identified as SIPS, namely TARGET2, EURO1, and STEP2-T, operated by EBA CLEARING; and CORE(FR), operated by STET.97

2. Conduct of oversight The objectives and scope of the ESCB’s oversight function are defined in its Oversight Policy Framework,98 with the ECB and the NCBs performing their oversight tasks on the basis of the standards and recommendations they have developed,99 and in cooperation with other central banks and national authorities. Oversight standards and recommendations aim to ensure a harmonized and systematic oversight of payment, clearing and securities settlement systems, facilitating the comparison of assessments of different systems. The ESCB conducts oversight of individual entities, systems and schemes by collecting relevant information, assessing it against its oversight standards, and promoting measures aimed at inducing change, where deemed necessary.100 The ESCB assigns a leading role to the Eurosystem NCB that is best placed to oversee individual entities, systems and schemes, whether because the selected NCB is located in proximity to the overseen entity, or because the latter is legally incorporated within the jurisdiction of that NCB. For entities, systems or schemes that have no clear national anchor, the body entrusted with oversight responsibility is the ECB, unless the Governing Council of the ECB decides otherwise.101

95 ECB Regulation (EU) 795/2014 of 3 July 2014 on oversight requirements for systemically important payment systems (ECB/2014/28) [2014] OJ L217/16. 96 CPSS/IOSCO, Principles for Financial Market Infrastructures (BIS 2012). The PFMIs are the successors to the CPSIPS, see CPSS, Core principles for systemically important payment systems (BIS 2001). 97 The list identifying such payment systems and their respective operators and competent oversight authorities was adopted by the Governing Council of the ECB, and is published on the ECB’s website accessed 22 January  2020. 98 See ECB, ‘Eurosystem oversight policy framework’ (July 2016) accessed 20 January 2020. 99 See, for instance, ECB, ‘Revised Oversight Framework for Retail Payment Systems’ accessed 22 January  2020. 100 For a detailed account of the oversight methods performed by the Eurosystem, see Kokkola, The Payment System (n 51) 282–84. 101 ECB, ‘Financial Integration Report 2016’ accessed 22 January 2020.

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C. The ECB as catalyst—the case of SEPA 24.42

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The ECB and the ESCB’s oversight and catalyst functions fulfil complementary purposes, with the latter seeking to facilitate the efficiency of the arrangements for payments, clearing and settlement, and to promote the safety of the overall market infrastructure. In acting as a catalyst, the Eurosystem encourages change in the retail payment and securities sectors, it seeks to overcome the problem of fragmentation (which can lead to inefficiencies, lower levels of growth and innovation and discourage competition), and it strives to mitigate risks arising from the complexity of the market.102

1. Single Euro Payments Area The Single Euro Payments Area (SEPA) project, set in motion in 2002 by the European banking industry, represents a major step towards European integration in the field of retail payments. Its aim is to implement common instruments, standards and infrastructures for retail payments in euro, thereby leading to the creation of a fully integrated retail payments market, and to the transformation of the various national markets into a single, SEPA market.103 To ensure that all euro payments in the Euroarea achieve the same degree of speed, safety and efficiency as national payments, all SEPA payments are treated as domestic payments, made through a single bank account, making use of a single set of payment instruments.104 At the time of writing, SEPA enabled customers to make cashless euro payments in thirty-four European countries (including non-euro area and non-EU countries),105 by way of credit transfer, direct debit, or through instant credit transfer.106 Within the euro area, standardisation at the level of direct debits has been achieved through the SEPA ‘Direct Debit’ scheme, the pan-European direct debit scheme that has replaced domestic Euro Direct Debits throughout the SEPA.107 As regards credit transfers, the PSD and its successor, PSD2, have sought to make cross-border credit transfers within the EEA as uncomplicated, efficient and secure as national payments. PSD2 inter alia mandates the European Banking Authority (EBA) to develop, in close cooperation with the ECB, regulatory technical standards and guidelines for payment service providers.108 In March 2012,

102 It should be noted that both the Eurosystem and the Commission are involved in activities facilitating market efficiency and integration, however, from slightly different perspectives. Whereas the Eurosystem has statutory responsibilities as regards the euro and the euro area (being responsible, among other things, for its payment, clearing and settlement arrangements), the Commission aims to create a single market with a level playing field and equal opportunities covering all of the countries of the EU, see Kokkola, The Payment System (n 51) 292. 103 For reasons of efficiency, it would be impractical to have national schemes operating in parallel to the SEPA scheme. In this respect, also see accessed 22 January 2020. 104 CPSS, Red Book—Payment, clearing and settlement systems in the euro area (BIS 2012) 67 and 85–89. 105 Norway and Switzerland are also SEPA countries. For an overview of payment integration in the context of SEPA, see accessed 22 January  2020. 106 A SEPA for card payments has yet to be achieved (see ECB, ‘Card payments in Europe—current landscape and future prospects: a Eurosystem perspective’ accessed 22 January 2020). 107 For an account of SEPA and the SEPA Direct Debit scheme, see accessed 22 January 2020. 108 In undertaking the work mandated by the PSD2, EBA and ECB use as common platform the European Forum on the Security of Retail Payments (SecuRe Pay). In this respect, see ECB, ‘Mandate of the European Forum on the Security of Retail Payments’ (2014) accessed 22 January 2020.

Recent Developments and Future Prospects 729 Regulation (EU) 260/2012 (SEPA Regulation)109 (commonly referred to as the ‘SEPA migration end-date’) was adopted, laying down rules for the initiation and processing of euro- denominated credit transfer and direct debit transactions.110 The SEPA project was a response to the EU Regulation on cross-border payments in euro,111 which established the rule that payment charges for cross-border euro payments within the EU (for instance, credit transfers and card payments) should be the same as those applied to corresponding domestic euro payments. Under the aegis and guidance of the Eurosystem and the Commission, the European Payments Council (EPC)112 defined new rules and procedures for euro payments, which have been adopted not only by euro area stakeholders but, also, by stakeholders in the other EU countries.

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Other notable integration initiatives in the field of retail payments, include the Interchange Fees Regulation for card-based payment transactions,113 which entered into force in June 2015, and introduced a harmonized set of rules for the provision of card payments, and the Green Paper on retail financial services,114 published by the Commission in December 2015, with the aim that it should feed into the Commission’s Action Plan to facilitate the cross-border supply of retail financial services within the Single Market.

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V. Recent Developments and Future Prospects The payments landscape is in a process of constant evolution, in sync with technological advances and changing consumer preferences. The on-going evolutionary change process is inter alia reflected in the rise of E-Commerce,115 in the use of instant payments, digital cash and virtual currencies as payment media, and in the emergence of single operator on-line payment platforms (such as PayPal), mobile-based digital wallets (such as Google Pay, Denmark’s MobilePay, Kenya’s M-Pesa, and Norway’s Vipps), and contactless payments116 (such as those offered by ApplePay and AndroidPay).117 But it is distributed ledger 109 European Parliament and Council Regulation (EU) 260/2012 of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) 924/2009 [2012] OJ L94/22. 110 The regulation defines a clear timeline by when these rules need to be implemented in all Member States. For the euro area, the final deadline was 1 February 2014, while the migration deadline for euro-denominated payments in non-euro area countries was 31 October 2016. As of these dates, existing national retail credit transfers and direct debit schemes for payments in euro have been phased out and replaced by SEPA alternatives. 111 European Parliament and Council Regulation (EC) 924/2009 of 16 September 2009 on cross-border payments in the Community and repealing Regulation (EC) 2560/2001 [2009] OJ L266/11. 112 The EPC was founded in 2002 as the ‘decision- making and co- ordination body of the European banking industry in relation to payments’. For more details about EPC and its tasks, see accessed 22 January 2020. 113 European Parliament and Council Regulation (EU) 2015/751 of 29 April 2015 on interchange fees for card- based payment transactions [2015] OJ L123/1. 114 See Commission, ‘Green Paper in retail financial services’ COM (2015) 630 final. 115 In 2015, the global E-commerce market was estimated at USD 1.9 trillion, up by 14 per cent compared to 2014. This figure was expected to rise to USD 2.4 trillion by 2019; Worldpay, ‘Global Payments Report 2015’ (November 2015) 9. 116 According to estimates, 2015 saw 31 per cent of global payments transactions (by value) being settled through E-wallets; Worldpay, ‘Global Payments Report 2016’ (September 2016) 3. 117 The reference is to credit and debit cards, smart cards or hand-held devices (including smartphones) equipped with a chip and an antenna, for secure low-value payments, through use of radio-frequency identification, near field communication or host-card emulation technology, without the user’s signature or personal identification number (users will typically wave or tap their card or device over a dedicated terminal, at a physical point

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730 PAYMENT SYSTEMS technologies (DLTs)118 that look set to revolutionize the payments landscape, should they ever turn mainstream. Their promise is to enable value transfers without recourse to intermediaries, paving the way for instant, point-to-point payments, in privately issued, virtual currencies (referred to, by the ECB, as ‘crypto-assets’)119 and, possibly, also in fiat money, at a fraction of the cost, and free of the credit or counterparty risk associated with intermediated, ‘slow’ payments (especially cross-border ones). 24.47

To the extent that modern technology (whether or not in the form of DLTs) can facilitate instant payments, without generating novel legal or operational risks, it could have an invaluable contribution to make towards overcoming some of the inefficiencies of the current payment environment, especially in its cross-border dimension. That said, there are also a number of legal challenges that technology-driven alternatives pose, and which would need to be overcome before their more wide-spread use as retail or, a fortiori, wholesale payment instruments. Given the space constraints of this chapter, this author would propose focusing on the legal challenges posed by two of the most prominent promise bearers in the field of (mostly retail) payments, namely instant payments and virtual currencies.120

A. Instant payments 24.48

The Euro Retail Payments Board, a body established under the aegis of the Eurosystem in the place of the SEPA Council, with the mission of fostering the development of an integrated, innovative and competitive market for retail payments in euro in the EU, has defined instant payments as electronic retail payment solutions available 24-7-365 and resulting in the immediate or close-to-immediate interbank clearing of the transaction and crediting of the payee’s account with confirmation to the payer (within seconds of payment initiation). This is irrespective of the underlying payment instrument used (credit transfer, direct debit or payment card) and of the underlying arrangements for clearing (whether bilateral interbank clearing or clearing via infrastructures) and settlement (eg with guarantees or in real time) that make this possible.121

24.49

Well before the emergence of demand for instant payments, the Eurosystem had, as mentioned earlier in this chapter, served as a catalyst for the creation of SEPA. By supporting of sale). While increasingly popular, contactless payments will not be examined separately, below, as they do not amount to an autonomous payment medium but, rather, to a technological spin to existing payment media. 118 The reference is to technological tools designed to facilitate the transaction-by-transaction reconciliation of each identical copy of a distributed ledger, as well as the exchange and sharing of the assets and/or data stored therein through, inter alia, peer-to-peer networking, the distributed storing of data, and the use of cryptography. 119 See ECB, ‘Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures’ (2019) Occasional Paper Series No 223 accessed 22 January 2020. 120 For a detailed account of the impact of digital financial innovation on payments and other types of financial transactions, see Phoebus L Athanassiou, Digital Innovation in Financial Services—Legal Challenges and Regulatory Policy Issues (Kluwer Law International 2018); and Phoebus L Athanassiou, ‘Impact of digital innovation on the processing of electronic payments and contracting: an overview of legal risks’ (2017) ECB Legal Working Papers Series 16. 121 See accessed 22 January  2020.

Recent Developments and Future Prospects 731 SEPA’s creation, the Eurosystem sought to pave the way for an integrated market in electronic payments in euro, in line with its statutory mandate of promoting the smooth operation of payment systems, as a condition precedent to the better transmission of monetary policy across the euro area. The achievement of integration in the market for electronic payments in euro was to turn on the SEPA’s fulfilment of two distinct, but intertwined, objectives: the attainment of end-user reachability122 for euro payments across Europe (‘pan- European reachability’) and the achievement of legal and regulatory harmonization across Europe. The first objective was to be achieved by ensuring that a single account with each end-user’s payment service provider (PSP) is sufficient for the processing of transactions within the European Union.123 The second objective was to be achieved through the introduction of a harmonized legal and regulatory framework on the basis of which PSPs were to operate when offering their services.124 Operationally, the soundness of instant payments depends on the existence of reliable clearing and settlement solutions. The latter may either originate with the private sector or, failing that, with the public sector (typically, central banks, given their statutory interest in safe and efficient payment systems and the pivotal role of clearing in the life-cycle of any payment transaction).125 As regards the settlement leg of instant payments, it follows from Article 83(1) PSD2 that the payor’s payment service provider is to ensure that the amount of the payment transaction is credited to the payee’s account with the payee’s PSP, at the latest by the end of the next business day. However, instant settlement cannot be achieved merely by way of legislation: what is necessary is a market infrastructure capable of meeting the market expectation of an instant (or nearly instant) cashless payment. For this, recourse to the large value payment system may be necessary, and the same would presumably apply to closed retail payment systems (whether operated by banks or by single-operator systems, such as PayPal) so that these can support the real time settlement of instant cashless payments at a reasonable cost.126 A number of operational and legal issues will need to be addressed before instant payments can rise up to the expectations of their users.127 These include the attainment 122 In accordance with Article 3 of the SEPA Regulation, any payee account reachable for national credit transfers, as well as any payer account reachable for national direct debits, must also be reachable for transactions initiated by a payer through a payment service provider located in any Member State. Comp. with Recital 9 of the SEPA Regulation. 123 Ibid. Moreover, in accordance with Article 9 of the SEPA Regulation, payers and payees are prohibited from conditioning payments on the geographical location of the other party’s payment account. It has also been held that the place of residence of the counterparty to a payment transaction cannot provide the basis for the imposition of any such conditions (see Case C-28/18 Verein für Konsumenteninformation v Deutsche Bahn AG [2019] ECLI:EU:C:2019:673). 124 The Payment Services Directive 2 provides for a pan-European authorization regime for PSPs, dictating that payment systems should ensure PSPs’ access on the basis of objective, non-discriminatory and proportionate rules. On the importance of ‘[a]‌n appropriate legislative framework that supports digitalisation, innovation and competition’ for SEPA and instant payments, also see ‘Digital Transformation of the Retail Payments Ecosystem’ (Introductory Speech by Mr Yves Mersch, Member of the Executive Board of the ECB, at the Joint ECB and Banca d’Italia Conference, Rome, 30 November 2017). 125 Digital innovation could have a key role to play here by, effectively, dispensing with the need for clearing for payment transactions executed between the owners of settlement assets native to a shared ledger. 126 Digital innovations could drastically increase the speed of settlement, through recourse to distributed ledgers and Blockchain-type technology: funds could be credited instantly to the account of the payee, if both the payor and the payee held accounts (and funds) within the same ledger, without the need for recourse to intermediaries, and without the delays (and costs) that their involvement entails. 127 There are, of course, other issues, including, for instance, that of the definition of the value date: if an instant payment solution is not available 24-7-365 (on account of a temporary outage) it will be essential for the parties to a payment transaction processed through it to be in a position to determine the value date for outgoing and incoming instant payments initiated outside the instant payment solution’s business hours or during

24.50

732 PAYMENT SYSTEMS of interoperability across different payment systems, so as to achieve the widest possible coverage of end-users, the protection of payments from external threats (including cyber- threats),128 error-detection and remediation,129 as well as legal and regulatory compliance (especially in respect of the consistency of their security and validation processes with anti- money laundering and counter-terrorist financing (AML/CTF) rules and regulations and local know-your-customer regulations).130 24.51

The Eurosystem’s involvement in the instant payments space originally took the form of support to private sector-driven instant payment solutions and, notably, to the intermediation services of automated clearing houses (ACHs), by technically facilitating, through TARGET2, the cash settlement process of PSPs when conducting instant payments through ACHs to which they participate as clearing members.131 With a view to promoting European integration in the field of instant payments, the Eurosystem decided, in June 2017, to develop its own, TARGET instant payment settlement (TIPS) service. The Governing Council of the ECB adopted the TIPS legal framework in August 2018, and TIPS was launched in November 2018,132 with the policy objective of facilitating pan-European reachability for instant payments (thus supporting the emergence of a European instant payments market), and extending the availability of settlement in CeBM on a 24-7-365 basis by offering real- time, final and irrevocable fund transfers in CeBM. The main focus of TIPS is on PSPs, and on the provision to the latter of a ‘front-to-end’ instant payment service (ie one that does not include a separate clearing stage as part of the process for effectuating instant payments) with immediate settlement in central bank money.133 By providing the TIPS service, the Eurosystem seeks to ensure that demand for instant payments can be met through the safe an outage. In the EU, the PSD prohibits the back valuation of the debit date for outgoing payments, and stipulates that the value date of incoming payments is to be the date of the funds’ inflow to the payee’s PSP (what is the value date of incoming payments received outside business hours?). Similar legal constraints may apply in other parts of the world. Thus, policy-makers may wish to consider whether ex ante value date conventions are desirable or whether, failing that, faster payment service providers should at least have the duty to inform customers of the time span for the execution of faster payments (subject to a duty of compensation, for delays attributable to their acts or omissions). 128 For a reflection of the acute interest of the official sector in matters of relevance to cyber security, especially in a payments context, see CPMI, Cyber resilience in financial market infrastructures (BIS 2014). 129 The immediacy of instant payments makes it harder to detect errors and correct them, since the window of opportunity for either or the above is narrower compared to ‘slow’ and/or manually processed payments. 130 The reference, here, is to the in-built potential of payment systems to communicate with other systems without any effort on the part of their end-users. For an account of issues specific to payment systems interoperability, see Carol C Benson and Scott Loftesness, ‘Interoperability in Electronic Payments: Lessons and Opportunities’ (2012) CGAP accessed 22 January 2020. 131 The reference is to the introduction, through ECB Guideline (EU) 2017/2082 of 22 September 2017 amending Guideline ECB/2012/27 on a Trans-European Automated Real-time Gross settlement Express Transfer system (TARGET2) (ECB/2017/28) [2017] OJ L295/97, of ‘settlement procedure 6 real-time’ for ancillary systems (ASI6-RT). ACHs fall under the TARGET2 Guideline’s definition of an ‘ancillary system’. 132 See, ECB, ‘ECB Goes Live with Pan-European Instant Payments’ (Press Release, 30 November 2018). 133 Although it is mainly credit institution PSPs that are eligible to directly participate in TIPS as holders of settlement accounts for instant payments (‘TIPS Dedicated Cash Accounts’ or ‘TIPS DCAs’), TIPS applies a flexible access structure, under which PSPs may also connect to TIPS as ‘reachable parties’. The latter can settle their instant payment orders on the TIPS DCA of a direct participant, ie without the need to open and maintain an own TIPS DCA. This arrangement accommodates the needs of, especially, non-credit institution PSPs, which, although not eligible to access central bank money, are increasingly becoming key players in retail payments.

Recent Developments and Future Prospects 733 and efficient infrastructure of TARGET2, which serves as the technical platform of the TIPS service.134

B. Virtual currencies, stablecoins, and their use in payments Virtual currencies can be defined as any privately-issued, tradable, digital representation of value, which meets the functional definition of money, but which does not enjoy legal tender status in any one jurisdiction, nor represents a claim against a central bank or another central issuing authority, nor has, in principle, any physical representation. For their part, stablecoins are a novel type of privately-issued currency, the issuers of which seek to attain price stability by backing its value with a pool of ‘reserve assets’, including fiat currencies or commodities. The best-known example, to date, of a stablecoin is Libra, Facebook’s private currency, scheduled for release in the first half of 2020. The use of virtual currencies and stablecoins as a means of payment would give rise to a litany of legal concerns, some of which are highlighted below.

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First and foremost amongst those challenges is that of their legal characterisation (whether as money, property, commodities, securities, contractual or other, sui generis, rights), and of the certainty and enforceability of the ‘rights’ they evidence. The Commission had proposed, already in 2016, the first-ever EU legal definition of virtual currencies, defining ‘virtual currencies’ as ‘a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically’.135 Authoritative definitions of stablecoins had yet to materialize at the time of writing. Without clarity on their legal status, and on the nature of the rights they embody, it is difficult to see how these can compete with fiat currencies and established cash alternatives as means of payment (for retail or, a fortiori, wholesale payments), especially in a cross-border context, where clarity on their public and private law attributes is crucial.

24.53

The ability of virtual currency and stablecoin networks to achieve settlement finality is another major source of concern with their eventual wide-spread use as means of payment. Depending on the specifics of their design, decentralised payment solutions relying on the use of virtual currencies and stablecoins may not achieve finality, an essential attribute of any sound and reliable FMI. The finality of payment transactions processed by virtual currency and stablecoin networks need not match the legal understanding of the concept of

24.54

134 In TIPS, instant payments are processed on a technically separate platform, which, from a legal point of view, is part of TARGET2; in other words, TIPS does not constitute an individual ‘system’ within the meaning of the SFD, being instead incorporated into TARGET2. 135 Commission, ‘Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC’ COM (2016) 450 final, 30. The same definition of ‘virtual currencies’ now appears in Article 3 AMLD4, as amended by AMLD5 (European Parliament and Council Directive (EU) 2018/843 of 30 May 2018, amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/ EC and 2013/36/EU [2018] OJ L156/43; as well as in Article 2(d) of European Parliament and Council Directive (EU) 2019/713 of 17 April 2019 on combating fraud and counterfeiting of non-cash means of payment and replacing Council Framework Decision 2001/413/JHA [2019] OJ L123/18.

734 PAYMENT SYSTEMS finality (as enshrined in the SFD),136 and it is not clear to what extent the currently applicable statutory settlement finality safeguards would apply to decentralized payment solutions, to the extent that these may not qualify as ‘systems’. The finality properties of different virtual currency or stablecoin networks would need to be explored and understood, and decentralized ledgers used for the processing of transactions settled in virtual currencies or stablecoins would need to be brought within the scope of the national settlement finality rules (alternatively, those rules should be revisited), to ensure that payments settled in them enjoy the same level of finality as those settled by the centralized payment system. 24.55

Another challenge posed by virtual currencies, in particular, is linked to the avoidance of the risk of its ‘double spending’, defined as the (illicit) re-use of digital financial assets through the simultaneous or consecutive submission, within a virtual currency network, of payment transactions or other asset transfers relating to funds or assets already allocated to one or more other payment transactions or value transfers. Modern, centralized payment systems address this concern through the existence of centralized records (master ledgers), usually maintained at the level of the body situated at the apex of the payment system (the central bank or national monetary authority). The aim of the master ledger is to reflect the flow of money across the various accounts within the payment system, and to record, in a reliable manner, adjustments in the balances of those accounts, in line with the incoming and outgoing flows. Decentralized payment systems that settle transactions in virtual money will lack a master ledger (this will typically be substituted by a distributed ledger framework, which can avert the risk of ‘double spending’ provided their validation and verification protocol is robust and immune to external interference).

24.56

The risk of system-wide fraud is another concern specific to the use of virtual currencies and stablecoins. Decentralized payment systems settling transactions in virtual money or stablecoins are more susceptible to system-wide fraud, compared to centralized payment systems, should the process of achieving consensus among their participants (in terms of the creation and putting in circulation of new virtual money) be compromised. Cryptographic currency schemes, such as bitcoin, are designed so that would-be fraudsters would require sustained control of a majority of the total computer power across the entire network of ‘currency miners’ to be able to tamper with the decentralized digital records of transactions. Harmonized technical safeguards, subject to regular review, will be necessary, to ensure that loosely coordinated pools of miners cannot muster, through collusion, the degree of computing power within a given crypto currency network necessary for them to be in a position to fraudulently alter the decentralized ledgers on the basis of which that particular network operates.

C. Concluding remarks on technological innovation in payments 24.57

Without prejudice to the foregoing, technological innovation and digital payment solutions that bypass, partially or entirely, the banking system and retail card network, raise a 136 Virtual currency or stablecoin networks may not achieve ‘finality’ in the legal sense of the term, but, technically speaking, they can offer ‘irreversibility’. This, in turn, may generate difficulties, in the event of honest errors or manifestly improper transactions.

Recent Developments and Future Prospects 735 number of horizontal issues, relevant to upholding the public interest in the preservation of trust in payments and the payment system at large. Legal safeguards are necessary to ensure that technological innovation does not (i) expose payment transactions and their counterparties to novel risks, in the form of criminally-motivated theft-identity and/or tampering with digital records; (ii) preclude the detection and prompt remediation of honest errors; (iii) diminish the ability of authorities to monitor the compliance of payment system participants with public law-driven AML/CTF safeguards; and (iv) provide the counterparties to payment transactions with opportunities to avoid the obligations they assume under those transactions (eg on account of the absence of trusted intermediaries, acting as points of reference in the event of discrepancies). Thus, some of the key horizontal legal challenges for technological innovation as applied to payments are first, cyber-security (to prevent crime); second, the remediation of genuine errors (as an exception to settlement finality in payment transactions); third, continuing compliance with public-policy motivated constraints to access to the payment system and/or its use for transfers serving illicit purposes; and fourth, trust-building, both amongst payment system participants and vis-à-vis the payment system as a whole. The jury is out on whether it will prove possible to overcome the vulnerabilities and the issues of trust that the use of modern technology in the field of payments would appear to give rise to.137 Until then, this author would expect regulators, including central banks, and policy-makers to remain vigilant, keeping track of the inroads of technological innovations into the contemporary world of payments, so as to protect the public interest in efficient and sound payment systems, while at the same time standing ready to reap the benefits of technological innovation where there is a proven need for its use.

137 In the same vein see Yves Mersch, ‘Money and Private Currencies: Reflections on Libra’ (ECB Legal Conference, Frankfurt am Main, 2 September 2019).

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25

ERM II Ulla Neergaard*

I. Introduction II. Historical Background III. Economic Rationale IV. Overall Legal Framework V. Transition of States with a Derogation to the Euro Area

25.1 25.3 25.8 25.10 25.17

VI. The Special Danish, Swedish, and British Situation A. Sweden B. United Kingdom C. Denmark

VII. Future Prospects

25.23 25.24 25.25 25.26 25.32

I. Introduction 25.1

From the very beginning, an essential cornerstone of the Economic and Monetary Union (EMU) has been the European Exchange Rate Mechanism II (ERM II). It has been in force since 1 January 1999, ie from the initiation of the third phase of the EMU. Its overall purpose is to link currencies of Member States outside the euro area to the euro. Its importance lies in the fact that aspiring Member States must first join the mechanism for at least two years before being admitted as members of the euro area, as ERM II ‘membership’ is one of the four convergence criteria, which are required to be fulfilled for a Member State’s eventual adoption of the euro.

25.2

In what follows, the historical background to the mechanism (Section II) and the underlying economic rationale (Section III) will be outlined, followed by an analysis of its legal framework (Section IV). Subsequently there will follow an outline of the distinction between Member States whose currency is the euro and Member States with a derogation, focusing on the requirements, which are pre-conditions to concrete participation in the ERM II (Section V). Thereafter, there will follow an analysis of the special Swedish, British and Danish situation with the primary focus on Denmark, as this country at present is the only one participating in the mechanism (Section VI). The chapter ends with a limited discussion of future prospects (Section VII).

II. Historical Background 25.3

Historically, countries have been pegging the value of their own currencies to some anchor—either a foreign currency or a commodity such as gold—over whose value they have Ulla Neergaard, 25 ERM II In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0030

Historical Background 737 little control.1 The advantage is that if the value of the anchor does not change too quickly, and the peg is credible, then the domestic currency will also remain stable.2 The ERM II may be understood in light of its historical roots in such kinds of arrangements, which hitherto have existed in many different forms. In that regard, the first thing worth mentioning is the gold standard arrangement, which was the dominant international exchange rate system between the mid-nineteenth century and the early mid-twentieth century.3 According to that arrangement, the central bank of every participating country had to stand ready to exchange its currency for gold at some fixed ratio.4

25.4

Secondly, it was also to some degree rooted in the Bretton Woods system, which was established after World War II and survived until 1971. It was a system of fixed exchange rates, where all currencies were fixed against the US dollar, which itself was traded at a fixed rate against gold.5

25.5

There then followed a few years (from 1972 to 1978) when the so-called European ‘currency snake’ was used.6 This had been established as an attempt to recreate the collapsed Bretton Woods system in a European context. It ended up using the D-mark as the anchor currency.7 Soon, however, the last important predecessor of ERM II, namely the European Exchange Rate Mechanism (ERM), was established by the EEC on 13 March 1979 to keep the participating currencies within a narrow band.8 It was a mechanism also known as a semi-pegged system, which was established as a part of the European Monetary System (EMS).9 The mechanism was conceived as a system of fixed but adjustable exchange rates (a successor to the snake).10

25.6

Self-evidently, the history of the ERM II is also closely linked to the history of the euro and the EMU, and thereby associated with the recurring ambition in that regard which had

25.7

1 Markus Konrad Brunnermeier, Harold James, and Jean-Pierre Landau, The Euro and the Battle of Ideas (Princeton UP 2016) 89 (hereafter Brunnermeier, James, and Landau, The Euro and the Battle of Ideas). 2 Ibid, 89. 3 Ibid, 76. 4 Ibid. 5 Ibid, 77. 6 See generally about this construct, Harold James, Making the European Monetary Union (Harvard UP 2012) 89ff (hereafter James, Making the European Monetary Union). 7 Kim Abildgren, Monetary History of Denmark 1990–2005 (Danmarks Nationalbank 2010) 27–28 (hereafter Abildgren, Monetary History of Denmark 1990–2005). See further Chapter 2. 8 Brunnermeier, James, and Landau, The Euro and the Battle of Ideas (n 1) 80. See generally about this construct, James, Making the European Monetary Union (n 6) 146f. 9 For a description of the history of the EMS, see eg Dan Ciuriak, ‘Is the European Exchange Rate Mechanism a Model for East Asia?’ (2003) 30 Asian Affairs: An American Review 3, 8, where it is viewed as having consisted of three periods, namely ‘the early phase, from 1979 to 1987; the subsequent “new EMS” phase, which extended from the Basel-Nyborg Agreement of September 1987 through the ERM crisis of 1992; and the postcrisis period up to the establishment of monetary union at the beginning of 1999’. 10 Rosa M Lastra, International Financial and Monetary Law (OUP 2015) 228, who also explains: The ERM was a parity grid of bilateral exchange rates, with interventions limiting the swings in currency prices between pre-announced floors and ceilings . . . The currencies could fluctuate against each other within a maximum band of plus or minus 2.25 per cent (or 6 per cent for currencies at the beginning of their participation in the ERM). The central banks were committed to intervening in order to attempt to maintain their currencies within the established fluctuation margins . . . The ERM set for each one of the participating currencies a central exchange rate against the ECU. That, in turn, gave them central cross-rates against one another. The term, ECU, refers to the term European Currency Unit.

738 ERM II begun to emerge in the late 1960s. Ultimately, it is thus linked with a vision of establishment of increased economic stability and an environment of higher growth and employment. In that context, the European Council decided in its Resolution of 16 June 1997 to set up the ERM II, when the third stage of the EMU was due to begin on 1 January 1999.11 It was therefore resolved that the EMS would be replaced by the ERM II as defined in the Resolution.

III. Economic Rationale 25.8

The core of the ERM II was stipulated in the Resolution of 16 June 1997 as linking currencies of Member States outside the euro area to the euro, which was intended to be the centre of the new mechanism. It was envisaged that it would function within the requisite framework of stability-orientated policies in accordance with the EC Treaty. The main rationales behind the mechanism were explained as follows: Lasting convergence of economic fundamentals is a prerequisite for sustainable exchange- rate stability. To this end, in the third stage of economic and monetary union all Member States must pursue disciplined and responsible monetary policies directed towards price stability. Sound fiscal and structural policies in all Member States are, at least, equally essential for sustainable exchange-rate stability. A stable economic environment is necessary for the good functioning of the single market and for higher investment, growth and employment and is therefore in the interest of all Member States. The single market must not be endangered by real exchange-rate misalignments, or by excessive nominal exchange- rate fluctuations between the euro and the other EU currencies, which would disrupt trade flows between Member States . . . The exchange-rate mechanism will help to ensure that Member States outside the euro-area participating in the mechanism orient their policies to stability, foster convergence and thereby help them in their efforts to adopt the euro. It will provide those Member States with a reference for their conduct of sound economic policies in general and monetary policy in particular. At the same time, the mechanism will also help to protect them and the Member States adopting the euro from unwarranted pressures in the foreign-exchange markets . . .12

25.9

Accordingly, the ultimate aim is stability, but it is also of central importance to avoid misalignments or fluctuations between the euro and the other EU currencies.13 However, by

11 European Council Resolution of 16 June 1997 on the establishment of an exchange-rate mechanism in the third stage of economic and monetary union [1997] OJ C236/5. The considerations at the time and the negotiations themselves are described by Kirsten Rohde Jensen, ‘Inside EU, Outside EMU: Institutional and Legal Aspects of the Exchange Mechanism II’ in ECB (ed), Legal Aspects of the European System of Central Banks (ECB 2005) 137 (hereafter Jensen, ‘Inside EU, Outside EMU: Institutional and Legal Aspects of the Exchange Mechanism II’). 12 European Council Resolution on the establishment of an exchange-rate mechanism in the third stage (n 11) ss 1.1–1.3. 13 The rationales have been repeated over time, see eg Agreement of 13 November 2014 between the European Central Bank and the national central banks of the Member States outside the euro area amending the Agreement of 16 March 2006 between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union [2015] OJ C64/1, where it is stated that the ERM II is: designed to help ensure that non-euro area Member States participating in ERM II orient their policies to stability, foster convergence and thereby help the non-euro area Member States in their efforts to adopt the euro.

Overall Legal Framework 739 ‘fostering convergence’ the ERM II also functions as an instrument to prepare non-euro Member States for participation in the single currency.

IV. Overall Legal Framework The ERM II is regulated in the Lisbon Treaty itself, although only relatively briefly. Of greater importance, however, its central concepts are referred to in Article 140(1) TFEU in the context of the convergence criteria and the position of Member States with a derogation (ie Member States in respect of which the Council has not decided that they fulfil the necessary conditions for the adoption of the euro). It is the third of the four convergence criteria, which is of interest here. Thus, it significantly is stipulated that an aspiring Member State shall have observed the normal fluctuation margins provided for by the ERM II, for at least two years, without devaluing against the euro. Protocol No 13 on the convergence criteria expands further on this. In Article 3, it is stipulated that:

25.10

The criterion on participation in the Exchange Rate mechanism of the European Monetary System referred to in the third indent of Article 140(1) of the said Treaty shall mean that a Member State has respected the normal fluctuation margins provided for by the exchange- rate mechanism on the European Monetary System without severe tensions for at least the last two years before the examination. In particular, the Member State shall not have devalued its currency’s bilateral central rate against the euro on its own initiative for the same period.

The ERM II is in other words a construct serving the purpose of establishing a kind of ‘waiting room’ for aspiring Member States which, in part and to the extent possible, ensures that only Member States, which are truly ‘ready’ to join the euro, are allowed to. Participation in the ERM II is viewed not only as supporting the stability of a given Member State’s currency, but also as providing a way to evaluate its prospects in relation to a possible transfer to the euro area. The use of the term ‘at least two years’ indicates that the intention was only to set up a minimum requirement as to the length of participation.

25.11

If and as long as there are Member States with a derogation, the ECB must, in line with Article 141(2) TFEU as regards those Member States, monitor the functioning of the ERM. Furthermore, in Article 142 TFEU, it is emphasized that each Member State with a derogation shall treat its exchange-rate policy as a matter of common interest and, in so doing, Member States shall take account of the experience acquired in cooperation within the framework of the exchange rate mechanism.

25.12

The abovementioned Resolution of 16 June 1997 stipulates that the ERM II will be based on central rates against the euro and that the standard fluctuation band will be relatively wide.14 More specifically, a central rate against the euro will be defined for the currency of each Member State outside the euro area participating in the exchange rate mechanism:

25.13

14 European Council Resolution on the establishment of an exchange-rate mechanism in the third stage (n 11) s 1.7.

740 ERM II 25.14

There will be one standard fluctuation band of plus or minus 15 per cent around the central rates. Intervention at the margins will in principle be automatic and unlimited, with very short-term financing available. However, the ECB and the central banks of the other participants could suspend intervention if this were to conflict with their primary objective. In their decision they would take due account of all relevant factors and in particular of the need to maintain price stability and the credible functioning of the exchange-rate mechanism.15

25.15

Moreover, it is provided that the exchange-rate mechanism will function without prejudice to the primary objective of the European Central Bank and the national central banks to maintain price stability.16 Regarding the decision-making process, it is stipulated that decisions on central rates and the standard fluctuation band shall be taken by mutual agreement of the ministers of the euro area Member States, the ECB and the ministers and central bank governors of the non-euro area Member States participating in the mechanism, following a common procedure involving the European Commission, and after consultation with the Economic and Financial Committee.17 However, also the ministers and governors of the central banks of the Member States not participating in the exchange rate mechanism take part, but do not have the right to vote in the procedure.18

25.16

The Resolution furthermore states that an agreement concerning the operating procedures of the mechanism is expected to be concluded between the European Central Bank (ECB) and the national central banks.19 Accordingly, the mechanism was originally based on an Agreement of 1 September 1998 between the ECB and the national central banks situated in the countries outside the Eurozone,20 which however has been amended several times since then, and ultimately replaced by a new Agreement of 2006,21 which again has also been amended several times.22 Here, the overall topics touched upon are: (1) central rates 15 Ibid, s 2.1. 16 Ibid, s 1.5. 17 Ibid, s 2.3. See for a critique in this regard, Chiara Zilioli and Martin Selmayr, The Law of the European Central Bank (Hart Publishing 2001) 207–09 (hereafter Zilioli and Selmayr, The Law of the European Central Bank), where it is among others indicated that: It is questionable whether such a new procedure, which is not foreseen by the EC Treaty, may be established by a Resolution of the European Council at all, and if so under what legal basis. The European Council as such neither has the competence to amend the EC Treaty . . . nor could it derogate from it by way of an international agreement between the Member States sitting in the European Council, even if it was considered that the Resolution amounts to such an agreement, nor has it—not being part of the institutional framework of the Community . . . —a power to act in a legally binding manner under the EC Treaty, to commit the Community institutions or even to give instructions to the ECB . . . That the ECB, under this common procedure, has a right to veto any decision on central rates or fluctuation bands does not sufficiently reflect its implied (exclusive) external competence in relation to Community currencies. In this respect, it is striking that the ECB is not in a position to adapt autonomously the central rates to new economic developments, but has only the possibility of initiating a procedure for reconsidering these rates. 18 European Council Resolution on the establishment of an exchange-rate mechanism in the third stage (n 11) s 2.3. 19 Ibid, 2.2. 20 Agreement of 1 September 1998 between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union [1998] OJ C345/05. 21 Agreement of 16 March 2006 between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union [2006] OJ C73/21. 22 For an overview of amendments, see accessed 30 January 2020.

Transition of States with a Derogation 741 and fluctuation bands; (2) intervention; (3) very short-term financing facility; (4) closer exchange rate cooperation; (5) monitoring the function of the system; and (6) non- participation. The agreement is often referred to as the ERM II-agreement. The parties to it are according to Zilioli and Selmayr acting under public international law by virtue of their (limited or derivative) international legal personality.23

V. Transition of States with a Derogation to the Euro Area When the third phase of the EMU entered into force on 1 January 1999, the eleven participating Member States were: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. These had all been ERM Member States, so that there were only two ERM Member States, namely Denmark and Greece, which were not ‘selected’.24 Today, altogether nineteen Member States have now adopted the euro, including Cyprus (2008), Estonia (2011), Greece (2001), Latvia (2014), Lithuania (2015), Malta (2008), Slovakia (2009), and Slovenia (2007). These latter eight Member States had beforehand fulfilled the convergence criteria including participation in the ERM II.25 Nine Member States are however still outside, namely: Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden, and United Kingdom. Among these, there is presently only one currency in the ERM II, namely the Danish Krone. The UK which, in any event, is about to leave the EU, and Denmark have de jure arrangements to stay outside the euro. Importantly, these two arrangements are not completely identical.26 Sweden is considered to have a de facto exemption.27 Thus, it is at present only six of the eight Member States, namely Bulgaria, Croatia, Czech Republic, Hungary, Poland, and Romania, which realistically can be expected eventually to join the euro, provided first and foremost, they have attained a sufficiently sound development of their respective economies.28

23 Zilioli and Selmayr, The Law of the European Central Bank (n 17) 207. More generally about international law and the EMU, see eg Angelos Dimopoulos, ‘The Use of International Law as a Tool for Enhancing Governance in the Eurozone and its Impact on Institutional Integrity’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), The Constitutionalization of European Budgetary Constraints (Hart Publishing 2014) 41–63; Michael Ioannidis, ‘Towards a European Monetary Fund: Comments on the Commission’s Proposal’ (EU Law Analysis, 31 January 2018) accessed 30 January 2020; Bruno de Witte, ‘Using International Law in the Euro Crisis: Causes and Consequences’ (2013) Arena Working Paper 4/2013, 1–23 accessed 30 January  2020. 24 Abildgren, Monetary History of Denmark 1990–2005 (n 7) 56. 25 For further details, see Commission, ‘EMR II—the EU’s Exchange Rate Mechanism’ accessed 30 January  2020. 26 See on this matter further Section VI. 27 Ibid. 28 According to the various Accession Treaties, it is only expressed that it is expected that each of the new Member States shall participate in the EMU from the date of accession as a Member State with a derogation within the meaning of the Treaty. See in that regard, eg Article 4 of the Treaty concerning the Accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia, and the Slovak Republic to the European Union [2003] OJ L236/33, which entered into force on 1 May 2004; or more recently, Article 5 of the Treaty concerning the Accession of Croatia to the European Union [2012] OJ L112/10. This is understood by Kristyn Inglis, ‘The Union’s Fifth Accession Treaty: New Means to make enlargement possible’ (2004) 41 Common Market Law Review 937, 948, as:

25.17

742 ERM II 25.18

As already briefly touched upon above, those Member States, which have not adopted the euro, are referred to as Member States with a derogation (cf Article 139 TFEU).29 It is, in particular, Articles 139–144 TFEU that regulate these Member States’ special legal status, including the conditions for abrogation of a derogation.30 In the light of Article 140(2) TFEU it may be understood that, after consulting the European Parliament and after discussion in the European Council, it is the Council, on a proposal from the Commission, which decides which Member States with a derogation fulfil the necessary conditions and abrogate the derogations of the Member States concerned. At that stage, it appears—at least formally—to be out of the hands of a given Member State with a derogation to decide if, having changed its mind, not to join the euro after all. The aforementioned Resolution of 16 June 1997 adds to the general regulation of this aspect by stipulating that:

25.19

Participation in the exchange-rate mechanism will be voluntary for the Member States outside the euro area. Nevertheless, Member States with a derogation can be expected to join the mechanism. A Member State which does not participate from the outset in the exchange-rate mechanism may participate at a later date.31

25.20

Against this background, it is understood that it is in principle voluntary for a Member State with a derogation to participate in the ERM II. Yet, somewhat cryptically, it is at the same time expected that such a State will participate at a later date, although what such ‘expectation’ includes and when this ‘later date’ is envisaged to take place is not spelled out in explicit terms. In effect, a Member State has a right of refusal to join. Also, as pointed out by Jensen, the Resolution makes no mention of entry conditions and provides no reasons for a refusal of an application.32 Also Lastra and Louis contribute to the understanding of the [U]‌pon accession, the new Member States do not transfer their monetary sovereignty . . . The new Members are given no possibility for opt-out comparable to that of the UK for e xample . . . In similar vein, Christoph Herrmann, ‘Monetary Sovereignty over the Euro and External Relations of the Euro Area: Competences, Procedures and Practice’ (2002) 7 European Foreign Affairs Review 1, 20–21, explains: There will thus be no opting-out for any of the candidate countries as regards EMU . . . Once they become a member of the Union they will also be a part of EMU, but with a derogation . . . Before a decision about their participation in Stage three can be taken, they will have to fulfil the convergence criteria, including participation in ERM II . . . From the date of their accession, they will be required to treat their economic and exchange rate policies as matters of common concern and they are principally expected to join ERM II. Otherwise, they will not be able to fulfil the convergence criteria. 29 As to the assessment of these countries’ convergence, see ECB, ‘Convergence Report 2016’ (June 2016) accessed 30 January 2020 (hereafter ECB, ‘Convergence Report 2016’). Here, in addition to ERM II participation and nominal exchange rate developments against the euro over the period under review, evidence relevant to the sustainability of the current exchange rate is briefly reviewed (see 13). Regarding the ERM II in particular, see especially, 49ff, where it is stated that none of the seven countries examined in the report participates in ERM II and that these countries operate under different exchange rate regimes, which are further described in the report. 30 See further Chapter 8. 31 European Council Resolution on the establishment of an exchange-rate mechanism in the third stage (n 11) s 1.6. 32 Jensen, ‘Inside EU, Outside EMU: Institutional and Legal Aspects of the Exchange Mechanism II’ (n 11) 140. Also see Peter Backé and others, ‘The Acceding Countries’ Strategies towards ERM II and the Adoption of the Euro: An Analytical Review’ (2004) ECB Occasional Paper Series No 10, 6, who point out: Participation in the exchange rate mechanism will be voluntary for the Member States outside the euro area. Nevertheless, Member States with a derogation can be expected to join the mechanism, while a Member State which does not participate from the outset in the exchange rate mechanism may do so at a later date. The Resolution makes no mention accord on the central parity and fluctuation bands needs to be reached, provides no grounds for a refusal of the application. However, ‘all parties to the mutual agreement, including the ECB, have the right to initiate a confidential procedure aimed at reconsidering central rates’.

Transition of States with a Derogation 743 issues at stake through the following critique of the facultative feature of the ERM II, which they see as contradictory with the fact that the participation over the two-year period is listed by the Treaty as one of the convergence criteria for the adoption of the euro: There are good arguments for considering that, on this matter, the Resolution is not in line with the Treaty. The Resolution of 1997 assigns two complementary objectives to the ERM2. First, it aims at ensuring monetary stability which is a necessity for European Economic and Monetary Union the smooth functioning of the single market and the development of investments, growth, and employment. Secondly, the participation in ERM2 should orientate the policies of Member States towards stability, facilitate convergence, and support their efforts towards joining the euro. For the authors of the Resolution, participation in ERM2 would contribute to the equality of treatment of all the candidates as far as respect of convergence criteria is concerned. There are no pre-established criteria for participation in ERM2 but as the Policy position adopted on 18 December 2003 by the Governing Council specifies, adjustments in macro-economic policies are needed for a harmonious participation in the field of price liberalization and fiscal policy. Participation in ERM2 is but one element of the general framework of economic policy. It has to be compatible with other elements of this framework, in particular, with monetary, budgetary, and structural policies. The central rate adopted for the participation must of course reflect the best evaluation possible of the equilibrium exchange rate at the moment of accession to the mechanism.33

Obviously, it is a very sensitive issue to what degree all Member States with a derogation eventually are supposed to become members of the euro area and thereby to surrender national monetary sovereignty. Ultimately, the issue is related to the question as to what degree a multi-speed union is desirable or not.34 Therefore, it is not too surprising that this issue was touched upon in relation to the In/Out referendum in the UK (‘Brexit’). Thus, in the Conclusions of the European Council arising from its summit on 18–19 February 2016, the same cryptic pattern as discussed above is discernible: 33 Rosa M Lastra and Jean Victor Louis, ‘European Economic and Monetary Union: History, Trends, and Prospects’ (2013) 32 Yearbook of European Law 57, 87–88. Also see Jean-Victor Louis, ‘The Economic and Monetary Union: Law and institutions’ (2004) 41 Common Market Law Review 575, 604–05, who adds to the understanding of the general matters at stake in the following manner: First, the participation in the ERM II was conceived by the authors of the Resolution of 16 June 1997 as being not legally compulsory for the Member States not participating in the euro . . . There are two reasons for that. On the one hand, the central bank of the country concerned must be capable of complying with the obligations of the Mechanism. It has to be admitted by the other participants. On the other hand, both the UK and Sweden, for reasons which are partly different, were against something like a legal commitment to participate in the ERM. Hence, in particular, the choice of a resolution of the European Council to adopt the ERM II. However, since the participation in stage three of EMU is an obligation for those Member States without an opt-out (or opt-in) facility, there is an underlying obligation to do whatever is needed in order to be able to join the final stage of EMU . . . This obligation is one that could not easily be subject to sanctions. Why? Because, right from the beginning of the 1990s, it was recognized in the literature, . . . and perhaps more importantly, in the facts, that a Member State could not be constrained to join, due to the global undertaking that such a change over pre-supposes. EMU is not a ‘policy of the Union’ like the other policies, as the draft Constitution seems to imply. It is a new way for the State concerned to participate in European integration, which implies legislative, administrative, logistic and operational actions, not to mention the preparation of the private sector and the citizens. Without the active participation of all the actors, the changeover is not possible. 34 In that regard, see eg Commission, ‘White Paper on the Future of Europe, Reflections and Scenarios for the EU27 by 2025’ COM (2017) 2025; Commission, ‘Reflection Paper on the Deepening of the European Economic and Monetary Union’ COM (2017) 291.

25.21

744 ERM II In order to fulfil the Treaties’ objective to establish an economic and monetary union whose currency is the euro, further deepening is needed. Measures, the purpose of which is to further deepen economic and monetary union, will be voluntary for Member States whose currency is not the euro and will be open to their participation wherever feasible. This is without prejudice to the fact that Member States whose currency is not the euro, other than those without an obligation to adopt the euro or exempted from it, are committed under the Treaties to make progress towards fulfilling the conditions necessary for the adoption of the single currency.35 25.22

Also, it is of interest that, to the Central Bank of the at times only ERM II-participating country, it has quite understandably been essential that the mechanism should remain a well-functioning fixed-exchange-rate mechanism vis-à-vis the euro.36 Consequently, this point has been emphasized in discussions on the participation of new Member States in the ERM II.37 In particular, it has been stressed that new states should adjust their monetary and fiscal policies prior to joining to bring their stabilization-policy frameworks in line with the requirements of a fixed-exchange-rate policy, and that a key prerequisite of successful participation therefore was that government budgets were under control.38 However, as pointed out above, such requirements are not formally in force.39

VI. The Special Danish, Swedish, and British Situation 25.23

As briefly touched upon above, three of the Member States with a derogation, namely Denmark, Sweden, and the United Kingdom, are in a special situation, as Sweden is considered to have a de facto ‘exemption’, which is in contrast to Denmark and the UK, which have de jure ‘exemption’.

A. Sweden 25.24

The background to the somehow curious Swedish arrangement is a non-binding referendum regarding the euro, which took place in Sweden in 2003. A majority of 55.9 per cent voted against introducing the euro as currency, whereas 42 per cent voted in favour.40 Since then, public support for introducing the euro has mainly been in the negative.41 35 European Council, ‘European Council meeting—Conclusions’ (EUCO 2/16, 18 and 19 February 2016) 12. 36 Abildgren, Monetary History of Denmark 1990–2005 (n 7) 70. 37 Ibid. 38 Abildgren, Monetary History of Denmark 1990–2005 (n 7) 70. 39 Commission, ‘The history of the euro’ accessed 30 January 2020, where it is explained that at present, the Bulgarian lev is pegged to the euro at a constant rate and that Croatia also targets a stable nominal exchange rate with the euro. 40 See for a detailed discussion of the referendum, Ulf Bernitz and others, ‘Sweden’ in Ulla Neergaard, Catherine Jacqueson, and Jens Hartig Danielsen (eds), The Economic and Monetary Union: Constitutional and Institutional Aspects of Economic Governance within the EU (Djøf Publishing 2014) 583ff (hereafter Bernitz and others, ‘Sweden’). 41 Eleonor Kristoffersson and Joakim Nergelius, ‘Fact sheet on legal foundations for fiscal, economic, and monetary integration: Sweden’ (EMU Choices: The Choice for Europe since Maastricht, Salzburg Centre of European Studies 2016) 1–2 accessed 30 January 2020 (hereafter Kristoffersen and Nergelius, ‘Fact sheet on legal foundations for fiscal, economic, and monetary integration’). Here, it is indicated that in May 2015 the public opinion was 75 per cent against and only 15 per cent in favour of the euro.

The Danish, Swedish, and British Situation 745 As a consequence, Sweden has never formally decided to join the ERM II as, at present, it would not want to do so against the wishes of the electorate. A fortiori, any such decision might lead, after approximately two years, to being driven to join the euro itself and so it could appear as ‘safer’ to stay out of the mechanism. As explained by Bernitz and others, Sweden has autonomously decided not to take part in ERM II, as the EU has never decided to keep Sweden outside the system.42 The country applies a floating exchange rate.43 Except for the ERM II aspect, Sweden has always met all the other relevant convergence criteria.44 Thereby, Sweden is assessed as behaving as if it has a binding right to stay outside the third phase of the EMU. This choice could, on the one hand, be viewed as a pragmatic solution to a difficult dilemma, but on the other hand of course, having regard to the overall intention behind the cooperative economic framework and to the initial promises made by Sweden, it seems also rather critical when viewed from outside a purely national context. This is not least so because the country with its sound economy and organization of society would be an attractive partner to include in the cooperation.

B. United Kingdom The British arrangement dates back to the adoption of the Maastricht Treaty and is normally referred to as an ‘opt-out’ arrangement. It implies that the UK is not obliged to participate in the third phase of the EMU unless it actively decides otherwise.45 Protocol 15 of the Lisbon Treaty states that unless the UK notifies the Council that it intends to adopt the euro, it shall be under no obligation to do so, with the consequence that the UK shall retain its powers in the field of monetary policy according to national law.46 Thus, the country is not under an obligation to introduce the euro even if the convergence criteria are fulfilled.47 In the circumstances, it could in principle have joined the ERM II, but never did so. After the In/Out referendum in the UK (‘Brexit’) on 23 June 2016, it is obviously only a matter of time before it will no longer be of any relevance to consider this British arrangement in its present shape. This not least because the ERM II is not intended to include participants, which are not EU Member States, but also because it is unlikely that, even if this were otherwise, the UK and the EU would even be interested and if, they were, the construction of the mechanism could be altered to fit future contingencies.48

42 See for a detailed discussion of the referendum, Bernitz and others, ‘Sweden’ (n 40) 585. 43 Kristoffersen and Nergelius, ‘Fact sheet on legal foundations for fiscal, economic, and monetary integration’ (n 41) 2. 44 Kristoffersen and Nergelius, ‘Fact sheet on legal foundations for fiscal, economic, and monetary integration’ (n 41) 2. See also ECB, ‘Convergence Report 2016’ (n 29) 63–64, 134ff. 45 See eg, Francis Snyder, ‘EMU—Integration and Differentiation: Metaphor for European Union’ in Paul Craig and Gráinne de Búrca (eds), The Evolution of EU Law (OUP 2011) 703. 46 Paul Craig, ‘Fact sheet on legal foundations for fiscal, economic, and monetary integration: United Kingdom’ (EMU Choices: The Choice for Europe since Maastricht, Salzburg Centre of European Studies 2016) 1 accessed 30 January  2020. 47 In European Council, ‘European Council meeting—Conclusions’ (EUCO 2/16, 18 and 19 February 2016) 9, this special status was confirmed once again. At p 10 it is stated that the United Kingdom is entitled under the Treaties not to adopt the euro and therefore to keep the British pound sterling as its currency. 48 See generally about ‘Brexit’, eg Paul Craig, ‘Brexit: A Drama in Six Acts’ (2016) 41 European Law Review 447; Paul Craig, ‘Brexit, A Drama: The Interregnum’ (2017) 36 Yearbook of European Law 3.

25.25

746 ERM II

C. Denmark 25.26

Probably, the most paradoxical arrangement among the three discussed here is after all that of Denmark, which will thus be given slightly more attention in what follows. On the one hand, Denmark will after the exit of the UK from the EU be the only Member State with a de jure right not to join the euro area, yet the country is at the same time also the only country, which at present participates in the ERM II. In fact, together with Greece, it had already joined back in 1999, when the euro was introduced, and its participation has therefore been extremely stable and long-lasting. Perhaps even more remarkably, the country has for many years been able to fulfil the convergence criteria and is thus qualified to join the euro.49

25.27

This peculiar situation has its background in the so-called Danish ‘No’ in 1992 to the Maastricht Treaty (with only 50.7 per cent in favour thereof).50 According to the Edinburgh Agreement of 1992, the purpose of which was to assist in approval in a second referendum, four exemptions were allowed for.51 Accordingly, in a new referendum, which took place in 1993, the Danes finally accepted the Maastricht Treaty. The four opt-outs, which are still in force even today, concern Union Citizenship, EMU, Defence Policy, and Justice and Home Affairs. The opt-out regarding the euro gave Denmark the right to decide if and when it would join the euro. In more exact terms, in Section B of the Edinburgh Decision, which is included in the Edinburgh Agreement, the following is stated: (1) The Protocol on certain provisions relating to Denmark attached to the Treaty establishing the European Community gives Denmark the right to notify the Council of the European Communities of its position concerning participation in the third stage of Economic and Monetary Union. Denmark has given notification that it will not participate in the third stage. This notification will take effect upon the coming into effect of this decision. (2) As a consequence, Denmark will not participate in the single currency, will not be bound by the rules concerning economic policy which apply only to the Member States participating in the third stage of Economic and Monetary Union, and will retain its existing powers in the field of monetary policy according to its national laws and regulations, including powers of the National Bank of Denmark in the field of monetary policy. (3) Denmark will participate fully in the second stage of Economic and Monetary Union and will continue to participate in exchange-rate cooperation within the European Monetary System (EMS).52

49 See Martin Marcussen, ‘Denmark and the Euro Opt-out’ in Lee Miles and Anders Wivel (eds), Denmark and the European Union (Routledge 2014) 53, who explains that Denmark like most other countries in the EU in 2014 was no longer able to fulfil the convergence criteria. 50 See further on this referendum and more generally about the Danish relation to the EU, Morten Kelstrup, ‘Denmark’s Relation to the European Union: A History of Dualism and Pragmatism’ in Lee Miles and Anders Wivel (eds), Denmark and the European Union (Routledge 2014) 14–29. See also Anders Wivel, ‘As Awkward as They Need to Be: Denmark’s Pragmatic Activist Approach to Europe’ in Malin Stegmann McCallion and Alex Brianson (eds), Nordic States and European Integration. Awkward Partners in the North? (Palgrave 2018) 13ff. 51 Denmark and the Treaty on European Union [1992] OJ C348/1 (hereafter Denmark and the Treaty on European Union). 52 Ibid.

The Danish, Swedish, and British Situation 747 It is an international law decision and is considered to constitute a legally binding instrument, complementing the EU Treaty law.53 Pursuant to Section E, No 1, of the decision, it took effect on the date of entry into force of the Treaty on European Union and without any prior ratification in the individual Member States.54 This so-called ‘Danish euro opt-out’ can be said successively to have been transferred to the various Treaties when having been revised.55 In the present Lisbon Treaty, reference may in particular be made to the Protocols 16, 17, and 22 as of relevance to the Danish reservations.56 In that regard, it may in particular be emphasized that in Protocol No 16, the so-called ‘special Danish EMU protocol’ having its origin in the Maastricht Treaty, the following is stated:

25.28

PROTOCOL (No 16) ON CERTAIN PROVISIONS RELATING TO DENMARK THE HIGH CONTRACTING PARTIES, TAKING INTO ACCOUNT that the Danish Constitution contains provisions which may imply a referendum in Denmark prior to Denmark renouncing its exemption, GIVEN THAT, on 3 November 1993, the Danish Government notified the Council of its intention not to participate in the third stage of economic and monetary union, HAVE AGREED UPON the following provisions, which shall be annexed to the Treaty on European Union and to the Treaty on the Functioning of the European Union: 1. In view of the notice given to the Council by the Danish Government on 3 November 1993, Denmark shall have an exemption. The effect of the exemption shall be that all Articles and provisions of the Treaties and the Statute of the ESCB referring to a derogation shall be applicable to Denmark. applicable to Denmark. 2. As for the abrogation of the exemption, the procedure referred to in Article 140 shall only be initiated at the request of Denmark. 3. In the event of abrogation of the exemption status, the provisions of this Protocol shall cease to apply.57

Any change with regard to this opt-out is due to section 20 of the Danish Constitution assessed to require a referendum.58 In fact, in 2000 the Danish electorate—despite the fact that only six months earlier a fairly large share of the population was in favour of voting in the positive—voted against joining the euro in a referendum (rejection by 53.2 per cent of voters). Thus, it is not in the least likely that a new referendum will be planned in the near future, a stance which is further supported by the negative result (rejection by 53 per cent

53 Udenrigsministeriet, ‘Notat til Udenrigspolitisk Nævn om Edinburgh-aftalen’ (2008) accessed 30 January  2020. 54 Ibid. According to Section E, no 2, Denmark may at any time, in accordance with its constitutional requirements, inform other Member States that it no longer wishes to avail itself of all or part of this decision. In that event, Denmark will apply in full all relevant measures then in force taken within the framework of the European Union. 55 See, eg Folketinget EU-Oplysning, Lissabontraktaten sammenskrevet med det gældende traktatgrundlag (Folketinget 2008). 56 Also see the important political agreement among six political parties, namely ‘Politisk aftale mellem Regeringen (Venstre og Det Konservative Folkeparti), Socialdemokraterne, Socialistisk Folkeparti, Det Radikale Venstre og Ny Alliance om dansk europapolitik i en globaliseret verden af 21 Februar 2008’ accessed 12 August  2019. 57 A Danish understanding thereof may be found here, Justitsministeriet, ‘Notat om visse forfatningsretlige spørgsmål i forbindelse med Danmarks ratifikation af traktaten om stabilitet, samordning og styring i Den Økonomiske og Monetære Union (den såkaldte finanspagt)’ (22 February 2012) 10 accessed 30 January  2020. 58 See the account of the relevant literature and the Ministry of Justice’s assessments in that regard the memorandum, Justitsministeriet, ‘Notat om hvorvidt dansk deltagelse i det styrkede banksamarbejde forudsætter anvendelse af proceduren i grundlovens § 20’ (29 April 2015) accessed 30 January 2020.

25.29

748 ERM II of voters) on the most recent referendum on another of the opt-outs, namely whether to convert Denmark’s current full opt-out on home and justice matters into an opt-out with case-by-case opt-in, which took place on 3 December 2015.59 An approval by the Danish electorate was in particular needed for Denmark to remain in Europol under the new rules.60 Public support in favour of the euro itself is still rather weak, which also supports the impression that it would not be realistic to launch a new referendum in the near future. Therefore, it can reasonably be predicted that the Danish euro opt-out will stand for the years to come.61 25.30

The Danish Central Bank is ‘Danmarks Nationalbank’. The legal basis for it is an act named ‘Lov om Danmarks Nationalbank’, which dates back to 1936.62 According to Section 1, the purpose of the bank is to maintain a safe and secure currency system and facilitate and regulate the traffic in money and the extension of credit.63 The bank itself reads the act as prescribing three main objectives, namely: (1) Stable prices;64 (2) Secure payments;65 and (3) Stability of the financial system.66 Pursuant to Section 2(3) of ‘Bekendtgørelse af lov om valutaforhold m.v.’, ie Consolidated Act on Foreign Exchange, etc No 279 of 11 April 1988, ‘Guidelines for the foreign-exchange policy to be conducted while the Act is in force shall be laid down after negotiation between Danmarks Nationalbank and the Royal Bank Commissioner’.67 This means that the bank is responsible for monetary policy— independently of the Danish government—but exchange-rate policy has to be laid down by the Danish government, albeit in consultation with the bank.

25.31

The fixed-exchange-rate policy vis-à-vis the euro was agreed upon nearly twenty years ago.68 More precisely, it was concluded at an informal meeting of the Ecofin Council on 59 See in that regard, eg Folketingets EU-Oplysning, ‘De danske EU-forbehold’ accessed 30 January  2020. 60 See the proposal of Folketinget ‘Forslag til Lov om Danmarks deltagelse i den fælles valuta, Vedtaget af Folketinget ved 3. behandling den 6 september 2000’ accessed 30 January 2020. 61 See eg, Tænketanken Europa, ‘Forbeholdslandet Danmark. De mange aktiveringer af forbeholdene—og det voksende tab af suverænitet’ (Rapport, 2 June 2017) 15 accessed 30 January 2020. 62 See accessed 30 January 2020. 63 The translation is taken from Danmarks Nationalbank, Monetary Policy in Denmark (3rd edn, Rosendahls— Schultz Grafisk 2009) 1, 9 (hereafter Danmarks Nationalbank, Monetary Policy in Denmark). The formulation in Danish is: ‘Danmarks Nationalbank, der ved denne Lovs Ikrafttræden, jfr. § 33, overtager Nationalbanken i Kjøbenhavn, har som Landets Centralbank til Opgave i Overensstemmelse med denne Lov og de i Henhold til Loven udfærdigede Forskrifter at opretholde et sikkert Pengevæsen her i Landet samt at lette og regulere Pengeomsætning og Kreditgivning’. 64 According to Danmarks Nationalbank, Monetary Policy in Denmark (n 63) 9 this includes: ‘Danmarks Nationalbank helps to ensure stable prices, ie low inflation. This is done by using monetary policy to maintain a fixed exchange rate of the krone against the euro’. 65 According to Danmarks Nationalbank, Monetary Policy in Denmark (n 63) 9 this includes: ‘Danmarks Nationalbank helps to ensure that cash and electronic payments can be settled in a secure manner. This is done by issuing banknotes and coins and by ensuring that banks can settle payments among themselves’. 66 According to Danmarks Nationalbank, Monetary Policy in Denmark (n 63) 9 this includes: ‘Danmarks Nationalbank helps to ensure the stability of the financial system. This is done by monitoring financial stability and payment systems, producing financial statistics and managing government debt’. 67 The wording in Danish is: ‘Stk. 3. Retningslinjerne for den valutapolitik, der skal føres i lovens gyldighedstid, fastsættes efter forhandling mellem Danmarks Nationalbank og den kongelige bankkommissær’. The full text of the consolidated act is available at accessed 30 January 2020. 68 According to Danmarks Nationalbank, Monetary Policy in Denmark (n 63) 9. Importantly, also before joining the ERM II, Denmark had conducted a fixed-exchange-rate policy. This policy was initiated back in the early 1980s, initially against the D-mark and then against the euro. See further Danmarks Nationalbank,

Future Prospects 749 25–27 September 1998 in Vienna between the ministers for economy and finance and the central bank governors of the EU Member States.69 A narrow fluctuation band of +/-2.25 per cent around the central rate in ERM II was the decision at that time.70 In the circumstances, Denmark keeps the rate of exchange within a much narrower range than required in the system (as a currency here is allowed to float within the quite wide range of +/-15 per cent). In practice, since the fixed-exchange-rate policy ensures that fluctuations in the ‘krone’ rate against the euro are kept at such a very modest level, the ‘krone’ will match the euro’s fluctuations vis-à-vis other currencies.71 The ERM II still today constitutes the formal framework for the Danish fixed-exchange-rate policy.72 The Danish Central Bank has assessed that this policy has given a stable anchor for low and stable inflation expectations.73

VII. Future Prospects Generally, the future of the ERM II is inevitably linked with the future of the EMU. At the more concrete level, it has a role to play in relation to the Danish situation as it is sensible for it to exist as long as Denmark has its so-called ‘euro opt-out’. Also, as long as there are Member States with a derogation as such, it is still a sensible arrangement, functioning as it is as a ‘waiting room’ with the purpose of preparation for such countries’ transition to the euro area. In his high-profile speech regarding the state of the Union by Commission President Juncker, it was importantly stated:

25.32

If we want the euro to unite rather than divide our continent, then it should be more than the currency of a select group of countries. The euro is meant to be the single currency of the European Union as a whole. All but two of our Member States are required and entitled to join the euro once they fulfil the conditions. Member States that want to join the euro must be able to do so. This is why I am proposing to create a Euro-accession Instrument, offering technical and even financial assistance.74

This vision signals not only that the pressure on Member States with a derogation from joining the euro may increase further in the years to come, but also that the EU is ready to Foreign-Exchange-Rate Policy and ERM II accessed 30 January  2020. 69 According to Danmarks Nationalbank, Monetary Policy in Denmark (n 63) 9. 70 Ibid. 71 Danmarks Nationalbank, Monetary Policy in Denmark (n 63) 120. 72 See accessed 30 January 2020. 73 See accessed 30 January 2020. For further details, see Morten Spange and Martin Wagner Toftdahl, ‘Fastkurspolitik i Danmark’ (Danmarks Nationalbank, Kvartalsoversigt 1 Kvartal 2014, 18 March 2014) accessed 30 January 2020. Importantly, the ECB can choose not to support the ‘krone’; see Agreement of 16 March 2006 between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union [2006] OJ C73/21. Article 3.1 states: ‘Intervention at the margins shall in principle be automatic and unlimited. However, the ECB and the participating non-euro area NCBs could suspend automatic intervention if this were to conflict with their primary objective of maintaining price stability.’ 74 European Commission President Jean-Claude Juncker, ‘State of the Union Address 2017’ (SPEECH/17/3165, 13 September 2017).

25.33

750 ERM II increase the support so as to enable them to get ready. As the overall purpose of the earlier stage, the ERM II, is to link currencies of Member States outside the euro area to the euro, and thereby to increase stability (including the associated advantages mentioned above, which are said to flow from it) generally through the mean of more stable domestic currencies, it could be considered as a way to facilitate more or all countries joining the mechanism. In connection therewith, it could then be considered that membership of the ERM II is not necessarily combined with an eventual almost ‘automatic’ transfer as membership of the euro area (ie the Swedish ‘fear’). Under all circumstances and with reference to the above discussion of various aspects of the construct, in particular the entry and exit conditions, could be considered becoming more transparent and explicit.75

75 Whether the mechanism more generally and in an economic sense may be conceived as working sufficiently neatly and fulfilling its underlying objectives is outside the scope of the present chapter.

26

PRUDENTIAL SUPERVISORY TASKS (ARTICLE 127(6) TFEU, MONETARY POLICY VS PRUDENTIAL SUPERVISION) ‘Kissing awake the Sleeping Beauty provision’ Rosa M Lastra and Georgios Psaroudakis

I. Introduction II. Development and Scope of EU Banking Supervision

26.1

26.3 A. Historical overview 26.3 B. From Lamfalussy to De Larosière 26.18 C. Establishment of the Single Supervisory Mechanism: Waking of the Sleeping Beauty Provision 26.22 D. Scope and nature of ECB competence within the Single Supervisory Mechanism 26.31

III. The Interplay Between Monetary Policy and Banking Supervision in EU Law

26.36

A. Monetary policy vs prudential supervision; financial stability as a link between the two B. Arguments for and against separation C. ECB governance since the establishment of the Single Supervisory Mechanism D. Jurisdictional domain and the Single Supervisory Mechanism

26.36 26.45 26.50 26.58

IV. Macro-and Microprudential Supervision and ELA

26.64 A. ESRB and macroprudential supervision 26.64 B. ECB and macroprudential supervision 26.80 C. ECB and emergency liquidity assistance 26.100

I. Introduction This chapter attempts to describe the interplay between Economic Monetary Union (EMU) and Banking Union and the central function of the European Central Bank (ECB) in both areas.1 It offers a historical background to the development of European Union (EU) level prudential supervision on the basis of the Treaty on the Functioning of the European Union (TFEU) and examines issues at the intersection between monetary policy and banking supervision. Relatedly, financial stability is discussed as a public good that informs both areas of ECB activity. The chapter further examines difficult organizational choices, arising from the development of a Banking Union not foreseen in the Maastricht Treaty (which 1 See generally Rosa M Lastra, International Financial and Monetary Law (OUP 2015) chs 6–11 (hereafter Lastra, International Financial and Monetary Law). Rosa M Lastra and Georgios Psaroudakis, 26 Prudential Supervisory Tasks (Article 127(6) TFEU, Monetary Policy vs Prudential Supervision) In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0031

26.1

752 PRUDENTIAL SUPERVISORY TASKS only included an ‘enabling clause’): Should the same institution (ie, the ECB) have both monetary and prudential competence? If so, what governance arrangements are necessary for this institution, also given that final authority over all matters rests with the Governing Council according to the Treaty itself? 26.2

Furthermore, the Banking Union brings about a potential for further development of the ECB’s activity in related areas. In this context, the rise of macroprudential supervision, currently exercised as it is at the EU level by the European Systemic Risk Board (ESRB) (which is weak) and by the ECB (which has narrow powers) in addition to national authorities, is considered too. It is also suggested that the ECB is able under current primary law to assume lender of last resort responsibilities (aka emerging liquidity assistance) to individual banks in the euro area itself (a task currently performed by national central banks).

II. Development and Scope of EU Banking Supervision A. Historical overview 26.3

Prudential supervision was not a basic task of the ECB according to the Maastricht Treaty and the Protocol on the Statute of the European System of Central Bank (ESCB Statute). However, the Draft ESCB Statute—released by the Committee of Governors of the EC Central Banks in November 1990—had included prudential supervision amongst the basic tasks of the ESCB. The opposition of some countries (notably Germany) to such an inclusion meant that the final version of the ESCB Statute and of the Treaty only referred to supervision in a limited way, as a non-basic task, according to the language of Article 127 of the Treaty (Article 105 EC according to the Maastricht Treaty) and Article 25 ESCB Statute. A compromise solution was the inclusion at the insistence of the late Tommasso Padoa Schioppa of an enabling clause, Article 127(6) TFEU (formerly Article 105.6 EC) which left the door open for a possible future expansion of supervisory responsibilities following a simplified procedure.2 This ‘Padoa Schioppa clause’ is the legal basis of the establishment of the first stage of Banking Union, the Single Supervisory Mechanism (SSM).3

26.4

Article 127(6) of the Treaty—the so-called ‘enabling clause’—reads as follows: The Council, acting by means of regulations in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament and the European Central Bank, confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.

2 See Rosa M Lastra, ‘The Division of Responsibilities Between the European Central Bank and the National Central Banks Within the European System of Central Banks’ (2000) 6 The Columbia Journal of European Law 167. 3 In his comments on Lastra, International Financial and Monetary Law (n 1) ch 10, René Smits rightly pointed out that the European Parliament’s (EP) assent required for the ‘kissing awake of the Sleeping Beauty provision’ was abolished by TFEU. Article 127(6) TFEU permits the Council to confer tasks upon the ECB by a regulation of the Council, after merely consulting the EP.

Scope of EU Banking Supervision 753 Regrettably TFEU did not attempt to introduce substantial changes to this provision, even though it is an anachronism to refer—as Article 127(6) TFEU does—to ‘prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings’. Financial developments combined with a global financial crisis have rendered this exception meaningless, since nowadays financial conglomerates encompass banking, securities, and insurance undertakings.

26.5

Though other chapters in this volume deal with banking union and financial market integration, from a historical perspective and in order to understand the genesis and activation of Article 127(6) it is fitting to offer a brief overview of the history of the legislative processes to adopt financial legislation and regulation in the EU and the unrelenting process of centralization in this area.

26.6

To begin, the thinking before the global financial crisis was that a single market in financial services did not need a single supervisor though it needed some common rules. A bit of history helps explain the evolution of the legislative processes for adopting financial regulation in the EU.4 The approximation of legislations in the field of banking and finance as required by Article 100 of the original EEC Treaty had been difficult before 1985. Indeed while the European Commission had succeeded in the approximation of laws (mainly through regulations) in the fields of quality, composition, labelling and control of goods, industrial property rights, public procurement, technical or administrative barriers to trade, industrial safety and hygiene, and so on, it had failed to approximate laws in other fields such as banking and financial services, transport, energy, telecommunications, and the like, owing to stark differences across Member States in the structure of their services industry, owing to the political implications of the liberalization of some ‘key’ services, and owing to the existence of exchange controls.5 A new strategy was needed, with new political initiatives and more flexible techniques for integration.

26.7

The new strategy first envisaged in the 1985 White Paper on the Internal Market and legally enshrined in the 1986 Single European Act was rooted in the generalization of the concept of mutual recognition on the basis of prior minimum harmonization (rather than full or detailed harmonization) and on the principle of home state control.6 Directives became the preferred legislative instrument for achieving financial integration.7 The use of directives is consistent with the principles of minimum harmonization and mutual recognition. Regulations, as opposed to directives, are consistent with the principle of full or detailed

26.8

4 See Rosa M Lastra, Central Banking and Banking Regulation (London School of Economics and Political Science 1996) 215–23. 5 The Single European Act also gave momentum to the liberalization of capital movements, one of the four freedoms of a true single market and a precondition for the full liberalization of financial services. In his comments to this chapter, René Smits remarked that he counts five freedoms: (i) goods; (ii) services; (iii) workers and self- employed persons; (iv) freedom of establishment; (v) capital, with payments the corollary sixth freedom. 6 The principle of home country control and the limitations of the divide between home and host country responsibilities have become a matter of concern for financial supervisors in the EU, particularly in the new members in Central and Eastern Europe. See, eg, European Shadow Financial Regulatory Committee, ‘Challenges to Financial Regulations in the Accession Countries’ (Statement No 18, European Shadow Financial Regulatory Committee Budapest 2004 accessed 5 February 2020). 7 The Single European Act in its Declaration on Article 100a of the EEC Treaty stated that: ‘[T]‌he Commission shall give precedence to the use of the instrument of a directive if harmonisation involves the amendment of legislative provisions in one or more Member States’. The Amsterdam protocol also states in its point 6: ‘[D]irectives should be preferred to regulations’.

754 PRUDENTIAL SUPERVISORY TASKS harmonization. And regulations—in the context of Article 288 TFEU—leave no freedom to Member States with regard to their national transposition. 26.9

Despite the relative success of the new strategy in advancing the Community’s goal of creating a single market, it had also limitations. These limitations became apparent in the process of integrating capital markets in Europe, where the legislative process was often criticized for being too slow and rigid to adapt to market developments.8 On past experience, the adoption of directives in the field of financial regulation takes two to three years, followed by a one-to two-year period for national implementation. In the absence of other legislative instruments, directives often dealt with both broad framework principles on the one hand and very technical issues on the other hand. This resulted in a mix of ambiguity in some cases and excessive prescription in some others. The legislative process also proved inadequate to deal with the needs and concerns of market participants.

26.10

Though bank-dominated systems have traditionally prevailed in Europe (with the exception of the UK), the development of capital markets in recent years has required a greater deal of dialogue, consultation, and cooperation between the many parties involved: lawmakers, supervisors, self-regulatory organizations, market intermediaries, issuers, and investors.9 The techniques needed to regulate securities markets (disclosure requirements, fiduciary rules) have a much larger component of market discipline and consultation than the regulatory techniques typically applied to lending and deposit taking (mandatory rules, capital requirements).

26.11

In response to criticisms about an inefficient EU process for regulating capital markets, in July 2000 the European Council set up the Committee of Wise Men on the Regulation of European Securities Markets under the chairmanship of Alexandre Lamfalussy.10 The mandate given to the Wise Men was confined to the workings of the law-making process concerning securities markets regulation in Europe, with the aim of speeding it up and making it more flexible in order to respond to market developments. The Wise Men were asked to identify the imperfections of this process and to come up with recommendations for change. The mandate of the Wise Men was not to identify what should be regulated, nor to look at other relevant issues such as international implications or prudential considerations.

26.12

The ‘Final Report of the Committee of Wise Men on the Regulation of European Securities Markets’ (the ‘Lamfalussy Report’)11 was published on 15 February 2001 and the European Council in its Resolution of 23 March 200112 adopted some of the proposals recommended in the Report. The Report focused on the question of ‘how’ to speed up reform, that is, on the processes and legal procedures needed to reform securities markets regulation, rather 8 See Rosa M Lastra ‘Regulating European Securities Markets: Beyond the Lamfalussy Report’ in Mads Andenas and Yannis Avreginos (eds), Financial Markets in Europe: Towards a Single Regulator? (Wolters Kluwer Law 2003) 211 (hereafter Lastra, ‘Regulating European Securities Markets’). 9 See Karel Lannoo, ‘Updating EU Securities Market Regulation: Adapting to the Needs of a Single Capital Market’ (2001) CEPS Task Force Reports No 34. 10 Council, ‘Press Release’ (Conseil/00/263, Brussels, 17 July 2000) accessed 5 February 2020. 11 Alexandre Lamfalussy and others, ‘Final Report of the Committee of Wise Men on the Regulation of the European Securities Markets’ (Brussels, 15 February 2001) (hereafter Lamfalussy Report) accessed 5 February  2020. 12 European Council, ‘Residency Conclusions Stockholm European Council 23 and 24 March 2001’ (C/01/900, Stockholm March 2001) accessed 5 February  2020.

Scope of EU Banking Supervision 755 than on the question of ‘what’ needs to be reformed. Thus, the Lamfalussy Report had a procedural character. It is interesting to observe that though the Lamfalussy approach started as a ‘regulatory issue’ (confined to the workings of the law-making process concerning securities markets regulation in Europe), it soon became a ‘supervisory matter’, leading to an overhaul of the institutional design of supervision and not only for securities, but also for banking and insurance (as well as financial conglomerates).

26.13

With the publication of the Lamfalussy Report and the subsequent establishment of the Committee of European Securities Regulators (CESR) in 2001 and the European Securities Committee (ESC) in 2002, the dual structure that emerged was referred to as the ‘Lamfalussy framework’. It comprised: four level 2 committees (the European Securities Committee, the European Banking Committee, the European Insurance and Occupational Pensions Committee, and the Financial Conglomerates Committee13)), chaired by the European Commission and based in Brussels, and three level 3 committees (the Committee of European Securities Regulators, located in Paris; the Committee of European Securities Supervisors, located in London; and the Committee of European Insurance and Occupational Pensions Supervisors, located in Frankfurt14). The ‘Lamfalussy framework’ did not imply the centralization of supervisory and regulatory responsibilities. There was no transfer of competencies from the national to the supranational arena. The level 2 and level 3 committees were a form of supervisory cooperation.

26.14

The aim of the four-level regulatory Lamfalussy approach (framework principles in Level 1, implementing technical measures in Level 2, cooperation in Level 3, and enforcement in Level 4)—namely to speed up the legislative process for the regulation of securities markets—implies a ‘governance change’, a bottom-up approach, rather than top-down, also applicable to other areas of European integration.15 The distinction between ‘core principles’ in level 1 and non-essential ‘technical implementing matters’ in level 2 mirrors at the EU level what happens at the national level with the distinction between primary legislation and secondary regulation.

26.15

There is an inevitable tension between the quality and the democratic nature of the legislative output and the need for speed and flexibility. At the national level, this tension has been solved through the distinction between primary and secondary law. By definition, primary law—the legislative process—is rigid and slow, but ‘democratically accountable’,

26.16

13 Established, respectively, by Commission Decisions 2001/528/EC of 6 June 2001 establishing the European Securities Committee [2001] OJ L191/45; Commission Decision 2004/10/EC of 5 November 2003 establishing the European Banking Committee [2003] OJ L3/36; Commission Decision 2004/9/EC of 5 November 2003 establishing the European Insurance and Occupational Pensions Committee [2004] OJ L3/34; and by European Parliament and Council Directive 2002/87/EC of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate [2002] OJ L35/1. 14 Established, respectively, by Commission Decisions 2001/527/EC of 6 June 2001 establishing the Committee of European Securities Regulators [2001] OJ L191/43; Commission Decision 2004/5/EC of 5 November 2003 establishing the Committee of European Banking Supervisors [2003] OJ L3/28; and Commission Decision 2004/6/EC of 5 November 2003 establishing the Committee of European Insurance and Occupational Pensions Supervisors [2004] OJ L3/30. 15 Lamfalussy Report (n 11). See Alexandre Lamfalussy, ‘Reflections on the Regulation of European Securities Markets’ (SUERF Studies: 14, Vienna 2001) 16–17.

756 PRUDENTIAL SUPERVISORY TASKS while secondary law—the regulations and rules issued by regulatory agencies—is flexible and quick, but less ‘democratically accountable’. 26.17

The Resolution of the European Council of 23 March 2011 also invited the Commission to use regulations instead of directives, whenever this is ‘legally possible’. The move towards maximum harmonization has been a feature of the EU legislative process in financial regulation and supervision ever since.

B. From Lamfalussy to De Larosière 26.18

The financial crisis highlighted a number of weaknesses in the EU financial supervision framework, which remained decentralized and fragmented at the national level despite the changes in the EU financial architecture explained earlier in this chapter.16 In his speech on October 2008 José Manuel Durão Barroso, President of the European Commission, called for a coordinated response to the crisis while criticizing Member States for the lack of ‘real effort at co-ordination’ ensuring cooperation among the national authorities and the EU level institutions.17 While praising the efficiency of Member States actions during the financial crisis, Barroso stated their actions must be based on the common principles and taken within a commonly agreed framework, and that the cross-border effects of such actions must be taken into account.

26.19

Barroso also announced the European Commission’s decision to set up a high level group of experts in financial services chaired by Jacques de Larosière, to advise on the future of European financial regulation and supervision and to make recommendations laying ‘the ground for building consensus on crossborder supervision’. As it stems from the text of the De Larosière group mandate, the Commission did not see the evolutional nature of the Lamfalussy committees as an appropriate framework to combat constantly changing and cross-border nature of the financial crisis.

26.20

The aim of the De Larosière group mandate was to provide a report on the establishment of ‘a more efficient, integrated and sustainable European system of supervision’.18 The report (De Larosière Report) with 31 recommendations was presented to the European Commission in February 2009.19 These recommendations called for the creation of an EU-level body 16 See the Commission, ‘Mandate for the High Level Expert Group on EU financial supervision’ (Press Release, IP /08/1679, Brussels, 11 November 2008) accessed 5 February 2020. 17 José Manuel Barroso, ‘Preparation European Council’ (SPEECH/08/509, Brussels, 8 October 2008) accessed 5 February  2020. 18 Commission, ‘Report of the High-level Expert Group on financial supervision in the EU’ (Chaired by Jacques de Larosière, Brussels, 25 February 2009) 6 (hereafter De Larosière Report). For a critical analysis of the De Larosière Report see René Smits, ‘Europe’s Post-crisis Supervisory Arrangements—A Critique’ (2010) 1 C&R Revista de Concorrência & Regulaçao 125–66. 19 De Larosière Report (n 18). The De Larosière Report is divided into four chapters covering the analysis of the causes of the financial crisis, policy and regulatory issues, supervisory framework in the EU, and the global dimension and cooperation on international level. The De Larosière Report was endorsed by the European Commission in May 2009 and by the Council in June 2009. In September 2009 the European Commission presented legislative proposals to implement its recommendations (Commission, ‘Commission adopts legislative proposals to strengthen financial supervision in Europe’ (IP/09/1347, Brussels, 23 September 2009) accessed 5 February 2020). In September 2010 the European Parliament, following agreement by the Council, adopted the new supervisory framework. (European Parliament, ‘Parliament gives green light to new financial supervision architecture’ (Press Release, 20100921IPR83190, 22 September

Scope of EU Banking Supervision 757 to oversee risk in the financial system as a whole; stronger system in place to reduce the risk and severity of future crises; convergence of technical rules across Member States; a mechanism for ensuring agreement and coordination among supervisors of cross-border financial institutions (including those in colleges of supervisors); a rapid and effective mechanism to ensure the consistent application of EU rules; coordinated decision-making in emergency situations. Following the recommendations of the De Larosière Report, the European System of Financial Supervision (ESFS) was established in 2010. The new regime came into force on 1 January 2011. The ESFS is an integrated network of national and EU supervisors which comprises three European supervisory authorities (ESAs): (i) a European Banking Authority (EBA);20 (ii) a European Insurance and Occupational Pensions Authority (EIOPA);21 and (iii) a European Securities and Markets Authority (ESMA),22 as well as the Joint Committee to foster cross-sectoral coordination amongst ESAs, a European Systemic Risk Board (ESRB),23 and the national supervisory authorities.

26.21

C. Establishment of the Single Supervisory Mechanism: Waking of the Sleeping Beauty Provision The waking up of the Sleeping Beauty provision, Article 127(6) TFEU took place with the 26.22 advent of the first pillar of banking union, the Singe Supervisory Mechanism (SSM), established by Regulation 1024/2013 and further operationalized as regards its practical arrangements by the SSM Framework Regulation 468/2014, which was issued by the ECB on the basis of Article 6(7) SSM Regulation. The rationale of SSM in particular can be explained by the confluence of a number of factors: a flawed institutional EMU design combining a strong monetary pillar with weak economic and supervisory pillars, the relevance of the so- called financial ‘trilemma’, the ‘vicious link’ between banking debt and sovereign debt, and 2010) accessed 5 February  2020). 20 EBA replacing CEBS, based in London, was established under European Parliament and Council Regulation (EU) 1093/2010 of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/78/EC [2010] OJ L331/ 12 (EBA Regulation); as amended by European Parliament and Council Regulation (EU) 1022/2013 of 22 October 2013 amending Regulation (EU) 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation (EU) 1024/2013 [2013] OJ L287/5 (EBA Amending Regulation). 21 EIOPA, the successor of CEIOPS, based in Frankfurt, was established by European Parliament and Council Regulation (EU) 1094/2010 of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/79/EC [2010] OJ L331/48 (EIOPA Regulation). 22 ESMA, which replaced CESR, based in Paris, was established by European Parliament and Council Regulation (EU) 1095/2010 of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/77/EC [2010] OJ L331/84 (ESMA Regulation). 23 ESRB, the new body responsible for macroprudential oversight and based in Frankfurt, was established under European Parliament and Council Regulation (EU) 1092/2010 of 24 November 2010 on European Union macroprudential oversight of the financial system and establishing a European Systemic Risk Board [2010] OJ L331/1 (ESRB Regulation); and Council Regulation (EU) 1096/2010 of 17 November 2010 conferring specific tasks upon the European Central Bank concerning the functioning of the European Systemic Risk Board [2010] OJ L331/162.

758 PRUDENTIAL SUPERVISORY TASKS the need for independent supervision and adequate conditionality. Let us examine in turn each of these arguments. 26.23

As to the flawed institutional design, the financial crisis that commenced in the United States in August 2007 and that became a global financial crisis in 2008 following the demise of Lehman Brothers had a profound effect in the EU. In the Euro area, the financial crisis mutated into a sovereign debt crisis in 2010. At the root of the Euro area problems lay a fundamental inconsistency between a relatively strong monetary pillar (with the euro and ECB) and weak economic and supervisory pillars (the weak E and S). Each of the weak pillars of EMU—the economic one and the supervisory one—proved not only weak on their own; they also proved weak in their inter-linkages.24 The inadequacy of the principle of decentralized supervision in a monetary union became all too evident; existential doubts about the very sustainability of the euro led to a frenzy of legislative and policy reforms. In the words of Verón, banking union is ‘the most consequential policy initiative since the start of the EU’s financial crisis’.25

26.24

Moreover, it should be recalled that one of the main economic arguments in favour of EMU was the need to solve the ‘inconsistent quartet’ of policy objectives: free trade, full capital mobility, pegged (or fixed) exchange rates, and independent national monetary policies. The only long-term solution to this inconsistency was to complement the internal market with monetary union,26 thus abandoning national control over domestic monetary policies. A similar argument was made with regard to financial supervision by Niels Thygesen and Dirk Schoenmaker. Thygessen pointed out that it is difficult to achieve simultaneously a single financial market and financial stability while preserving a high degree of nationally based supervision.27 Schoenmaker referred to these inconsistent objectives as the ‘trilemma in financial supervision’: a stable financial system, an integrated financial market, and national financial supervision.28 The financial trilemma is an argument also used to justify the need for EU wide (and not simply euro area) supervisory arrangements, as well as international solutions.29 The dichotomy between national laws and policies and international or supranational institutions and markets remains a daunting challenge.

24 Banking crises often require the involvement of the fiscal authority. Hence, a full banking union needs some degree of fiscal union (the issue of burden sharing of the potential fiscal costs of bank recapitalization remains a thorny one). For a recent study of the economic governance challenges and proposals to address the weakness in the economic pillar, see generally Rosa M Lastra and Jean-Victor Louis, ‘European Economic and Monetary Union: History, Trends, and Prospects’ (2013) 32 Yearbook of European Law 57 (hereafter Lastra and Louis, ‘European Economic and Monetary Union’). See also Lastra, International Financial and Monetary Law (n 1) ch 8. 25 See Nicolas Verón, ‘Testimony: European Banking Union: Current Outlook and Short-Term Choices’ (Banking Union and the Financing of the Portuguese Economy Conference, Lisbon, 26 February 2014). 26 See generally Tommaso Padoa-Schioppa, The Road to Monetary Union in Europe: The Emperor, the Kings and the Genies (OUP 2000). 27 See Niels Thygesen, ‘Comments on “The Political Economy of Financial Harmonisation in Europe” ’ in Jeroen Kremer, Dirk Schoenmaker, and Peter Wierts (eds), Financial Supervision in Europe (Edward Elgar Publishing 2003) 145. 28 See Dirk Schoenmaker, Financial Supervision: from National to European? (NIBE–SVV 2003). 29 See generally Dirk Schoenmaker, Governance of International Banking: The Financial Trilemma (OUP 2013). See also Jens-Hinrich Binder, ‘Auf dem Weg zu einer europäischen Bankenunion? Erreichtes, Unerreichtes, offene Fragen’ (2013) 25 Journal of Banking Law and Banking 297, 304–05, suggesting that, in light of national differences in interpretation and practice, an argument can be made that centralized banking supervision serves the level playing field and ultimately the internal market.

Scope of EU Banking Supervision 759 Against this background, the twin financial and sovereign debt crises in the eurozone have evidenced the interdependence between the national governments issuing sovereign debt and the banks purchasing such debt. This doomed loop, vicious link or fatal embrace between banks and sovereigns got exacerbated because many banks relied upon restructuring and resolution frameworks—at times a full ‘bail-out’—backed by national budgets.30 Bank rescue packages compromise the fiscal position of the government and increase national indebtedness, while in turn the sustainability of sovereign debt threatens the stability of the banks that hold such sovereign debt.31

26.25

This doomed loop was the catalyst for the quick political agreement that was forged in 2012 to move swiftly towards a banking union. This move towards a banking union was also made possible because European independent supervision was identified as a necessary precondition for access to European Stability Mechanism (ESM) funding. In June 2012 the Euro Area Summit decided that the European Stability Mechanism should get an instrument to recapitalize banks directly in order to relieve troubled euro area Member States from the substantial rise of their national indebtedness due to the need to finance the restructuring of their banks: ‘When an effective single supervisory mechanism is established, involving the ECB, for banks in the Euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly.’32 On 10 June 2014, Euro area Member States reached a political understanding on the operational framework of the ESM direct recapitalization instrument, which was then added to the toolkit of the ESM by the start of the SSM supervision in December 2014.33

26.26

European supervision should be able to distance itself from a purely domestic or national approach to supervision where it is thought that politics or national economic priorities may lead to regulatory forbearance.34 Banking union should help prevent that the financial consequences of improper or delayed national supervisory measures be transferred to the European level, and thereby, to taxpayers of other Member States. This issue was of great concern to Germany and other countries. The theory is that European supervisors can provide a more independent and objective assessment of the problems identified in the course of the supervisory process than national supervisors.35 Supra-national supervision can also

26.27

30 See Markus K Brunnermeier and others, ‘The Sovereign-Bank Diabolic Loop and ESBies’ (2016) 106 American Economic Review 508. 31 However, to break this vicious link we also need to address—as Jens Weidman, ‘Stop encouraging banks to load up on state debt’ Financial Times (1 October 2013) suggested—the regulatory treatment of sovereign exposures and end the ‘fiction of risk-free assets’, which receive favourable ratings by credit rating agencies. 32 See Euro Area Summit, ‘Statement’ (Brussels, 29 June 2012) accessed 5 February 2020 (hereafter Euro Area Summit, ‘Statement’). See also Treaty Establishing the European Stability Mechanism accessed 5 February  2020. 33 ESM, ‘ESM direct bank recapitalisation instrument adopted’ (Press Release, Luxembourg, 8 December 2014) accessed 5 February 2020. Under its original set of instruments, the ESM could only give financial assistance to its Member States, which could then use such assistance to recapitalize their banks. 34 Nicolas Verón, ‘Tectonic Shifts’ (2014) 51 Finance and Development 18: ‘Most countries were deeply reluctant to identify weak banks for fear of putting their banking sector at a disadvantage’. 35 This theory is implied in Recital (12) of the Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63 (hereafter SSM Regulation): As a first step towards a banking union, a single supervisory mechanism should ensure . . . that those credit institutions are subject to supervision of the highest quality, unfettered by other, non-prudential considerations.

760 PRUDENTIAL SUPERVISORY TASKS facilitate the imposition of adequate conditionality, if European funds are to be disbursed to help recapitalize failing or troubled institutions. 26.28

What is in a name?36 The name ‘banking union’ is a bit of a conceptual accordion, with different layers. Arguably, the first layer of a banking union has already been achieved via European regulation, namely the Directives and Regulations that form the corpus of common rules under which banks operate in the EU/European Economic Area ‘EEA’. Of course, this first layer, this ‘narrow’ banking union, was incomplete—as evidenced by the financial crisis—due to the lack of effective rules on cross-border crisis management and insolvency. The 2010 innovations under de De Larosière reform, introducing three silos of coordination of the financial sector (EBA, ESMA, and EIOPA) with some override powers over national supervisors, did not have sufficient effect. The ‘banking union’ that the European Commission advocated in September 201237 goes beyond regulation and coordination ‘with bite’, and encompasses micro-prudential supervision, some macroprudential supervisory powers (which are now included in Article 5 SSM regulation, as examined in detail below) and crisis management—including resolution and deposit insurance. A ‘broader’ and full banking union should encompass all these elements plus lender of last resort (the ‘missing pillar’).

26.29

The idea of a single European authority for banking supervision is not new, neither doctrinally38 nor from a policy perspective.39 However, concrete steps towards its realization are very recent.40 The report of the president of the European Council, Herman Van Rompuy in May 2012, acknowledged that EMU was ‘facing a fundamental challenge’ and that it needed ‘to be strengthened to ensure economic and social welfare’.41 According to the Van Rompuy report, the achievement of closer EMU integration was to be based on four building blocks: an integrated financial framework, an integrated budgetary framework, an integrated economic policy framework, and democratic legitimacy and accountability.

26.30

A political consensus to advance towards banking union was agreed by the European Council on 29 June 2012:42

36 See generally Rosa M Lastra, ‘Banking Union and Single Market: Conflict or Companionship?’ (2013) 36 Fordham International Law Journal 1190–224 (hereafter Lastra, ‘Banking Union and Single Market’). 37 Commission, ‘Communication from the Commission to the European Parliament and the Council: A Roadmap towards a Banking Union’ COM (2012) 510 final. 38 As early as in 1989, an academic group proposed draft statutes for the European System of Central Banks with a prudential control mission for the ECB, see Jean-Victor Louis and others, Vers un système de banques centrales (Editions de l’Université de Brussels 1989). 39 According to Recital (8) of the SSM Regulation: The European Parliament has called on various occasions for a European body to be directly responsible for certain supervisory tasks over financial institutions, starting with its resolutions of 13 April 2000 on the Commission communication on implementing the framework for financial markets: Action Plan and of 21 November 2002 on prudential supervision rules in the European Union. 40 In May 2012 the European Commission voiced the need for integrated financial supervision and in June 2012, José Manuel Barroso, the president of the European Commission, in his speech before the European Parliament confirmed that creating a banking union must be a priority as this is an, ‘area where major progress could be made quickly, and without Treaty changes’, see José Manuel Barroso, ‘Joint European Parliament Debate on the forthcoming European Council meeting and the Multiannual financial framework’ (SPEECH/12/440, Strasbourg, 13 June 2012) accessed 5 February  2020. 41 Herman van Rompuy, ‘Towards a genuine Economic and Monetary Union’ (5 December 2012) accessed 5 February  2020. 42 Euro Area Summit, ‘Statement’ (n 32).

Scope of EU Banking Supervision 761 We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution- specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.

D. Scope and nature of ECB competence within the Single Supervisory Mechanism Having thus examined the long way towards the SSM, it is time to go back to its ‘enabling clause’ (Article 127.6 TFEU) and have another look at it. It should not go unnoticed that this provision refers to ‘specific tasks’ that may be conferred on the ECB in this area. Recital (15) SSM Regulation suggests that such tasks are those ‘which are crucial to ensure a coherent and effective implementation of the Union’s policy relating to the prudential supervision of credit institutions’. This is a rather qualitative understanding of the ‘specific tasks’ clause, which does not impose a limit on the size of conferral of tasks on the ECB, but rather introduces (or indeed confirms explicitly) a subsidiarity test: The underlying idea seems to be that such tasks are to be performed at the EU level, whose exercise by national authorities would not ensure the coherence and effectiveness sought in prudential supervision. One might also argue, in a more formalistic vein but still without limiting the size of conferral, that tasks are ‘specific’ when they are clearly defined. Therefore, it is indeed possible under this clause to confer such competence on the ECB, as the case has been on the basis of the SSM Regulation.43

26.31

Indeed, the General Court seems to have recently made one step further, by explaining in the Förderbank case44 that it now (ie post-SSM Regulation) considers prudential supervision in the SSM to have become an area of exclusive EU competence, rather than shared

26.32

43 See on this discussion Josef Ruthig, ‘Die EZB in der europäischen Bankenunion’ (2014) 178 Zeitschrift für das gesamte Handelsrecht 443, 452ff (hereafter Ruthig, ‘Die EZB in der europäischen Bankenunion’); Klaus Lackhoff, ‘How will the Single Supervisory Mechanism (SSM) Function? A Brief Overview’ (2014) 29 Journal of International Banking Law and Regulation 13, 14–15 (hereafter Lackhoff, ‘How will the Single Supervisory Mechanism (SSM) Function?’); Martin Selmayr in Hans van der Groeben, Jürgen Schwarze, and Armin Hatje (eds), Europäisches Unionsrecht (7th edn, Nomos 2015) Article 127 TFEU, paras 53–55 (hereafter Selmayr in von der Groeben, Schwarze, and Hatje (eds), Europäisches Unionsrecht); Jonathan Bauerschmidt, ‘Finanzstabilität als Ziel der Bankenunion’ (2019) 183 Zeitschrift für das gesamte Handelsrecht 476, 488–89 (hereafter Bauerschmidt, ‘Finanzstabilität als Ziel der Bankenunion’). Critical voices have tended to suggest that the establishment of the SSM, with the scope of competence that it has, goes beyond the ‘specific tasks’ (and would only be possible on the basis of Article 352 TFEU): Tim Oliver Brandi and Konrad Gieseler, ‘Vorschläge der EU-Kommission zur einheitlichen Bankaufsicht in der Eurozone’ [2012] Betriebs-Berater 2650; Matthias Herdegen, ‘Europäische Bankenunion: Wege einer einheitlichen Bankenaufsicht’ (2012) 66 Zeitschrift für Wirtschafts-und Bankrecht 1891–92 (hereafter Herdegen, ‘Europäische Bankenunion’). 44 Case T-122/15 Landeskreditbank Baden- Württemberg— Förderbank v European Central Bank [2017] ECLI:EU:T:2017:337 (hereafter Förderbank).

762 PRUDENTIAL SUPERVISORY TASKS competence. The issue at hand was that the Landeskreditbank Baden-Württemberg— Förderbank had been classified by the ECB as significant institution under its sole supervision rather than under shared supervision with German authorities, essentially on account of its size. The credit institution itself believed that shared supervision was fully sufficient in its case, in view of its risk profile; it invoked Article 70(1) SSM Framework Regulation, which refers to the case that classification of an institution as significant is ‘inappropriate’, as this provision should in its view be interpreted in conformity with superior norms of law, including the principles of proportionality and subsidiarity. The General Court dismissed the action for annulment of the ECB decision. What is most remarkable for present purposes, is that the General Court held that ‘the Council has delegated to the ECB exclusive competence in respect of the tasks laid down in Article 4(1) Basic Regulation’ (ie the SSM Regulation).45 This was significant in that particular case because it stood in the way of a potential argument from subsidiarity against this individual ECB decision (as opposed to subsidiarity in the introduction of the Regulation itself), given that subsidiarity presupposes shared competence and the Court held that such competence does not exist anymore since the coming into force of the SSM Regulation. 26.33

Furthermore, this is remarkable, because on the basis of Article 6(4) SSM Regulation the ECB has indeed exclusive competence, applying to all credit institutions in the euro area, for the tasks mentioned in Article 4(1)(a) and (c) of the said Regulation (ie authorization and withdrawal thereof, as well as the assessment of qualifying holdings), but the rest of the tasks are carried out by national competent authorities in the case of less significant institutions.

26.34

However, the General Court was influenced by the announcement (albeit ‘within the framework of Article 6’) in Article 4(1) that the ECB ‘shall be exclusively competent to carry out, for prudential supervisory purposes’ all tasks, in other words the tasks that national authorities implement in case of less significant institutions as well. This has been taken to mean that Article 6 does not introduce a division of competence, but rather an arrangement on the implementation of tasks.46 The Court was also influenced by the ‘important prerogatives’47 retained by the ECB even with regard to the tasks implemented by national authorities: in particular, the ECB may issue regulations, guidelines and general instructions to national authorities, and may also decide to exercise itself the powers left to national authorities with regard to one or more credit institutions: Article 6(5)(a) and (b) SSM Regulation. The conclusion drawn by the Court is that the ECB micro-prudential competence under the SSM Regulation is exclusive. Still, the ECB does not perform all relevant tasks by itself; but this is due to this division regarding the implementation of tasks in Article 6 of the Regulation, which establishes a decentralized implementation of the ECB competence by national authorities, under the control of the ECB.48 45 Förderbank (n 44) para 63. 46 See in particular, on this differentiation between competence and decentralized implementation thereof, the Förderbank (n 44) para 54, and relatedly Georgios Psaroudakis, ‘The Scope for Financial Stability Considerations in the Fulfilment of the Mandate of the ECB/Eurosystem’ (2018) 4 Journal of Financial Regulation 119, 149ff (hereafter Psaroudakis, ‘The Scope for Financial Stability Considerations’). It had been noted previously as well that national authorities supervise less significant institutions on behalf of the ECB: Ruthig, ‘Die EZB in der europäischen Bankenunion’ (n 43) 474; Stijn Verhelst, ‘Assessing the Single Supervisory Mechanism: Passing the Point of No Return for Europe’s Banking Union’ (2013) Egmont Paper No 58 accessed 5 February  2020. 47 See Förderbank (n 44) para 59. 48 Ibid, para 63.

MONETARY POLICY/BANKING SUPERVISION IN EU LAW 763 Therefore, the prevailing understanding is that the micro-prudential competence of the 26.35 ECB is not merely broad as a quantitative matter, but it is also exclusive as a legal matter. Notwithstanding the (partially) decentralized implementation, the location of micro- prudential competence in the euro area is, fundamentally, the ECB.

III. The Interplay Between Monetary Policy and Banking Supervision in EU Law A. Monetary policy vs prudential supervision; financial stability as a link between the two The global financial crisis and the subsequent sovereign debt crisis in the euro area where the vicious link between bank debt and sovereign debt threatened to derail the very existence of the euro, evidenced the inadequacy of combining monetary policy centralization with decentralized prudential supervision. Of course, this inconsistent arrangement was a product of its time of enactment: It is interesting to observe that while there was debate about including prudential supervision as a basic task of the ECB, the debate about the objectives was not as prescient. Financial stability was not considered at the time the Maastricht Treaty was signed in 1992 as relevant as the ‘primary’ goal of price stability.49 Indeed, while the wording of the latter is crystal clear: ‘The primary objective of the European System of Central Banks shall be to maintain price stability’, the language of Article 127(5) is much less forceful: ‘The ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system’. Of course, the law simply reflected the division of responsibilities at that time. The ‘basic’ task conferred onto the ECB was monetary policy (one goal: price stability, one instrument: monetary policy) while prudential supervision remained decentralized at the level of the Member States. Though there is now a consensus that the neglect of financial stability considerations in the years leading up to the crisis was one of its causes,50 the primary law cannot be changed easily.

26.36

The separation between the monetary and the supervisory functions of a central bank is a contentious issue in the institutional design of supervision. The central bank has a fundamental role with regard to monetary stability and financial stability. Central bankers’ duties towards the maintenance of ‘financial stability’ typically referred before the global financial crisis to the maintenance of the safety and soundness of the banking system.51 Sound banking in turn relates to three basic central bank functions: central banks as bankers’ banks (including their role in the payments system), central banks as supervisory agencies

26.37

49 See Rosa M Lastra, ‘The Evolution of the European Central Bank’ (2012) 35 Fordham International Law Journal 1260, 1265. 50 See generally Rosa M Lastra and Geoffrey Wood, ‘The Crisis of 2007–2009: Nature, Causes, and Reactions’ (2010) 13 Journal of International Economic Law 531–50. 51 As Christos Hadjiemmanuil and Mads Andenas pointed out, ‘the concepts of “financial stability” and “bank safety and soundness”, which guide prudential supervision, are broad and imprecise. They do not provide operational criteria for administrative action, but require application of discretion on an individual basis’. See Christos Hadjiemmanuil and Mads Andenas, ‘Banking Supervision and European Monetary Union’ (1999) 1 Journal of International Banking Regulation 84, 96.

764 PRUDENTIAL SUPERVISORY TASKS (when they are entrusted with supervisory functions), and central banks as lender of last resort. In the post global financial crisis world, central bank’s functionality in the pursuit of financial stability has extended beyond the banking sector to encompass the financial sector generally.52 For example in the USA, under the Dodd Frank Act 2010, the Federal Reserve System was given responsibility to supervise any financial institution (any non-bank financial company) that is deemed to be systemically important by the Financial Stability Oversight Council pursuant to Section 804(a) of the Act. 26.38

Together with this broadening of the scope of regulatory activity, financial stability, as an independent regulatory objective, has clearly drawn much more attention that in the past. Characteristically, it has been remarked53 that it could be said to be the most important regulatory objective (among others including the micro-prudential safety and soundness of financial institutions and consumer and investor protection), because it is a prerequisite for the pursuit of other objectives, and also because it has no natural constituency to support it, all the more since it calls for conservative, ie profit-reducing, measures in times of growth (when such calls are less likely to be heard). Relatedly, in the European context, financial stability is today a cornerstone of the banking union, even though the ECB’s role in financial stability (recognized in Article 127.5 TFEU and Article 3.3 ESCB Statute) is not an exclusive one.

26.39

In any case, it can be argued that a financial stability mandate of the ECB can be derived from its price stability mandate,54 since the former latter is generally complementary with the latter.55 According to this line of argument, the expectation of low and stable inflation allows the provision of credit to function smoothly (even though it may sometimes lead to financial imbalances). At the same time, a stable financial system, in particular one that performs its fundamental task of maturity transformation from deposits to loans, is essential for price stability; it allows the credit channel56 for monetary transmission, in other words for the transmission of monetary policy to the real economy, to function.57 In this sense, 52 Thomas C Baxter, ‘Financial Stability: The Role of the Federal Reserve System’ (Future of Banking Regulation and Supervision in the EU Conference, Frankfurt am Main, November 2013) pointed out that ‘The Federal Reserve’s financial stability mandate is seen in the penumbra of the Federal Reserve Act’, and that ‘that is legally sufficient’ (deriving implied powers from the penumbra of other express powers). In our opinion, the legal basis for such financial stability mandate can already be found in the preamble to the Federal Reserve Act, in the words ‘effective supervision of banking in the United States’ and in other provisions of the original Federal Reserve Act. In his presentation Baxter further pointed out that the express terms of the Dodd-Frank Act place financial stability within the Federal Reserve’s legal mandate. 53 Dan Awrey, ‘Law, Financial Instability, and the Institutional Structure of Financial Regulation’ in Anita Anand (ed), Systemic Risk, Institutional Design, and the Regulation of Financial Markets (OUP 2016) 87–88 (hereafter Awrey, ‘Law, Financial Instability, and the Institutional Structure of Financial Regulation’). 54 On the analysis below see also Psaroudakis, ‘The Scope for Financial Stability Considerations’ (n 46) 130–34. 55 In the words of the ECB President: ‘price stability and financial stability are inherently interlinked. They tend to be mutually reinforcing, and in the long run each is a necessary, albeit insufficient, condition for the other’ (Mario Draghi, ‘The interaction between monetary policy and financial stability in the Euro area’ (First Conference on Financial Stability, Madrid, 24 May 2017) (hereafter Draghi, ‘The interaction between monetary policy and financial stability in the Euro area’) accessed 5 February 2020). 56 Which is particularly important in continental Europe, where the financial system is dominated by banks, see Martin F Hellwig, ‘Financial Stability and Monetary Policy’ (Max Planck Institute for Research on Collective Goods 2015/10). 57 Vestert Borger, ‘Outright Monetary Transactions and the stability mandate of the ECB: Gauweiler’ (2016) 53 Common Market Law Review 139, 174 and 181, referring to financial stability as an intermediate target towards price stability; Armin Steinbach, ‘The Legality of the European Central Bank’s Sovereign Bond Purchases’ (2013) 39 Yale Journal of International Law Online 15, 25.

MONETARY POLICY/BANKING SUPERVISION IN EU LAW 765 financial instability is a potential price stability issue, and therefore a secondary financial stability mandate of the ECB, in order to prevent eventual prejudice to its primary mandate, is implied in Article 127(1) TFEU.58 The ECJ judgment in Gauweiler and Weiss discussed the transmission mechanisms of monetary policy in the context of government debt. The ECB argued in Gauweiler that the Outright Monetary Transactions (OMT) programme was the proportionate response to the disturbance caused to monetary transmission by market overreaction to the government debt crisis in Eurozone members. The Court opted to defer to the ECB’s margin of appreciation,59 thus accepting in principle that monetary competence encompasses the instruments to prevent disturbances in monetary transmission.60 In Weiss the Court, again taking note of the ECB’s margin of appreciation, accepted that the secondary market public sector asset purchase programme (PPSP, a part of ‘quantitative easing’), which was implemented to contribute to the return of inflation rates close to the 2 per cent target level, was a valid exercise of the ECB’s competence to set monetary policy; it also explained that such a measure may have foreseeable indirect effects on economic policy and yet still fall under the ECB’s monetary competence.61 One would expect that the ECB would be equally able to implement measures, within its margin of appreciation, with the objective to maintain or restore financial stability, and thus ultimately to make monetary policy work credibly.

26.40

If this is so and the ECB has a financial stability mandate, then Article 127(5) TFEU, referring to the ECB’s contribution to the policies of prudential supervisors that promote financial stability, is not so much an independent basis for this mandate as it is the provision explicitly confirming it (which is useful in the EU law system of attributed competence), but also (and perhaps more importantly) restricting it.62 In particular, it restricts it to the benefit of prudential supervisors, to whose competence this ‘contribution’ may do no prejudice. It is important for present purposes to note that the establishment of the SSM has not rendered this limitation to be found in Article 127(5) TFEU irrelevant. The monetary and the prudential competences of the ECB are still distinct, indeed based on distinct legal bases, and also separated (if not completely) within the ECB governance structure.

26.41

This analysis also suggests that the measures required by the price stability and the financial stability mandate should ultimately converge. Nevertheless, it is conceivable, and has already been discussed, that there may be some temporary divergence, as it is possible

26.42

58 On the application of the implied powers principle in European law see Joint Cases C-281/85, 283-5/85, and 287/85 Germany v Commission [1987] ECR I-3203, para 28; Case C-295/90 Parliament v Council [1992] ECR I-4230, para 18. 59 Case C-62/14 Peter Gauweiler and Others v Deutscher Bundestag [2015] ECLI:EU:2015:C:2015:400, para 75 (hereafter Gauweiler). See also Case C-493/17 Heinrich Weiss and Others [2018] ECLI:EU:2018:C:2018:1000, para 91 (hereafter Weiss and Others); and further, see also, among others, Georgios Anagnostaras, ‘In ECB we trust . . . the FCC we dare! The OMT preliminary ruling’ (2015) 40 European Law Review 744, 750–52; Alicia Hinarejos, ‘Gauweiler and the Outright Monetary Transactions programme: the mandate of the European Central Bank and the changing nature of economic and monetary union’ (2015) 11 European Constitutional Law 563, 574; Marco Lamandini, David Ramos, and Javier Solana, ‘The European Central Bank (ECB) as a Catalyst for Change in EU Law. (Part 1): The ECB’s Mandates’ (2016) 23 Columbia Journal of European Law 10–11. 60 Gauweiler (n 59) para 50. 61 Weiss and Others (n 59) paras 56 and 61. 62 Psaroudakis, ‘The Scope for Financial Stability Considerations’ (n 46) 135–36.

766 PRUDENTIAL SUPERVISORY TASKS that one policy encourages credit expansion while the other the opposite,63 for example when an adverse foreign demand shock would call for lower interest rates, but on the other hand the domestic financial system is functioning at the proper level and lower rates might increase credit more than advisable.64 It has also been repeatedly remarked that financial cycles, covering accumulations of debt or gradual changes in asset prices and thus being of direct relevance to financial stability policy, are longer than economic cycles that central banks tend to take into account.65 In any case, price stability remains the primary objective, which must ultimately take precedence over financial stability concerns, should an actual conflict (as opposed to the need for a temporary accommodation of such concerns) emerge.66 26.43

Thus, it is submitted that the ECB is able to take financial stability into account in the context of flexible inflation targeting: The idea proposed is that the (numerical, in current practice) inflation target must be followed in the medium term (so that the primacy of the price stability mandate remains intact), but the central bank should take financial stability into account in determining exactly how swiftly and precisely it will pursue this target.67 This does not differ much (though it may indeed be a more pronounced and systematic application of the same concept) from the well-known suggestion that, while setting the policy rate, the central bank should ‘lean against the wind’ of extraordinary asset price movements.68 Admittedly, a practical difficulty (though not difficulty in principle) with this approach is that financial stability is not as easily subjected to concrete criteria as price stability with its numerical inflation target.69 However, it has been suggested in the economic literature that it is possible to develop indicators for financial stability problems, in particular looking at deviations of both credit70 and asset prices from historical 63 Elke Gurlit and Isabel Schnabel, ‘The New Actors of Macroprudential Supervision in Germany and Europe— A Critical Evaluation’ (2015) 27 Journal of Banking Law and Banking 349, 352 (hereafter Gurlit and Schnabel, ‘The New Actors of Macroprudential Supervision’). 64 Rose Cunningham and Christian Friedrich, ‘The Role of Central Banks in Promoting Financial Stability: An International Perspective’ (2016) Bank of Canada Staff Discussion Paper 2016-15, 13 accessed 5 February 2020 (hereafter Cunningham and Friedrich, ‘The Role of Central Banks in Promoting Financial Stability’). 65 Draghi, ‘The interaction between monetary policy and financial stability in the Euro area’ (n 55); Adina Criste and Iulia Lupu, ‘The central bank policy between the price stability objective and promoting financial stability’ (2014) 8 Procedia Economics and Finance 219, 224; Magnus Georgsson, Anders Vredin, and Per Åsberg Sommar, ‘The modern central bank’s mandate and the discussion following the financial crisis’ (2015) Sveriges Riksbank Economic Review 2015:1, 7, 24; Frank Smets, ‘Financial Stability and Monetary Policy: How Closely Interlinked?’ (2014) 10 International Journal of Central Banking 263, 272 (hereafter Smets, ‘Financial Stability and Monetary Policy’). 66 See eg Gurlit and Schnabel, ‘The New Actors of Macroprudential Supervision’ (n 63) 352; Herdegen, ‘Europäische Bankenunion’ (n 43) 1894. 67 See Psaroudakis, ‘The Scope for Financial Stability Considerations’ (n 46) 137–38; Smets, ‘Financial Stability and Monetary Policy’ (n 65) 273. 68 See eg David A Dodge, ‘Reflections on the Conduct of Monetary and Financial Stability Policy’ (2010) 43 Canadian Journal of Economics 32. 69 See also Charles A E Goodhart, ‘A Framework for Assessing Financial Stability?’ (2006) 30 Journal of Banking and Finance 3415; Bauerschmidt, ‘Finanzstabilität als Ziel der Bankenunion’ (n 43) 478; Lastra, International Financial and Monetary Law (n 1) para 3.62, as well as (n 45) above. On the numerical definition for price stability see Klaus Tuori, paras 22.8ff in this work. 70 As to credit, this refers in particular to the so-called ‘Basel gap’, ie the difference between the current (at a given time) ratio of credit to GDP and the long-run trend of this ratio. See on this Jan Hannes Lang and Peter Welz, ‘Measuring credit gaps for macroprudential policy’ [2017] ECB Financial Stability Review May 2017, 144, 146 accessed 5 February 2020; these authors also present, at 151–56, a complementary method, which looks at an economic model for credit, based on structural factors, as the benchmark with which the current level of credit is compared.

MONETARY POLICY/BANKING SUPERVISION IN EU LAW 767 trends.71 This would be important in order to rationalize the use of financial stability in central bank decision-making. This discussion establishes that financial stability provides a common background to both monetary policy and banking supervision, as it is served by the latter and is also beneficial to (or even essential for) the former. But it also establishes that price stability and financial stability are not conceptually or practically identical, and there may (at least temporary) divergences between these two policies. Therefore, it should now be examined whether the monetary and prudential authority should be kept separate from each other or not.

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B. Arguments for and against separation72 Micro prudential supervision is not a necessary or exclusive function of a central bank.73 It is evidently not necessary because there are central banks not directly entrusted with this task; neither is it exclusive, as responsibility for supervision can be shared, and actually often is, with other regulatory agencies. Goodhart and Schoenmaker in a seminal contribution74 claimed that the main arguments for separating monetary and supervisory functions are the potential conflicts of interests, the likely preferability of a single financial regulator (in a context of blurring frontiers between different types of financial intermediaries), and the danger of reputational damage. Furthermore, since managerial time is limited, and since supervisory issues—particularly in times of crisis—are very time consuming, a case can be made for the central bank to focus its attention on the important and demanding task of conducting monetary policy.75 Conflicts of interest are possible when the prime concern of the monetary authorities is to keep an external objective, such as a fixed exchange rate. This was the case with the crisis of the Exchange Rate Mechanism (ERM) of the European Monetary System in 1992–93,76 when the interest rate deemed necessary to keep participating in the ERM endangered financial stability.

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On the other hand, according to Goodhart and Schoenmaker,77 the main arguments against separation are the central bank’s lender of last resort role (especially in the case of systemic failure) and its oversight function in the payment system (whether or not the central bank participates in the operation of that system). The safeguard of systemic stability might be adversely affected if supervision is transferred from the central bank to a specialized agency, since the ethos, culture, and priorities of the separate supervisory agency may come to focus on conduct of business and consumer protection issues, leaving aside

26.46

71 Claudio Borio, ‘Monetary policy and financial stability: what role in prevention and recovery?’ (2014) BIS Working Paper No 440, 9ff accessed 5 February 2020 (hereafter Borio, ‘Monetary policy and financial stability’). See also Ricardo Reis, ‘Central Bank Design’ (2013) 27 Journal of Economic Perspectives 17, 25, referring to the buildup of leverage or the spread between key borrowing and lending rates as possible indications to look at. 72 This subsection of the paper draws on Lastra, International Financial and Monetary Law (n 1) ch 3. 73 Supervision can be separated from the central bank and yet the central bank always keeps a regulatory role. 74 See Charles A E Goodhart and Dirk Schoenmaker, ‘Should the Functions of Monetary Policy and Banking Supervision be Separated?’ (1995) 47 Oxford University Papers 539. 75 See Charles A E Goodhart, ‘The Organizational Structure of Banking Supervision’ (2000) FSI Occasional Papers No 1, 29–30. 76 Ibid,  33–40. 77 Ibid.

768 PRUDENTIAL SUPERVISORY TASKS systemic considerations.78 Another argument against separation is the need for consistency between monetary policy and supervisory decisions. Those formulating monetary policy must have a comprehensive and intimate understanding of the workings of the banking system, and bank supervisors must understand the policy environment within which they operate. There are also advantages of synergy in placing banking supervision under the central bank, because of the knowledge central banks have about the health of individual credit institutions and the financial system as a whole. Owing to its lender of last resort role, the central bank has a keen interest in monitoring the solvency of the institutions to which it may eventually have to lend. 26.47

This argument can be broadened if we accept—as discussed above—that financial stability is required to safeguard price stability. Given that prudential supervision is directed at promoting financial stability, though not conceptually necessary, it makes practical sense that the central bank should be involved in supervision too. Furthermore, with the advent of macroprudential supervision the argument against separation has been reinforced in the eyes of some commentators. In the EU context and as will be discussed in more detail below, responsibility for macroprudential policy is now shared between the ECB, national authorities/councils of financial stability and the ESRB (though the latter’s ‘powers’ are limited).79

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The debate about the supervisory responsibilities of central banks is linked to the discussion of the goals and history of central banks. The Federal Reserve System was set up in 1913 ‘to establish a more effective supervision of banking’,80 following the banking crises of the nineteenth and early twentieth centuries (attributable to the inability of banks to convert their demand deposits into cash). The Fed conceives of its monetary policy role as having been largely grafted onto its supervisory functions, and regards its supervisory and regulatory functions as a prerequisite and complement to its monetary policy responsibilities.

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The twin banking and sovereign debt crises in the Euro area evidenced the inadequacy of the principle of decentralized banking supervision in a monetary union and paved the way for banking union,81 waking up the Sleeping beauty provision.

C. ECB governance since the establishment of the Single Supervisory Mechanism 26.50

Article 127(6) TFEU was thus applied and the ECB became a supervisory authority as well as monetary agency. This novel situation for the ECB necessitated significant changes in its governance structure. Indeed, a new internal body called the ‘Supervisory Board’ was established according to Article 26 SSM Regulation. The Supervisory Board is composed of a

78 Ibid. 79 See Charles A E Goodhart and others, ‘Interaction between monetary policy and bank regulation’ (Monetary Dialogue, 23 September 2015, Policy Department A: Economic and Scientific Policy) accessed 5 February 2020 (hereafter Goodhart and others, ‘Interaction between Monetary Policy and Bank Regulation’). 80 See Introduction to the Federal Reserve Act of 23 December 1913 and Lastra, International Financial and Monetary Law (n 1) ch 2. 81 See generally Lastra and Louis, ‘European Economic and Monetary Union’ (n 24), and Lastra, ‘Banking Union and Single Market’ (n 36) 1190–223.

MONETARY POLICY/BANKING SUPERVISION IN EU LAW 769 Chair and Vice Chair, four representatives of the ECB—who may not be charged with any tasks directly linked to the monetary policy tasks of the ECB—and one representative of the national authority competent for the supervision of credit institutions in each participating Member State (Article 26.6). Decisions of the Supervisory Board shall be taken by a simple majority of its members and each member shall have one vote (Article 26.8). The Supervisory Board carries out preparatory works regarding supervisory tasks conferred on the ECB and propose complete draft decisions to the Governing Council of the ECB. These decisions are adopted by the Governing Council as the decision-making body of the ECB recognized in the Treaty (primary law), whose competences cannot be restricted by secondary law. A draft decision of the Supervisory Board is deemed to be adopted unless the Governing Council objects within a certain period (Article 26.8). According to this ‘non-objection procedure’ the Governing Council can adopt or object a draft decision of the Supervisory Board (’take it or leave it’). In case of an objection by the Governing Council, the matter can be referred to a Mediation Panel (Article 25.5).

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The rule in Article 26(8) on this potential objection by the Governing Council is remarkable, in that it requires the Governing Council to state in writing the reasons for objecting, and highlights monetary policy concerns in this context. Therefore, it may be that the ultimate authority rests with the Governing Council because this is mandated by primary law, which only refers to the Governing Council as the decision-making body of the ECB;82 this (obligatory) design also serves as an institutional expression of the primacy of monetary policy over prudential concerns.

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Nevertheless, it is worth discussing two features of this governance structure that mitigate (if only from a procedural point of view and to a limited extent) this hierarchy and try to accommodate prudential concerns somewhat. First, the duty of the Governing Council to provide in writing its reasons for objecting establishes that the prudential judgment of the Supervisory Board must be duly considered. Second, and perhaps more importantly, the Governing Council does not have any formal power to formulate prudential decisions on its own, or modify the draft decisions it receives.83 It either adopts or objects to the draft decisions submitted by the Supervisory Board. The potential involvement of the Mediation Panel of Article 25(5) SSM Regulation is useful in itself, but it does not really alter this fundamental division of tasks, both because its opinions are not binding anyway84 and because their practical result is, at best, the submission of a new draft decision by the Supervisory Board to the Governing Council, with which the ultimate authority still rests: Articles 10(3) and 11(1) of ECB Regulation (EU) 673/2014.

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However, this point on the lack of Governing Council power to formulate decisions should not be overemphasized, given that the formal power to object brings with it an informal power to influence the precise content of the decision, and thus the ultimate authority

26.54

82 This is why the separation in governance between the monetary and the prudential function is necessarily incomplete, indeed at the highest level: see also Jan Ceyssens, ‘Teufelskreis zwischen Banken und Staatsfinanzen— Der neue europäische Aufsichtsmechanismus’ (2013) 66 Neue Juristische Wochenschrift 3704, 3707. 83 See on this feature of SSM governance Lackhoff, ‘How will the Single Supervisory Mechanism (SSM) Function?’ (n 43) 26ff, who calls it a method, ‘to limit the conflict potential with the Governing Council’s role in monetary policy’; Ruthig, ‘Die EZB in der europäischen Bankenunion’ (n 43) 471. 84 Though they may have persuasive power, Selmayr in von der Groeben, Schwarze, and Hatje (eds), Europäisches Unionsrecht Article 127 TFEU (n 43) para 56.

770 PRUDENTIAL SUPERVISORY TASKS remains undoubtedly with the organ that has the power to object; this is also why there is indeed no conflict with primary law. In any case, the fact the decisions must originate in the Supervisory Board allows it at least a vivid participation in this intra-institutional dialogue. 26.55

As discussed elsewhere,85 the decision-making structures of the ECB were designed primarily for monetary policy. This poses challenges with regard to the actual conduct of supervision by the ECB. Supervision, lest us forget, is by definition resource and personnel intensive, very litigious, prone to reputational damage and, generally, a ‘thankless task’ in which failures are magnified and successes are often hidden.

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The conferral of supervisory responsibilities onto the ECB also poses challenges for its cherished independence. The creation of ‘Chinese walls’ within the ECB, in order to ensure the effective separation of its monetary responsibilities from its supervisory tasks is a key challenge for the ECB, which has highlighted the separation between these two areas, indeed more so than other prominent central banks such as the Federal Reserve and the Bank of England.86 Furthermore, every transfer of a new task to the ECB raises concerns about democratic legitimacy. Progress towards addressing these issues have been made in arrangements between the ECB and the European Parliament on the one hand, and between the ECB and the Council87 on the other, which provide for significant reporting and accountability mechanisms.88

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Article 24(1) SSM Regulation establishes an Administrative Board of Review for the purposes of carrying out an internal administrative review of the decisions taken by the ECB in the exercise of its supervisory powers.

D. Jurisdictional domain and the Single Supervisory Mechanism 26.58

Issues of ‘jurisdictional domain’ haunt the design of banking union. The Euro area, the SSM area, the EU, and the EEA represent concentric circles of integration, subject to differentiation and conditionality. And then of course we also have the international dimension since global institutions also expand beyond the contours of Europe.

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A major challenge for the EU is that the needs of a well-functioning single market in financial services cannot be disentangled from the design of the supervisory pillar. The existence of two ‘banking authorities:’ EBA and ECB is a reflection of the co-existence of the Single Market and the Banking Union. These two realities have different jurisdictional domains though some of their needs intersect. From an institutional perspective, EBA is not as powerful—has never been, will never be—as the ECB.89 The ECB, on the other hand, is a 85 See Lastra, ‘Banking Union and Single Market’ (n 36) 1190. 86 See Goodhart and others, ‘Interaction between Monetary Policy and Bank Regulation’ (n 79) 15. 87 Interinstitutional Agreement between the European Parliament and the European Central Bank on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB within the framework of the Single Supervisory Mechanism [2013] OJ L230/1. 88 For a broader theoretical analysis on democratic accountability in the area of financial regulation see Fabian Amtenbrink and Rosa M Lastra, ‘Securing Democratic Accountability of Financial Regulatory Agencies—A Theoretical Framework’ in R V De Mulder (ed), Mitigating Risk in the Context of Safety and Security. How Relevant is a Rational Approach? (Erasmus School of Law and Research School for Safety and Security 2008) 115. 89 See Takis Tridimas, ‘EU-Financial Regulation: From Harmonisation to the Birth of EU Federal Financial Law’ in Harold James, Hans-Wolfgang Micklitz, and Heike Schweitzer (eds), The Impact of the Financial Crisis on the European Economic Constitution (EUI Working Paper LAW 2010/05) 3, 14.

MACRO/MICROPRUDENTIAL SUPERVISION AND ELA 771 proper European institution. The ECB is governed by primary law, while EBA is a product of secondary law. The problems of coordination amongst different banking authorities—in the case of the EU, the ESRB, EBA and ECB, as well as ESM—are real, as the tripartite arrangement in the UK showed during the Northern Rock episode. The European Banking Authority (EBA) will remain in charge of the single rulebook (ie regulations and technical standards) and will be guardian, with the Commission, of the single market. But the ECB will be a very powerful institution. EBA’s existence and powers (strengthened by the EBA regulation) are justified because of the different jurisdictional domain EU/Euro area, but add a layer of complexity to the supervisory picture.

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Recital (31) SSM Regulation emphasizes the need for cooperation not only with EBA, but also with ESMA and EIOPA, as well as with the relevant resolution authorities and facilities (reference to ESFS and ESM) financing direct or indirect public financial assistance.

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Issues of jurisdictional domain have characterized the design of financial regulation and supervision in the United States, with a mix of federal and state powers. Federal law prevails in securities, while insurance has traditionally been a matter of state law and banking offers a mix of federal and state powers. Over the years, however, there has been a process of federalization in the supervision and crisis management of financial institutions, with the latest addition, the Dodd Frank Act, substantially increasing federal powers for any financial institution that is deemed to be systemically significant. Lender of last resort was federalized in 1913 with the Federal Reserve Act, while the Federal Deposit Insurance Corporation (FDIC) was established in 1933. FDIC has three hats as receiver of failed or failing banks (and now also financial institutions under the Orderly Liquidation Authority), deposit insurer and supervisor.

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The creation of the Single Supervisory Mechanism and the Single Resolution Mechanism co- exist with the existing architecture for competition and state aid. The European Commission (Directorate-General for Competition) remains in charge of watching over the compliance of state aid with EU rules.90 State aid rules are a fundamental component of the Single Market, and are intrinsically related to the area of resolution. Banking union as the name indicates centralizes banking policy but responsibility for other sectors of the financial system (securities, insurance) remains decentralized albeit subject to increasing ‘federalization’ through ESMA and EIOPA.

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IV. Macro-and Microprudential Supervision and ELA A. ESRB and macroprudential supervision The ESRB is responsible for the macroprudential oversight of the EU financial system in order to contribute to the prevention or mitigation of systemic risks to financial stability,91 90 See Commission, ‘Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication)’ [2013] OJ C216/1. 91 Article 3(1) ESRB Regulation.

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772 PRUDENTIAL SUPERVISORY TASKS which directly contributes to the smooth functioning of the internal market. As explained elsewhere,92 this initiative was a response to a necessity underscored by the G20 London meeting of April 2009 which inter alia led to the transformation of the Financial Stability Forum into a Financial Stability Board (FSB), to the creation in the US of the Financial Stability Oversight Council (FSOC), as part of the Dodd-Frank reform in the summer 2010,93 and to the establishment of financial stability councils or central bank committees in charge of macroprudential supervision.94 26.65

The scope of the ESRB mandate is very broad, as the ‘financial system’ is defined in Article 2(b ESRB Regulation as all financial institutions, markets, products and market infrastructures. The notion of ‘systemic risk’ is also defined very broadly in Article 2(c) as a risk of disruption in the financial system, irrespectively of the sector or type of entity, with the potential to have serious negative consequences for the internal market and the real economy.

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In identifying, analyzing and monitoring systemic risks the ESRB relies on information provided by ESAs, ESCB, the European Commission, national supervisory authorities, and the national statistics authorities with whom the ESRB closely cooperates to fulfil its tasks.95 The ESRB can ask for information in aggregate form, so that individual firms cannot be identified, or request data about individual institution. However, in this latter case it must justify why such data is deemed to be systemically relevant and necessary.96

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The ESRB receives data in aggregated form on a regular basis from the ECB and ESAs, and can also make ad hoc requests.97

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In practice, the legal framework for provision of information to the ESRB has proven to be relatively weak leading to delays, irregular and partial provision of data.98

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The ESRB’s instruments are limited to warnings of systemic risks that are deemed to be significant and recommendations for the remedial action that should be taken to address the risks identified.99 The recommendations can be either of a general or a specific nature,100 92 Lastra and Louis, ‘European Economic and Monetary Union’ (n 24) 85. 93 See also the Council of Financial Regulation and Systemic Risk established in France in October 2010, the Interim Financial Policy Committee (FPC) established within the Bank of England in February 2011 and the Council of Cooperation on Macro-prudential Policy created by the Sveriges Riksbank and the Finanzinspektionen at the beginning of 2012, mentioned in Michaela Posch and Remco Van der Molen, ‘The macro-prudential mandate of national authorities’ (2012) ESRB Macro-prudential Commentaries No 2, 5. 94 This was stressed, in particular, in the De Larosière Report (n 18) paras 146, 153 and 173. 95 Article 15(1) ESRB Regulation. 96 Article 15(6) ESRB Regulation. 97 See generally, European Systematic Risk Board Decision of 21 September 2011 on the provision and collection of information for the macroprudential oversight of the financial system within the Union (ESRB/2011/6) [2011] OJ C302/3. This decision was drafted as an interim solution and therefore the data was provided on ‘best- effort basis’ which was not sufficient. 98 This problem was acknowledged by the High-Level Group on the ESRB Review, ‘Contribution to the Review of the ESRB (foreseen in the ESRB Regulation)’ (March 2013) 16–17 accessed 5 February 2020. In this report it was suggested granting more powers to the ESRB to request data on a permanent and on ad hoc (aggregate or firm-specific) basis. This probably explains the reason why certain notification requirements were embedded in Article 133 CRD IV and Article 458 CRR which also require the ESRB to provide opinions and issue recommendations on specific national macroprudential policy measures. See also European Systemic Risk Board Decision of 27 January 2014 on a coordination framework regarding the notification of national macroprudential policy measures by competent or designated authorities and the provision of opinions and the issuing of recommendations by the ESRB (ESRB/2014/2) [2014] OJ C98/3. 99 Article 16 ESRB Regulation. 100 See accessed 5 February  2020.

MACRO/MICROPRUDENTIAL SUPERVISION AND ELA 773 and may be addressed to the EU as a whole, the European Commission (in relation to EU legislation), Member States, ESAs, and national supervisory authorities. The ESRB has no legally binding powers101 and no powers to intervene or decide on emergencies.102 The ESRB does not have legal personality.103 Both ESRB warnings and recommendation can be kept confidential or made public; the ESRB decides this on a case-by-case basis.104 The institutions to which the ESRB recommendations are addressed should implement them and report to the ESRB and the Council on the actions undertaken, and provide adequate justification for any inaction. The ESRB monitors compliance with its recommendations, based on reports from the addressees. If the ESRB considers that a reaction is inappropriate, it informs the addressees, the Council and, where appropriate, the ESAs concerned, but it does not have any enforcement tools to ensure compliance.

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In terms of governance, the ESRB consists of a General Board, a Steering Committee, a Secretariat, an Advisory Scientific Committee and an Advisory Committee.105 The General Board, which meets at least four times a year,106 takes the decisions necessary to ensure the performance of the tasks entrusted to the ESRB. This decision-making organ brings together central bank governors, high-level representatives of the financial supervisory authorities from all EU Member States, the president and vice-president of the ECB,107 a member of the European Commission and the chairs of each ESA, the chair and the vice-chair of the Advisory Scientific Committee (ASC), and the chair of the Advisory Technical Committee (ATC), as well as some members without voting rights—the president of the Economic and Financial Committee (EFC) and high-level representatives from the NCAs.108 As explained elsewhere,109 the question of having the ECB President as the ESRB chair was the result of a compromise which proved inefficient, leading the European Parliament to recommend the appointment of an ‘independent’ chair who is not the ECB President.110

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101 Lastra and Louis, ‘European Economic and Monetary Union’ (n 24) 86–87. 102 When the ESRB determines that an emergency situation may occur it must promptly issue a confidential warning to the Council and provide their assessment of the situation. Pursuant to Article 3(2)(e), it is for the Council, not the ESRB, to adopt a decision addressed to the ESAs determining the existence of an emergency situation. 103 See also Deutsche Bundesbank, ‘The European Systemic Risk Board: from institutional foundation to credible macro prudential oversight’ (Deutsche Bundesbank Monthly Report, April 2012). 104 Articles 3(2)(c), (d), and 18(3) ESRB Regulation. 105 Article 4 ESRB Regulation. 106 In addition to ordinary meetings Article 9(1) ESRB Regulation also allows to hold extraordinary meetings at the request of the Chair or at least of one third of General Board members with voting rights. 107 Their presence and the role of the ECB President as chairman for the first five years (Article 5(1) ESRB Regulation) and the ECB’s permanent role as secretariat (Article 2 127.6 ECB Regulation in respect of the ESRB) makes for very significant ECB influence on the ESRB. 108 Article 6 ESRB Regulation. The General Board currently includes sixty-five members, thirty-seven voting members and twenty-eight non-voting members. 109 Lastra and Louis, ‘European Economic and Monetary Union’ (n 24). 110 Several arguments were put forth for changing the existing arrangements: greater independence of the ESRB and autonomy from the ECB, which is especially important taking into account the key role of the ECB within the SSM; the European Parliament also highlighted the importance of high dedication of the chair to the ESRB work. See Samuel McPhilemy and John Roche, ‘Review of the New European System of Financial Supervision (ESFS) Part 2: The Work of the European Systemic Risk Board’ (Policy Department A: Economic and Scientific Policy 2013) 61 and 86 accessed 5 February 2020 (hereafter McPhilemy and Roche, ‘Review of the New European System of Financial Supervision (ESFS) Part 2’).

774 PRUDENTIAL SUPERVISORY TASKS 26.72

The role of the Steering Committee is to ensure that the ESRB operates efficiently and to assist the ESRB decision-making process by preparing the Board’s meetings, reviewing the documents to be discussed and monitoring the progress of the ESRB’s ongoing work.111

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The ESRB Secretariat, which is provided and supported by the ECB,112 is responsible for the day-to-day business of the ESRB. It provides high quality analytical, statistical, administrative and logistical support to the ESRB, and it draws on technical advice from the ESAs, NCBs and national supervisory authorities. The head of the Secretariat is appointed by the ECB, in consultation with the General Board of the ESRB.113

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The Advisory Technical Committee’s responsibility is to provide advice and assistance on issues relevant to the work of the ESRB by bringing technical expertise on issues which might go beyond the support provided by the Secretariat.114 The ATC consists of representatives of the ESAs, each NCB, the ECB, the European Commission and national supervisors, among others.115 The Advisory Scientific Committee (ASC) provides advice and assistance on issues relevant to the work of the ESRB. The ASC consists of fifteen experts representing a wide range of skills and experiences, including the chair of the ATC and they are appointed ‘on the basis of general competence and their diverse experience in academic fields or other sectors’.116 According to the review of the ESRB work by the European Parliament pursuant to Article 20 ESRB Regulation, the ATC’s key role in prioritizing risks has been ‘inhibited by national position-taking by members from national central banks and national supervisory authorities’ thus hindering the ESRB ability to focus on controversial issues.

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Article 19 ESRB Regulation sets extensive accountability and reporting requirements for the ESRB. It must report to the European Parliament and the Council at least once a year. The chair of the ESRB will appear in an annual hearing in the European Parliament, marking the publication of the ESRB’s annual report to the European Parliament and the Council.117 In the event of widespread financial distress the meetings with the European Parliament and the Council can be held more frequently. In addition, the chair of the ESRB may be asked to attend hearings of the competent committees of the European Parliament.

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The ESRB is expected to coordinate its activities with the international financial organizations to contribute to a stronger international framework for risk monitoring, and more stable global financial markets. In particular, the ESRB has established contact with the IMF, US FSOC, and the Financial Stability Board (FSB), but no extensive cooperation was witnessed in this format. This can be explained by the fact that some representatives are already members of the FSB which is an international forum for the matters related to

111 Article 4(3) ESRB Regulation. 112 Articles 2 and 3 Council Regulation (EU) 1096/2010, Lastra, ‘Regulating European Securities Markets’ (n 8). 113 Article 3(2) Council Regulation (EU) 1096/2010. 114 The details are set up in the Mandate of the ATC, published by the ESRB on 20 January 2011 accessed 5 February  2020. 115 Article 13 ESRB Regulation. 116 Article 12(1) ESRB Regulation. See also European Systemic Risk Board Decision of 20 January 2011 on the procedures and requirements for the selection, appointment and replacement of the members of the Advisory Scientific Committee of the European Systemic Risk Board (ESRB/2011/2) [2011] OJ C39/10. 117 See ESRB, ‘Annual Reports’ accessed 5 February 2020.

MACRO/MICROPRUDENTIAL SUPERVISION AND ELA 775 macroprudential oversight.118 It also cooperates with the relevant bodies in countries outside the EU on issues relating to macroprudential oversight. As mentioned above, an extensive review of the ESRB work and its governance arrangements was undertaken pursuant to Article 20. In general, the report of 2013 concluded that the ESRB played a significant role in the macroprudential supervision and legislative process, but it was also stated that it is too early to assess the ESRB’s policy outputs. An important observation in the report refers to the ESRB’s potential to act as ‘a shield against groupthink’.119

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Being part of the ESFS, the ESRB is required to work closely with the ESAs and the Joint Committee. The ESRB and the ESAs are jointly developing a common set of quantitative and qualitative indicators for identifying and measuring systemic risk, known as the ‘risk dashboard’.120 They are also working together on an adequate stress-testing regime to help identify firms that may pose systemic risk.

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The ESRB has not been very effective so far. The advent of powerful European banking supervision (ECB-SSM) together with the lack of effective legal powers and legal personality of the ESRB may limit further the impact of the ESRB, possibly rendering it irrelevant in the long run. Of course, it can still play a useful role as a kind of observatory of systemic risk for the EU at large.

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B. ECB and macroprudential supervision121 Both micro and macroprudential supervision are ultimately directed at the same goal, namely financial stability. This common goal becomes even clearer, if it is considered that even micro-prudential supervision is not thought to necessarily protect the individual interests of depositors in EU law, at least as long as there is a functioning deposit insurance system.122 Therefore, the objective of micro-prudential supervision is also of an ‘institutional’ nature, referring to the system as a whole (at least in EU law). It is the tools that differ, as the one kind of supervisory activity is directed at the prudential condition of each credit institution separately, while the other looks at the entirety of the financial system, in particular at the overall supply of credit, with a view to identifying and potentially remedying financial imbalances that may develop.123

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At the same time, it has already been mentioned that macroprudential supervision is connected with monetary policy too. There was some discussion during the drafting of the SSM

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118 McPhilemy and Roche, ‘Review of the New European System of Financial Supervision (ESFS) Part 2’ (n 110) 49. 119 Ibid, 10. 120 Article 3(1)(g) ESRB Regulation. 121 On this section see generally Psaroudakis, ‘The Scope for Financial Stability Considerations’ (n 46) 139–44. 122 Case C-222/02 Peter Paul and Others v Bundesrepublik Deutschland [2004] ECR I-9460, para 32. Indeed, Article 1(1) SSM Regulation seems to confirm the same principle of merely ‘institutional’ protection: see also Lackhoff, ‘How will the Single Supervisory Mechanism (SSM) Function?’ (n 43) 19. 123 The definition of macroprudential policy by Paul Tucker, as quoted by Olivier Blanchard, ‘Ten Takeaways from the “Rethinking Macro Policy. Progress or Confusion?” ’ (VOX CEPR Policy Portal, 25 May 2015) accessed 5 February 2020, is telling in this respect: ‘The choice of dynamically adjusting regulatory parameters so as to maintain systemic resilience’.

776 PRUDENTIAL SUPERVISORY TASKS Regulation on whether macroprudential competence should be subjected to the same governance arrangement, going through the Supervisory Board (to which micro-prudential supervisory authorities appoint members), or should remain with the Governing Council without involvement of the Supervisory Board. The former option has been adopted, but this was presumably both because national micro-prudential authorities are often central banks as well124 and because, as explained below, the ECB’s macroprudential competence on the basis of this Regulation is quite limited anyway. 26.82

What emerges is a somewhat uneasy relationship between monetary policy, to the extent that it looks at financial stability as well, and macroprudential supervision. There may be an overlap between the two,125 which raises the question whether it is superfluous to both regard financial stability as a (secondary) objective of monetary policy and develop a macroprudential supervision regime. In this context, the so-called ‘Tinbergen rule’126 may be recalled, according to which each instrument of policy used should correspond to one policy rather than to more than one. It is true that the ECB could be said to have previously followed the Tinbergen rule in its (ie the ECB’s) original conception, to the extent that it had one primary objective (price stability) and one main instrument to follow it (monetary policy), and that both its objective and the instrument used were discussed and applied in a more straightforward manner than nowadays; in the meantime, the rise of both financial stability as a significant concern and novel tools of monetary policy have complicated this discussion. In any case, the Tinbergen rule might be taken in the present context to mean that monetary policy should be used to pursue price stability, and macroprudential (or, prudential generally) supervision should be directed at financial stability. But there is nothing conceptually necessary about the Tinbergen rule, which rather a suggestion than an actual rule.

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From a functional point of view, it has been found empirically127 that central banks with macroprudential powers are less inclined to take into account financial stability in their monetary policy than banks with such powers; this suggests that macroprudential policy at the level of the central bank decreases the need for monetary policy to address financial stability concerns. Similarly, it has been noted that monetary policy, based as it is on measures such as the setting of the policy rate, may be a rather blunt instrument128 in order to address financial imbalances, while macroprudential supervision may be better adjusted to varying circumstances.

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However, these arguments, useful as they may be towards a better understanding of the coexistence of these policies and the need for coordination, do not preclude a role for financial 124 Gurlit and Schnabel, ‘The New Actors of Macroprudential Supervision’ (n 63) 355. 125 Goodhart and others, ‘Interaction between Monetary Policy and Bank Regulation’ (n 79) 11. 126 On which see, among others, Lastra, International Financial and Monetary Law (n 1) para 2.93; Goodhart and others, ‘Interaction between Monetary Policy and Bank Regulation’ (n 79) 7; Smets, ‘Financial Stability and Monetary Policy’ (n 65) 264–65. 127 By Christian Friedrich, Kristina Hess, and Rose Cunningham, ‘Monetary Policy and Financial Stability: Cross- Country Evidence’ (2015) Bank of Canada Working Paper 2015- 41, 32 accessed 5 February 2020 (hereafter Friedrich, Hess, and Cunningham, ‘Monetary Policy and Financial Stability’). See also Cunningham and Friedrich, ‘The Role of Central Banks in Promoting Financial Stability’ (n 64) 14. 128 Loretta J Mester, ‘Five Points About Monetary Policy and Financial Stability’ (Sveriges Riksbank Conference on Rethinking the Central Bank’s Mandate, Stockholm, June 2016) 14 accessed 5 February  2020.

MACRO/MICROPRUDENTIAL SUPERVISION AND ELA 777 stability concerns in monetary policy as well. That the need for central banks to address such concerns by means of monetary policy may be reduced due to macroprudential powers, is an empirical rather than normative remark; in any case, monetary policy may remain useful, if in a narrower area. The comparative bluntness of monetary policy has been somewhat alleviated recently in the context of quantitative easing, given that monetary policy has been expanded, beyond the setting of the policy rate, to include a ‘second variant’129 which refers to asset purchases and the resulting expansion of the central bank’s balance sheet. Even more importantly, the bluntness of monetary policy may be useful as well. Indeed, macroprudential policy is inherently limited by the statutory scope of application of the tools used to apply it and thus susceptible to regulatory arbitrage. Put more simply, if macroprudential supervision only applies to banks, or more generally to regulated businesses, it is possible that the imbalances to be dealt with will be merely pushed to the non-regulated area, in particular the shadow banking system.130 Monetary policy, on the other hand, is thought to be more powerful, and certainly influences the conditions of lending whatever its source. Therefore, it is hard to say that monetary policy is not needed in order to address financial stability concerns on the basis that they are adequately addressed by macroprudential policy and that monetary policy is (supposedly) pre-empted in this area.131

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The solution that seems to emerge is to apply macroprudential tools as the first line of defence, while monetary policy would still be available in order to address widespread financial imbalances.132 To use a good comparative example, this solution, allowing a role for monetary policy in this area but also restricting its use to specific circumstances, is expressed in HM Treasury’s current remit for the Monetary Policy Committee of the Bank of England,133 where it is stated that:

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the Financial Policy Committee’s macroprudential tools are the first line of defence against such risks [ie, imbalances that may represent a potential risk to financial stability], but in these circumstances [ie, in circumstances in which rigid inflation targeting would exacerbate imbalances] the Monetary Policy Committee may wish to allow inflation to deviate from the target temporarily, consistent with its need to have regard to the policy actions of the Financial Policy Committee.134

While this example is obviously not of direct relevance to the euro area and while the limits of macroprudential policy are rather implied in the ‘first line of defence’ wording than

129 As per Goodhart and others, ‘Interaction between Monetary Policy and Bank Regulation’ (n 79) 4, 10. 130 Borio, ‘Monetary policy and financial stability’ (n 71) 11; Gurlit and Schnabel, ‘The New Actors of Macroprudential Supervision’ (n 63) 352; Smets, ‘Financial Stability and Monetary Policy’ (n 65) 281. 131 Pierre-Richard Agénor, Koray Alper, and Luiz Awazu Pereira da Silva, ‘Capital Regulation, Monetary Policy, and Financial Stability’ (2013) 9 International Journal of Central Banking 193, 230–31, arguing for a combination of monetary and prudential policies. 132 Friedrich, Hess, and Cunningham, ‘Monetary Policy and Financial Stability’ (n 127) 16; Psaroudakis, ‘The Scope for Financial Stability Considerations’ (n 46) 140–41. 133 Remit for the Monetary Policy Committee (attached to a letter of the Chancellor of the Exchequer to the Governor of the Bank of England, 29 October 2018) accessed 5 February 2020. 134 Of course, the same passage expresses the practice of flexible inflation targeting, which has been referred to previously in the text.

778 PRUDENTIAL SUPERVISORY TASKS spelled out, it can be argued that this is, indeed at a conceptual level, the proper manner to address the co-existence of monetary and macroprudential policy. 26.87

Ultimately and beyond functional considerations, the decisive reason, indeed as a legal matter, for accepting that, even if macroprudential tools are available, there is still room for financial stability concerns in monetary policy, is the latter’s very primacy in the EU law.135 To the extent that it is accepted that a secondary financial stability mandate for the ECB is implied in its price stability mandate, because financial stability is significant in the pursuit of price stability, as explained above, the central bank has authority to protect its mandated primary objective by dealing with financial stability as well, if necessary, when carrying out its tasks as per Article 127(2) TFEU: The typical example is flexible inflation targeting. Since financial stability concerns are, in this reading, potential price stability concerns as well, this authority of the central bank may not be precluded by other rules in secondary law, as that would be incompatible with the unqualified priority granted to price stability by Article 127(1) TFEU. Obviously, this is not to say that financial stability should only, or mainly, be promoted by means of monetary policy. On the contrary, it is clear on the basis of Article 127(5) TFEU that other, notably micro-and macroprudential, authorities (which may include the ECB in a different capacity according to Article 127(6)) have competence of their own in this area. However, the present interpretation is consistent with the above- mentioned ‘first line of defence’ approach to macroprudential supervision: If it is not sufficient, the central bank may take into account remaining financial stability concerns in the use of its own tools, such as the policy rate.

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Against this background, discussion may now turn to the ECB’s part in macroprudential supervision in current EU law on the basis of Article 127(6) TFEU and the SSM Regulation. Indeed, the basis in primary law for the assumption of such powers by the ECB is this provision of the Treaty, as it is not the accommodation of financial stability concerns in monetary policy (as it has been established above) that is discussed here, but rather the adoption of prudential measures. Because of Article 127(5) TFEU, the ECB is not able to adopt prudential measures by invoking its financial stability mandate, as already discussed; in other words, the ECB would not be able, but for the SSM Regulation, to play any role, eg in determining counter-cyclical buffers. Therefore, Article 127(1) implies (as argued here) a financial stability mandate for the ECB, Article 127(5) restricts it so that prudential measures may not be based directly on primary law, and Article 127(6) allows for an expansion of the ECB’s role to the prudential (including macroprudential) area, albeit upon act of secondary law.

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Undoubtedly, this part is rather limited in current law, both because EU- level macroprudential powers of legally binding nature are limited themselves and because the powers that do exist are mostly exercised by national authorities.136 Regarding the first point, it is true that macroprudential tools (such as the counter-cyclical capital buffer, the 135 Psaroudakis, ‘The Scope for Financial Stability Considerations’ (n 46) 141. 136 National authorities remain the default location of macroprudential power even in the context of the Banking Union, see Niamh Moloney, ‘European Banking Union: Assessing its risks and resilience’ (2014) 51 Common Market Law Review 1609, 1633; see also Kern Alexander, ‘European Banking Union: A Legal and Institutional Analysis of the Single Supervisory Mechanism and the Single Resolution Mechanism’ (2015) 40 European Law Review 154, 174ff (hereafter Kern, ‘European Banking Union’); Psaroudakis, ‘The Scope for Financial Stability Considerations’ (n 46) 141–42.

MACRO/MICROPRUDENTIAL SUPERVISION AND ELA 779 systemic risk buffer, and buffers for G-SIIs and O-SIIs, ie global systemically important institutions and other systemically important institutions) have been introduced by CRD IV; however, other widely discussed tools, such as limits on Loan-to-Value (LTV), Loan-to- Income (LTI) or Debt Service-to-Income (DSTI) ratios, which aim to constrain the expansion of credit, have not been adopted at the EU level, though they are applied to one extent or the other (and thus based on various rules and practices) at the national level.137 On a related but not identical note, the ECB’s potential for assuming further macroprudential powers is limited by Article 127(6) TFEU itself insofar as the ECB is unable to assume prudential authority over insurance undertakings. This is one aspect of the (regrettable, as already explained at the beginning of this chapter) exception of insurance undertakings from the ‘enabling clause’ of the Banking Union. As already explained, any prudential powers of the ECB must be based on Article 127(6) TFEU in order to overcome the restriction of its (secondary) financial stability mandate by Article 127(5) TFEU. Therefore, the ECB would not be able to invoke any broader mandate on financial stability to apply macroprudential measures to insurance undertakings, important as they may be for the financial system in general; it is equally restricted in this respect as it is for micro-prudential measures. This is to say that the scope of application of the ECB’s macroprudential authority is limited in comparison with the ESRB’s mandate, which also applies to the insurance sector of the financial system.138 On the other hand, it obviously easier for the ESRB to have a broader mandate, as this mandate does not involve the power to issue legally binding acts.

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Coming now to the macroprudential powers that are indeed exercised (though partly rather than comprehensively, as will be shown below) at the EU level, it is true that Article 5(1) SSM Regulation allows the ECB to object to decisions made by national authorities on macroprudential matters: Counter-cyclical buffer rates are explicitly named in this provision as a significant area of its potential application. However, the duty imposed on the national authority is merely procedural, ie to ’duly consider the ECB’s reasons’ for objection, rather than substantive; in other words, the national authority is ultimately able to disregard the ECB’s objection, though it should provide its own reasoning for doing so. Article 5(2)–(5) SSM Regulation provides for a somewhat stronger ECB position, in that the ECB has a (half-developed) decisive competence of its own: It is able to act in lieu of national authorities (either upon proposal of the authority concerned or even on its own, while cooperating with the national authority, consulting with it and considering any reasons to the opposite that the national authority suggests), albeit only in order to top up buffers. The underlying idea is that national authorities may be prone to inaction bias,139 so that it is more useful that the supranational authority is able to raise buffers than that to lower them. Still, it is clear that the ECB mostly reacts to decisions of national authorities and is not able to develop a fully-fledged macroprudential policy of its own.

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Relatedly, the analysis made above on the Förderbank case, in particular on the General Court’s acceptance of exclusive ECB competence in the area of prudential supervision, does

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137 See the Commission, ‘Consultation Document—Review of the EU macro-prudential policy framework’ accessed 5 February 2020 (hereafter Commission, ‘Consultation Document’). 138 Gurlit and Schnabel, ‘The New Actors of Macroprudential Supervision’ (n 63) 352. 139 See the Commission, ‘Consultation Document’ (n 137) 27.

780 PRUDENTIAL SUPERVISORY TASKS not affect macroprudential supervision. The macroprudential area should be distinguished from the findings of this recent judgment: The General Court discusses at length Articles 4 and 6 SSM Regulation on the (micro-)prudential tasks conferred on the ECB and the cooperation within the SSM, but never mentions Article 5 on macroprudential tasks and tools,140 and rightly so. There can be no discussion of an exclusive ECB competence in the macroprudential area, given the limited scope and intensity of ECB competence that has already been described and the lack of the ‘important prerogatives’141 that the Court took note of in its analysis of micro-prudential supervision. Moreover, the differentiation between significant and less significant institutions, which is the heart of the case, is not relevant in Article 5: ECB macroprudential competence may be limited in scope, but it applies potentially to all institutions—though the institution’s size and significance on the basis of criteria that can also be found in Article 6(4) SSM Regulation may be a relevant consideration in the application of such competence. 26.93

As a matter of policy, it has been suggested142 that this restriction of ECB macroprudential competence ‘leaves a gaping hole in the Banking Union prudential regulatory and supervisory framework’. It is indeed quite surprising that the ECB would be less powerful in the macroprudential area than in micro-prudential supervision. Precisely because central banks need to take into account the condition of the financial system as a whole in the context of their monetary policy mandate, it is only reasonable that they assume an active macroprudential function: This also corresponds to current practice, as evidenced in the quite common appointment of central banks as National Designated Authorities (NDAs) for macroprudential purposes (in the sense of provisions such as Articles 130.3 and 133.2 CRD IV) at the level of the Member States.143 Moreover, while there may be some debate, referred to above, on the proper boundaries between macroprudential policy and monetary policy, once it has been decided that they should coexist, there is a clear need for coordination between the two, which can be served by a strong function of the central bank in macroprudential policy as well.

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A similar, though not identical, discussion arises with regard to the interplay between micro-and macroprudential supervision.144 Micro-prudential supervision has a procyclical bias: In particular its capital requirements are procyclical, given that they follow risk and thus become less burdensome in times of growth and more burdensome in times of contraction; on the contrary, macroprudential supervision is characteristically countercyclical. Thus, while their method is not the same, and in particular it would be misguided to look 140 It is also telling that the applicant itself mentioned macroprudential supervision of the ECB merely in order to take it for granted, such as it is. In particular, it is mentioned in Förderbank (n 44) para 35 that the applicant submits that ‘monitoring by the national competent authority under the macroprudential supervision of the ECB would be sufficient for achieving the objectives of the Basic Regulation’. Irrespective of the merits of this argument, it makes clear that macroprudential supervision itself has not been the issue at hand. 141 Förderbank (n 44) para 59. Indeed, being able to top up the countercyclical buffer is not the same as being able to comprehensively assume supervision even over a less significant credit institution, as the ECB can do according to Article 6 SSM Regulation. 142 Kern, ‘European Banking Union’ (n 136) 154, 175. 143 On these matters see in particular the ECB, ‘Review of the EU Macroprudential Policy Framework’ accessed 5 February 2020. Among other things, this source refers to 19 EU Member States that have appointed central banks as National Designated Authorities for macroprudential purposes. 144 On which see Awrey, ‘Law, Financial Instability, and the Institutional Structure of Financial Regulation’ (n 53) 91–93; Gurlit and Schnabel, ‘The New Actors of Macroprudential Supervision’ (n 63) 355.

MACRO/MICROPRUDENTIAL SUPERVISION AND ELA 781 at financial stability as a mere aggregate of the stability of individual institutions,145 it is important to establish coordination between these two areas; having the same authority exercise both competences is a seamless way of doing so. Seen from this angle, an integrated micro-prudential and fractured macroprudential supervision in the euro area hardly looks like the preferable arrangement. Potential objections to a wider ECB competence here are not without merit, but they could be said to be ultimately unpersuasive. A first one would be that the central bank should not accumulate multiple areas of bureaucratic competence,146 as it is advisable to limit the concentration of power to any single administrative authority. While this may generally be a point of some significance, the close connection between ‘classic’ central bank tasks and macroprudential supervision suggests that it is not in this area in particular that this argument should be applied. A second potential objection is that national circumstances may differ and call for a varying application of macroprudential tools.147 However, ECB competence for macroprudential supervision would bring about uniform principles of application of these tools rather than uniform application to each particular case.148 The ECB as a European macroprudential authority of wider powers would certainly be able to take national differences into account, indeed even better so that the case is today, as this would happen in a principled manner.

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An expansion of ECB macroprudential competence would also be consistent with broader trends in EU law. The Court itself has referred to the effects of individual bank failure in other Member States as well,149 and has also highlighted, in the Kotnik and Dowling judgments, the stability of the financial system as an objective to be pursued and the corresponding emergence of systemic regulation in EU law.150 Kotnik and Dowling were unrelated to macroprudential supervision, and were rather about imposing capital measures on shareholders in spite of the Second Company Law Directive (Directive 2012/30/EU) and about financial stability as the basis for an exception from the Directive’s rule that such measures should normally be decided by the corporation itself; however, they are telling in their recognition of the protection of financial stability as a principle at the EU level.151 Expanding

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145 Lastra, International Financial and Monetary Law (n 1) para 3.72, referring to the ‘composition fallacy’. This is really the raison d’être of macroprudential on top of micro-prudential supervision. 146 See generally Donato Masciandaro, ‘Back to the Future? Central Banks as Prudential Supervisors in the Aftermath of the Crisis?’ (2012) 9 European Company and Financial Law Review 112, 123. 147 Pierre Schammo, ‘The European Central Bank’s Duty of Care for the Unity and Integrity of the Internal Market’ (2017) 42 European Law Review 12, notes that this may be an explanation for the comparatively limited role of the ECB in the area discussed. 148 See also Mark Hallerberg and Rosa M Lastra, ‘The Single Monetary Policy and Decentralisation: An Assessment’ (Monetary Dialogue, September 2017) 9 accessed 5 February 2020 (hereafter Hallerberg and Lastra, ‘The Single Monetary Policy and Decentralisation’), referring to differences among national markets, in particular the housing market, within the euro area and their significance for macroprudential policy. 149 Case C-8/15P to C-10/15 Ledra Advertising v Commission and ECB [2016] ECLI:EU:C:2016:701, para 72. See also Case C-526/14 Tadej Kotnik and Others v Državni zbor Republike Slovenije [2016] ECLI:EU:C:2016:102, Opinion of AG Wahl, para 59, and further Gianni Lo Schiavo, The Role of Financial Stability in EU Law and Policy (Wolters Kluwer 2017) 57–60 (hereafter Lo Schiavo, The Role of Financial Stability in EU Law and Policy). 150 Case C-526/14 Tadej Kotnik and others v Državni zbor Republike Slovenije [2016] ECLI:EU:C:2016:570, paras 88, 91; Case C-41/15 Dowling v Minister for Finance [2016] ECLI:EU:C:2016:836, para 54. See also Georgios Psaroudakis, ‘Kontik: Bank bail-outs and burden sharing in European law’ [2017] (1) Revue Internationale des Services Financiers 34, 39–40. Interestingly, Lo Schiavo, The Role of Financial Stability in EU Law and Policy (n 149) 46–57, points at financial stability as a ‘new supranational foundational objective’ in EU law. 151 See also Psaroudakis, ‘The Scope for Financial Stability Considerations’ (n 46) 142–43.

782 PRUDENTIAL SUPERVISORY TASKS EU macroprudential competence, which of course requires an act of secondary law, would contribute towards the full development of this principle. Of course, there are two conceivable methods of such expansion: either to broaden ECB competence or to establish a different EU-level macroprudential authority, possibly by strengthening the institutional position and legal powers of the ESRB.152 To the extent that there is merit in combining monetary and macroprudential, or micro-and macroprudential competence, the first solution might seem to be preferable; in any case, this is a political choice of administrative architecture. 26.97

To the extent that a wider ECB (or, in any case, EU) competence is thought to be desirable, this is related at first to the macroprudential tools that have already been adopted in EU law, and competence for which still rests primarily with national authorities. A further issue is whether EU law (and, potentially, ECB competence as well) should be expanded to further tools, such as those that have been mentioned above (LTV, LTI, and DSTI) and often relate to real estate financing. It is reasonable to suggest that these have remained matters of national law because of their political sensitivity. Moreover, as implied in the discussion above on monetary policy reaching all cracks, a significant issue with such limitations on mortgage finance is that they are only reasonable if imposed on other sources of mortgage finance as well rather than on banks alone, as to do otherwise would be to risk disintermediation. However, this is admittedly also the difficulty of the matter from a European point of view, as it would only add to the (national) political sensitivity of such activities.153

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In any case and notwithstanding the policy proposals that may be developed as to the proper scope of ECB macroprudential competence, a result of the limited scope and intensity of its competence in current law is that, whatever the merits of the theoretical discussion on the interplay between monetary and macroprudential policies (and it has been suggested here that the latter does leave room for the former in any case), the ECB is certainly not constrained from looking at financial stability while applying its monetary policy mandate. Indeed, given that macroprudential policy tools are only available to the ECB to a very limited extent (and indeed they are only partly developed in European law more generally), there is no basis for suggesting that this policy area is covered by such tools and that it would be superfluous for the ECB to look at financial stability while acting as the Eurozone’s central bank.

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In other words, the principle stated above (also with reference to the British example), ie that macroprudential policy is the first line of defence and monetary policy addresses cases of widespread imbalances for which macroprudential policy may be inadequate, remains valid. As regards the application of this principle to the case of the euro area, the less macroprudential powers are available, such as in this case, the more possible it becomes that monetary policy will be needed in order to deal with financial stability concerns.

152 Lo Schiavo, The Role of Financial Stability in EU Law and Policy (n 149) 218. 153 See the discussion in Goodhart and others, ‘Interaction between Monetary Policy and Bank Regulation’ (n 79) 12.

MACRO/MICROPRUDENTIAL SUPERVISION AND ELA 783

C. ECB and emergency liquidity assistance154 Lender of last resort (LOLR), a classic central banking function, is intimately related to the conduct of monetary policy, to the issue of banknotes (legal tender money) and to the central bank’s role in the pursuit of financial stability.

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LOLR or Emergency Liquidity Assistance (ELA) comes in two forms. The 1st is market liquidity assistance (the ‘monetary approach’)155 which is the competence of the ECB (thus centralized) and forms part of its monetary policy responsibilities in accordance with Article 18 of the ESCB Statute and Article 127 TFEU. The 2nd is individual liquidity assistance is the ‘credit approach’ or lending to individual illiquid but solvent credit institutions, which remains a national competence of the National Central Banks (thus decentralized), performed on their own responsibility and liability, in accordance with Article 14.4 ESCB Statute and a Governing Council decision of 1999, though subject to the fiat of the ECB’s Governing Council.

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Article 14.4 of the ESCB Statute156 assigns the Governing Council responsibility for restricting ELA operations if it considers that they interfere with the objectives and tasks of the Eurosystem, for example if there is a threat to the singleness of monetary policy or an obvious concern about a possible breach of the monetary financing prohibition. If the Governing Council finds such interference, by a majority of two thirds of the votes cast, it has a veto right over such operations. Failure of an NCB to comply with the Governing Council’s veto under Article 14.4 ESCB Statute can result in an infringement action being taken against them by the ECB before the Court of Justice under Article 271(d) TFEU. If there is no objection and ELA is provided, responsibility for the provision of ELA lies with the NCB concerned. Thus, any costs of, and the risks arising from, the provision of ELA are incurred by the relevant NCB and are not shared by the Eurosystem as a whole.

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As stated in the contribution by Hallerberg and Lastra for the European Parliament:

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though the content of the decision grant or not grant ELA(assessing the risks involved in order to act accordingly in each case) is discretionary and falls squarely upon the NCB concerned (which will bear any potential costs and losses), there are parameters or contours that must be observed from a procedural perspective for NCBs in the Eurosystem. The discretion that national central banks have in the provision of ELA is thus framed within a system of rules. National practices on ELA must be consistent with EU law and ECB requirements, in particular the relevant provisions in the Treaty and in the ESCB Statute, the

154 This section of the chapter draws on Hallerberg and Lastra, ‘The Single Monetary Policy and Decentralisation’ (n 148) and earlier writings of both Hallerberg and Lastra. 155 The CJEU in the Gauweiler (n 59) confirmed that the role of ELA at a macrolevel ‘is part of the ECB’s monetary policy, as the objective of safeguarding an appropriate transmission of monetary policy is likely both to preserve the singleness of monetary policy and to contribute to the ECB’s primary objective to maintain price stability’. See Gauweiler (n 59). 156 Article 14.4 of the ESCB Statute reads as follows: National central banks may perform functions other than those specified in this Statute unless the Governing Council finds, by a majority of two thirds of the votes cast, that these interfere with the objectives and tasks of the ESCB. Such functions shall be performed on the responsibility and liability of national central banks and shall not be regarded as being part of the functions of the ESCB.

784 PRUDENTIAL SUPERVISORY TASKS ELA procedures, first published in 2013 and recently revised again in 2017157 (but in existence since 1999), the ECB doctrine and guidance and the EU rules on state aid.158 26.104

The rationale for these procedural requirements is to ensure that ELA operations do not interfere with the single monetary policy.159

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There is also a further constitutional constraint and that is the independence of the ECB and the NCBs according to Article 130 TFEU and the prohibition of monetary financing of Article 123 TFEU.

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The missing pillar of banking union is lender of last resort. As it has been argued elsewhere,160 Article 18 ESCB Statute, Article 127 TFEU and the principle of subsidiarity provide sufficient legal basis, in particular in the context of the Single Supervisory Mechanism (SSM)/Banking Union since 2014 and thus no treaty amendment is required. It could also be argued161 to the same effect that subsidiarity leads to the recognition of ECB competence (as part of its contribution to financial stability) in an integrated credit system, taking into account European Monetary Union, the described rise of systemic regulation in EU law and, certainly, the establishment of the SSM.

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LOLR/ELA links monetary policy, supervision (micro and macro) and financial stability. The restrictive interpretation by the ECB of the ESCB Statute preventing it from acting as a lender of last resort to individual banks should be revisited, in particular for those significant credit institutions (banking groups) that are now supervised by the ECB.

157 See ECB, ‘ELA Procedures’ accessed 5 February 2020; and ECB, ‘Agreement on emergency liquidity assistance’ accessed 5 February 2020. 158 The Commission, ‘Banking Communication’ para 62: The ordinary activities of central banks related to monetary policy, such as open market operations and standing facilities, do not fall within the scope of the State aid rules. Dedicated support to a specific institution (commonly referred to as ‘emergency liquidity assistance’) may constitute state aid rules unless the following cumulative conditions are met: (a) the credit institution is temporarily illiquid but solvent . . .; (b) the facility is fully secured by collateral . . .; (c) the central bank charges a penal interest rate . . . (d) the measure is taken at the central bank’s own initiative. See also Georgios Psaroudakis, ‘State Aids, Central Banks, and the Financial Crisis’ (2012) 9 European Company and Financial Law Review 194, 218–20. 159 For example, where the government of a Member State could instruct an NCB to provide a large amount of ELA, it could indirectly influence the Eurosystem’s monetary policy and the Eurosystem would be forced to neutralize the effects of ELA on the monetary base in order to maintain price stability. 160 See Lastra, International Financial and Monetary Law (n 1) 378 and Rosa M Lastra, ‘Reflections on Banking Union, Lender of Last Resort and Supervisory Discretion’ (ECB Legal Conference 2015: From Monetary Union to Banking Union, on the way to Capital Markets Union) 154, 167–69. See also Christos Gortsos, ‘Last Resort Lending to Solvent Credit Institutions in the Euro Area Before and After the Establishment of the Single Supervisory Mechanism (SSM)’ (ECB Legal Conference 2015: From Monetary Union to Banking Union, on the way to Capital Markets Union) 53, 63–70. 161 Psaroudakis, ‘The Scope for Financial Stability Considerations’ (n 46) 144–50. Cf also Armin Steinbach, ‘The Lender of Last Resort in the Eurozone’ (2016) 53 Common Market Law Review 361, 379–80.

27

ECONOMIC POLICY COORDINATION Foundations, Structures, and Objectives Jean-Paul Keppenne*

I. Basic Features and Objectives A. Legal basis B. Objectives and basic features C. Evolution

II. Nature of the Union Competence: From Coordination Towards a Quasi-Common Policy III. Actors of the Union Economic Governance A. Limited role for the European Parliament B. Central role for the Council and its preparatory bodies C. Preparatory and monitoring role of the Commission D. The European Fiscal Board E. The European Council F. The bodies of the euro area

27.1 27.1 27.3 27.6

27.9 27.14 27.16 27.18 27.21 27.24 27.25 27.26

G. The Euro Summit H. The Euro group I. The evolution of the institutional balance within the Union

IV. The European Semester A. B. C. D.

Definition Country specific recommendations Successive steps Main procedural features

27.30 27.31 27.32 27.35 27.35 27.36 27.38 27.45

V. The Dialectic Between the European Union and the Euro Area 27.47 A. A ‘semi-intergovernmental’ method for the euro area

VI. Future Evolution

A. Centralization or reinforced coordination B. The Union and the euro area

27.48 27.59 27.62 27.65

I. Basic Features and Objectives A. Legal basis The Treaty on European Union (TEU) provides, in its Article 3(4), that ‘[t]‌he Union shall establish an economic and monetary union whose currency is the euro’.1 This Economic Monetary Union (EMU)2 finds its origin in the Treaty of Maastricht of 7 February 1992.

* All opinions are purely personal. 1 See generally, Helmut Siekmann in Helmut Siekmann (ed), EWU— Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 3 TEU, para 47 (hereafter Siekmann in Siekmann (ed), EWU). 2 On the EMU, see generally Christos Hadjiemmanuil, ‘Economic and Monetary Union’ in Damian Chalmers, Christos Hadjiemmanuil, Giorgio Monti, and Adam Tomkins (eds), European Union Law (CUP 2006); Rosa M Lastra and Jean-Victor Louis, ‘European Economic and Monetary Union: History, Trends, and Prospects’ (2013) 32 Yearbook of European Law 57–206 (hereafter Lastra and Louis, ‘European Economic and Monetary Union’); Francis Snyder, ‘EMU—Integration and Differentiation: Metaphor for European Union’ in Paul Craig and Gráinne de Búrca (eds), The Evolution of EU Law (2nd edn, OUP 2011) 687.

Jean-Paul Keppenne, 27 Economic Policy Coordination In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0033

27.1

788 ECONOMIC POLICY COORDINATION As part of this EMU, the core provisions framing the economic policy coordination of the Union3 are included in the Treaty on the Functioning of the European Union (TFEU) amongst the other internal Union policies. Consequently, the so-called ‘Community method’ fully applies in this field.4 27.2

The Union’s economic policy coordination is regulated by Articles 2(3) TFEU and 5(1) TFEU and further detailed in a separate chapter (Articles 120 TFEU to 126 TFEU) which is part of a joint title dedicated to the ‘economic and monetary policy’: – Article 2(3) TFEU provides that ‘[t]‌he Member States shall coordinate their economic and employment policies within arrangements as determined by this Treaty, which the Union shall have competence to provide’. – According to the first subparagraph of Article 5(1) TFEU, ‘[t]‌he Member States shall coordinate their economic policies within the Union. To this end, the Council shall adopt measures, in particular broad guidelines for these policies’. – These principles are further specified in Part Three, Title VIII TFEU: ‘Economic and Monetary Union’. Article 119 TFEU refers to a ‘close coordination of Member States’ economic policies’. According to the first paragraph of Article 121(1) TFEU, Member States shall regard their economic policies as a matter of common concern and shall coordinate them within the Council. Article 126 TFEU puts a particular emphasis on the surveillance of the fiscal situation of the Member States through the so-called ‘excessive deficit procedure’. These provisions were implemented through the Stability and Growth Pact, which we analyse further in Chapter 28. – The Maastricht Treaty also inserted the prohibitions which are now contained in Articles 123 to 125 TFEU with the aim to keep the Member States under the discipline of the financial markets and therefore to ensure and guarantee that they take responsibility for their own budgetary policies5 (in particular the no bail-out clause contained in Article 125 TFEU).6 These Articles apply to all Member States, since all of them are supposed to join the euro area at some stage (with the exception of the United Kingdom (UK), when it was still a Member State, and Denmark7). – Finally, since the Lisbon Treaty, the Treaty contains provisions specific to the euro area. According to the second subparagraph of Article 5(1) TFEU, ‘[s]‌pecific provisions 3 On the economic coordination, see generally Rosa M Lastra, Legal Foundations of International Monetary Stability (OUP 2006) ch 8; Jean-Victor Louis, L’Union européenne et sa monnaire (3rd edn, Université de Bruxelles 2009) ch III; Lastra and Louis, ‘European Economic and Monetary Union’ (n 2). 4 Unlike the Common Foreign and Security Policy, see Lastra and Louis, ‘European Economic and Monetary Union’ (n 2) 71. For a definition of ‘Community method’, see Renaud Dehousse, ‘The “Community Method” at Sixty’ in Renaud Dehousse (ed), The ‘Community Method’: Obstinate or Obsolete? (Palgrave Macmillan 2011). 5 See here, Doris Hattenberger in Jürgen Schwarze and others (eds), EU-Kommentar (3rd edn, Nomos 2012) Article 123 TFEU; Christoph Herrmann and Corinna Dornacher in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar zu EUV, GRC und AEUV (Mohr Siebeck 2017) Article 123 TFEU, paras 2ff. 6 For a discussion on the no bail-out clause, see Christoph Ohler in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 125 TFEU, para 177 (hereafter Ohler in Siekmann (ed), EWU); Matthias Ruffert, ‘The European Debt Crisis and European Union Law’ (2011) 48 Common Market Law Review 1777, 1785–86 (hereafter Ruffert, ‘The European Debt Crisis and European Union Law’); Rainer Palmstorfer, ‘To bail out or not to bail out? The current framework of financial assistance for euro area Member States measured against the requirements of EU primary law’ (2012) 37 European Law Review 771, 775–79; Jean- Victor Louis, ‘Guest Editorial: The No-Bailout-Clause and Rescue Packages’ (2010) 47 Common Market Law Review 971. 7 See Protocols No 15 and 16 annexed to the Treaties.

Basic Features and Objectives 789 shall apply to those Member States whose currency is the euro’. Those provisions are to be found in Articles 136 to 138 TFEU.8 – Two protocols attached to the Treaties complement the primary law framework: Protocol No 12 on the Excessive Deficit Procedure, which complements Article 126 TFEU, and Protocol No 14 on the Eurogroup.

B. Objectives and basic features The liberal orientation of European Union (EU) integration is present in the field of economic policy. The guiding principles are listed in Article 119 TFEU: stable prices, sound public finances and monetary conditions as well as a sustainable balance of payments.9 If one removes the objectives typically related to monetary policy, it appears that the objective of sound public finances receives a prominent place.10 Articles 119 and 120 TFEU also both refer to ‘the principle of an open market economy with free competition’ but the practice of the Commission and the Council reveals that this reference has no effects on the way in which the Union coordinates the economic policies of its Member States.

27.3

The fundamental idea behind these Treaty provisions is that in an increasingly integrated EU, and particularly within the euro area, the interdependence between Member States means that their interests are best served through the coordination of their economic policies. However, the Maastricht Treaty of 1992, which led to the creation of the euro as a single currency, included only limited provisions as regards economic governance.11 In substance, while the Treaty created a single monetary policy within the Eurozone, it did not create any common economic policy. We refer here to the famous ‘asymmetry of EMU’.12

27.4

The Maastricht Treaty was restrictive as regard the powers transferred to the Union level in that area. First, the Treaty referred simply to the concept of ‘coordination’, which is not even listed as a shared competence in Article 4 TFEU. The economic and fiscal policies remained decentralized at the national level while the Union was only in charge of ‘coordination’. The coordination was only an ‘external’, rule-based control over the Member States, while the budgetary and economic decisions were taken at national level. Moreover, the sanctions that the Treaty put at the disposal of the Union institutions in case of non-respect of the

27.5

8 For the sake of clarity, in this chapter and in Chapter 28, we simplify the expressions used in the TFEU as follows: ‘Member States whose currency is the euro’ are referred to as ‘euro area Member States’ and ‘Member States with a derogation’ (Article 139(1) TFEU) are referred to as ‘non euro area Member States’. 9 Christoph Herrmann in Matthias Pechstein, Carsten Nowak, and Ulrich Häde (eds), Frankfurter Kommentar zu EUV, GRC und AEUV (Mohr Siebeck 2017) Article 119 TFEU, paras 16ff; Siekmann in Siekmann (ed), EWU (n 1) Article 119 TFEU, paras 31ff. Some have argued that price stability is the ‘overriding objective’ or ‘Grundnorm’ of the EMU, see eg, Matthias J Herdegen, ‘Price Stability and Budgetary Restraints in the Economic and Monetary Union: The Law Guardian of Economic Wisdom’ (1998) 35 Common Market Law Review 9. 10 On sound public finances, see Siekmann in Siekmann (ed), EWU (n 1) Article 119 TFEU, paras 53ff. 11 Alicia Hinarejos, The Euro Area Crisis in Constitutional Perspective (OUP 2015) 68ff (hereafter Hinarejos, The Euro Area Crisis in Constitutional Perspective); see also Siekmann in Siekmann (ed), EWU (n 1) Einführung, paras 27ff. 12 See, inter alia, Rosa M Lastra, International Financial and Monetary Law (OUP 2015) 291 (hereafter Lastra, International Financial and Monetary Law); also, Hinarejos, The Euro Area Crisis in Constitutional Perspective (n 11) 3–10.

790 ECONOMIC POLICY COORDINATION Union guidance were rather weak, came late and, in practice, were never activated. Second, contrary to what applies to other Union policies, the Treaty provisions establishing the competence for economic coordination refer directly to the Member States themselves as being responsible for the coordination, albeit ‘within the Union’ (Article 5(1) TFEU), more precisely ‘within the Council’ (Article 121(1) TFEU). Protocol 14 on the Eurogroup also confirms that some form of coordination may take place directly between Member States. Third, the main instruments envisaged by primary law for the purpose of this coordination are of a ‘soft law’ nature. These are in particular the ‘broad guidelines of the economic policies of the Member States and of the Union’, referred to in Article 121(2) TFEU, coupled with a system of ‘multilateral surveillance’ operated by the Commission and the Council, as organized by paragraphs 3 to 6 of the same Article.

C. Evolution 27.6

This legal set up has dramatically changed since the conclusion of the Maastricht Treaty.13 The instruments provided for by Article 121 TFEU have considerably evolved over time, in particular with the creation of the European Semester and the adoption by the Council of ‘Country Specific Recommendations’ on an annual basis as part of this Semester.14 From a material point of view, the Union has also enlarged the aspects of national ‘economic’ policies monitored at Union level. For a very long time, the Union institutions put a strong emphasis on the budgetary and fiscal policies of the Member States, through the Stability and Growth Pact.15 As regards aspects of economic coordination other than the budgetary issues, the Union simply relied on Article 121(2) TFEU for issuing at regular intervals broad guidelines with limited impact on the behaviour of the Member States.16 Today, following the adoption of a number of new instruments of secondary law, the surveillance exercised by the Union upon the Member States covers not only budgetary policies but also structural reforms and economic policies in all their features, in particular through the macroeconomic imbalances procedure.17

27.7

Secondary law has profoundly expanded the competences of the Union as a follow-up of the financial crisis of 2008: – Within the EU framework, the legislator adopted the so-called ‘six-pack’ in 2011, a set of five Regulations and one Directive, to reinforce and enlarge the surveillance of the economic and fiscal policy of the Member States.18 Two Regulations amend the 13 For an overview of the pre-crisis set up of the European economic constitution, see Kaarlo Tuori and Klaus Tuori, The Eurozone Crisis: A Constitutional Analysis (CUP 2014) 119ff (hereafter Tuori and Tuori, The Eurozone Crisis); Hinarejos, The Euro Area Crisis in Constitutional Perspective (n 11) 15ff. 14 See Section IV. 15 Lastra and Louis, ‘European Economic and Monetary Union’ (n 2) 91. Lastra, International Financial and Monetary Law (n 12) 291; On the Stability and Growth Pact, see Chapter 28. 16 See Kenneth A Armstrong, ‘The New Governance of EU Fiscal Discipline’ (2013) 38 European Law Review 601, 602 (hereafter Armstrong, ‘The New Governance of EU Fiscal Discipline’); Sideek M Seyad, ‘A Critical Evaluation of the Revised and Enlarged European Stability and Growth Pact’ (2012) 27(5) Journal of International Banking Law and Regulation 421, 428–29; Alicia Hinarejos, ‘Fiscal Federalism in the European Union: Evolution and Future Choices for EMU’ (2013) 50 Common Market Law Review 1921, 1624–27. 17 See Chapter 29. 18 See Official Journal of the European Union (OJ) L306/1ff (November 2011).

Basic Features and Objectives 791 preventive and corrective arms of the Stability and Growth Pact, ie Regulations 1466/ 97 and 1467/97. A third Regulation sets up a new ‘excessive imbalance procedure’. Two other Regulations [(EU) 1173/2011 and 1174/2011] are addressed to euro area Member States only. They create new mechanisms for financial sanctions against euro area Member States in order to reinforce the effectiveness of the surveillance of their economic and budgetary policies.19 Financial sanctions may be imposed in a gradual way, from the preventive arm to the latest stages of the excessive deficit and excessive imbalance procedures, and may eventually reach 0.5 per cent of Gross Domestic Product (GDP). A reversed-qualified-majority voting (RQMV) procedure is introduced within the Council for the adoption of most sanctions, therefore, increasing the likelihood of their adoption. Under this procedure, a recommendation or a proposal of the Commission is considered adopted in the Council unless a qualified majority of Member States votes against it within a short deadline. The last element of the ‘six- pack’ is a Directive providing certain provisions for the national fiscal framework of the Member States.20 – In 2013, the EU legislator adopted the ‘two-pack’, two additional Regulations which apply only to the euro area Member States (Regulations 472/2013 and 473/2013).21 The ‘two-pack’ aims at further strengthening and better coordinating the surveillance mechanisms in the euro area, through the whole panel of situations a Member State can find itself in. It thus includes, first, provisions concerning all euro area Member States, to improve their budgetary frameworks and better coordinate the surveillance of their annual budgetary planning. Second, Member States in excessive deficit are subject to increased surveillance to make sure the correction of the excessive deficits is timely and long lasting. Finally, Member States experiencing, or at risk of experiencing, financial difficulties and those receiving external financial assistance are subject to new provisions, including during a transition period after their exit from the programmes. Outside the framework of the EU Treaties, twenty-five Member States22 have also concluded in 2012 a Treaty on Stability, Coordination and Governance in the Economic Monetary Union (TSCG) whose most important aspect is the so-called ‘Fiscal Compact’ by which contracting states agreed to incorporate a budget-balanced rule in their national legal framework.23

19 Jean-Victor Louis, ‘The Review of the Stability and Growth Pact’ (2006) 43 Common Market Law Review 85,  90–94. 20 Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41. 21 OJ L140/1ff (May 2013). 22 With the exception of Croatia, Czech Republic, and the United Kingdom, when it was still a Member State. 23 On the ‘fiscal compact’, see Paul Craig, ‘The Stability, Coordination and Governance Treaty: Principle, Politics and Pragmatism’ (2012) 37 European Law Review 231; Steve Peers, ‘The Stability Treaty: Permanent Austerity or Gesture Politics?’ (2012) 8 European Constitutional Law Review 404; Hinarejos, The Euro Area Crisis in Constitutional Perspective (n 11) 37–40; Armstrong, ‘The New Governance of EU Fiscal Discipline’ (n 16) 603–05; Christian Calliess, ‘The Governance Framework of the Eurozone and the Need for a Treaty Reform’ in Federico Fabbrini and others (eds), What Form of Government for the European Union and the Eurozone? (Hart Publishing 2015) 43–47 (hereafter Calliess, ‘The Governance Framework of the Eurozone’).

27.8

792 ECONOMIC POLICY COORDINATION

II. Nature of the Union Competence: From Coordination Towards a Quasi-Common Policy 27.9

As mentioned above, the EMU suffered from disequilibrium since its inception. While monetary policy was exclusively in the hand of the Union, and in particular the European Central Bank (ECB), economic policies of the Member States were only remotely coordinated through the so-called ‘open method of coordination’.24 Moreover, because of the conviction that all Member States would quickly adopt the euro,25 the coordination of economic policies was envisaged for the whole of the Union, without procedures for further coordination within the euro area.

27.10

The primary law provisions regarding economic and budgetary policies have stayed largely unchanged since 1992. The Maastricht Treaty contained only limited provisions: a few prohibitions whose purpose was to keep the Member States under the discipline of the financial markets and a soft coordination of economic policies in general. It included a stricter procedure to control and limit the budgetary deficits of the Member States, the famous ‘excessive deficit procedure’.26 However, this latter procedure provides only for an ‘external’ control on the Member States (the budgetary decisions are still taken at national level) and the sanctions that are available in case of non-respect of the Union guidance have never been activated.

27.11

The Lisbon Treaty has not fully remedied this situation. Its changes were rather minor with the notable exception of the inclusion of a new provision specific to the euro area, Article 136 TFEU.27 The Treaties are still based on the assumption that the EU is competent only for coordinating national policies and that the real decisions are taken at national level only. The Court of Justice also confirmed in the Pringle case that ‘Articles 2(3) and 5(1) TFEU restrict the role of the Union in the area of economic policy to the adoption of coordinating measures’.28

27.12

However, when the euro area crisis erupted, strong measures of solidarity and of reinforced coordination within the euro area were felt necessary but the Union was cruelly missing an adequate legal basis for their adoption. The pressure of events and strong legal creativity were, therefore, crucial for moving forward. This has led to a gradual change in nature of the Union competence regarding economic policy. It remains true that the Union cannot directly substitute the Member States in the conduct of their economic and fiscal policies. The General Court confirmed, for instance, that the adoption of a legislative act authorizing a Member State not to repay its debt could not be adopted on the basis of Article 136 TFEU.29 24 For a discussion on the ‘open method’, see eg, Dermot Hodson and Imelda Maher, ‘The Open Method as a New Mode of Governance: The Case of Soft Economic Policy Co-ordination’ (2001) 39 Journal of Common Market Studies 719. 25 Tuori and Tuori, The Eurozone Crisis (n 13) 28. 26 See generally, Ansgar H Belke, ‘The Fiscal Compact and the Excessive Deficit Procedure: Relics of Bygone Times?’ in Nazaré da Costa Cabral and others (eds), The Euro and the Crisis—Perspectives for the Eurozone as a Monetary and Budgetary Union (Springer 2017) 131ff. 27 See generally, Ohler in Siekmann (ed), EWU (n 6) Article 136 TFEU; Tuori and Tuori, The Eurozone Crisis (n 13) 168ff. 28 Case C-370/12 Thomas Pringle v Government of Ireland [2012] ECLI:EU:C:2012:756, para 64 (hereafter Pringle). See also Case T-450/12 Anagnostakis v Commission [2015] ECLI:EU:T:2015:739, para 58. 29 Pringle (n 28) para 58.

Actors of the Union Economic Governance 793 However, it becomes more and more difficult to maintain that economic governance is based only on mere coordination. Some power has moved from the national to the European level, even if gradually. There was in particular a shift from soft law measures without binding consequences toward a binding framework.30 While the governance instruments remain largely non-binding, financial sanctions may be imposed in case of non-respect of these instruments. In the same vein, the granting of financial assistance to Member States in difficulties was made strictly conditional on the implementation of reforms that were previously only recommended. This way, the lenders, be it the Union itself or intergovernmental bodies of various nature (European Financial Stability Facility (EFSF), European Stability Mechanism (ESM)), had a major influence on the main public policies of assisted Member States.31 Even the use of the Union Structural Funds is now dependent on a mechanism of so-called ‘macroconditionality’ through which commitments or payments of Union funds may be suspended if the Member State concerned does not comply with its obligations under the economic governance framework.32 The Barroso Commission also envisaged to set up contractual agreements between the Union and its Member States and the correct implementation of the reforms agreed in these agreements would activate a solidarity mechanism using loans, grants or guarantees,33 but the Member States did not agree on these reforms. The Juncker Commission has also tabled a set of budgetary instruments in order to support the cohesion and the financial stability of the Union and of the euro area.34

27.13

III. Actors of the Union Economic Governance As we have seen above, the Member States remain in charge of the effective conduct of their economic and budgetary policies, even if under the control of the EU. Therefore, national and regional governments and parliaments are the principal actors.

27.14

At the level of the Union, the governance structure initially put in place by the Maastricht Treaty for implementing the Union governance rules and mechanisms was rather simple. All competences were in the hand of the Council of Ministers for the final decisions and of the Commission, which exercised its classic functions of proposal, implementation and monitoring.

27.15

30 See Hinarejos, The Euro Area Crisis in Constitutional Perspective (n 11) 75. 31 See also Alberto de Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union during the Debt Crisis: The Mechanisms of Financial Assistance’ (2012) 49 Common Market Law Review 1613. 32 Article 23 Regulation (EU) 1303/2013 of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) 1083/2006 [2013] OJ L347/320. 33 See Commission, ‘Towards a Deep and Genuine Economic and Monetary Union The introduction of a Convergence and Competitiveness Instrument’ COM (2013) 165 final. 34 See Section VI.

794 ECONOMIC POLICY COORDINATION

A. Limited role for the European Parliament 27.16

When the Maastricht Treaty entered into force, the European Parliament was largely excluded from the field of economic coordination, which was attributed to the Member States acting ‘within the Council’. The Parliament was only informed about the guidelines adopted by the European Council. The Lisbon Treaty improved this originally weak participation of the European Parliament by introducing the ordinary legislative procedure in the area of economic coordination, in particular in Article 121(6) TFEU, thus paving the way for a progressive reinforcement of the European Parliament.35 The ‘six-pack’ has also created an additional mechanism of Economic Dialogue, which makes the Council and the Commission more accountable to the Parliament. Even the President of the European Council and the President of the Eurogroup are now involved in this Dialogue.36 The European Parliament must also be ‘duly involved in the European Semester in order to increase the transparency and ownership of, and accountability for the decisions taken’.37 Nevertheless, some analysts consider that this empowerment has remained largely theoretical.38

27.17

Within the Parliament, the work related to the Economic and Monetary Union is prepared mainly by the Economic and Monetary Affairs Committee (ECON). At services’ level, the Economic Governance Support Unit (EGOV) provides expertise to support the Parliament and its relevant committees and bodies in their scrutiny-related activities on the economic governance framework. The Parliament also requests contributions from external experts on a regular basis.

B. Central role for the Council and its preparatory bodies 27.18

The Council, in its configuration of the Ministers of Economy and Finance, the famous ECOFIN,39 has most of the decisional power regarding economic issues. The central role of the Council is easy to explain. Member States have kept most of their sovereignty in the field of economic and budgetary policy. The big society choices related to taxation, to the level and the nature of public spending, to redistribution measures etc, remain in the hand of each individual Member State. Therefore, the democratic control can still be exercised within national parliaments, where the decisions of national governments have to be supported by a majority. For that reason, it was felt that there was no need for a high degree of parliamentary scrutiny at the European Union level. The role of the Council thus reflects this prominent role of the Member States. This central role of the Council is reinforced by the fact that in most areas of economic policy coordination the Council decides upon recommendations and not proposals of the Commission. This means that the Council may

35 Ruffert, ‘The European Debt Crisis and European Union Law’ (n 6) 1794. 36 Article 2-ab(1) Regulation (EC) 1466/97 and Article 2a(1) Regulation (EC) 1467/97. 37 Article 2-a(4) Regulation (EC)1466/97. 38 Gavin Barrett, ‘European economic governance: deficient in democratic legitimacy?’ (2018) 40 Journal of European Integration 249–64; Diane Fromage, ‘The European Parliament in the post-crisis era: an institution empowered on paper only?’ (2018) 40 Journal of European Integration 281–94. 39 On the ECOFIN Council generally, see Uwe Puetter, The European Council and the Council: New Intergovernmentalism and Institutional Change (OUP 2014) 155ff (hereafter Puetter, The European Council and the Council).

Actors of the Union Economic Governance 795 depart from the Commission’s position without there being a need for unanimity of the Member States.40 A number of committees and working groups prepare the work of the Council. In the field of economic policy coordination, a central role is attributed to the Economic and Fiscal Committee (EFC). The EFC is directly provided for by Article 134 TFEU. It is the successor of the Monetary Committee put in place by the Maastricht Treaty.41 A number of specialized sub-committees prepare the work of the EFC, in particular the EFC Committee on IMF related questions (SCIMF) and the Eurogroup Working Group (EWG), which has grown in importance over the last years.

27.19

Finally, the Economic Policy Committee (EPC) also assists the Council. It was established in 1974 under Decision 74/112/EEC. Its task is to improve the coordination of national economic policies. The Council amended this Decision twice, in 2000 and 2003, to integrate the evolution of the EMU.42

27.20

C. Preparatory and monitoring role of the Commission The Commission is entrusted with the task of monitoring the economic policies and the economic situation of the Member States and recommending measures to the Council. Within the Commission services, the Directorate-General for Economic and Financial Affairs (DG ECFIN) is in charge of most of the preparatory work. The Secretary General has also increased its influence within the Commission over the last years, in parallel with the increased role of the President and the development of the European Semester procedure.

27.21

The Commission has been confronted with a number of challenges over the years in the fulfilment of its tasks related to economic policy coordination. Member States repeatedly put some pressure on its discretion. The development of strong informal coordination mechanisms between the euro area Member States has also been a challenging factor. On the one hand, the Commission remains bound to act for the Union as a whole; it is composed of members for the whole Union and its functioning is based on the principle of collegiality. On the other hand, it must often act to defend the specific interests of the euro area. As a temporary solution to this evolution, the specific competences of the Commissioner responsible for economic and monetary affairs within the Commission have been increased. For instance, he is empowered to adopt some technical decisions.43 Finally, to avoid undue interference by individual Commissioners, the rules of procedure of the Commission have

27.22

40 Article 293(1) TFEU. 41 See Council Decision of 21 December 1998 on the detailed provisions concerning the composition of the Economic and Financial Committee (98/743/EC) [1998] OJ L358/109; Council Decision of 31 December 1998 adopting the Statutes of the Economic and Financial Committee (1999) [1998] OJ L5/71; and Council Decision of 18 June 2003 on a revision of the Statutes of the Economic and Financial Committee (2003/476/EC) [2003] OJ L158/58. 42 Council Decision of 29 September 2000 on the composition and the statutes of the Economic Policy Committee (2000/604/EC) [2000] OJ L257/28 and Council Decision of 18 June 2003 amending Council Decision 2000/604/EC on the Composition and the Statutes of the Economic Policy Committee (2003/475/EC) [2003] OJ L158/55. 43 See Commission, ‘A blueprint for a ++deep and genuine economic and monetary union—Launching a European Debate’ COM (2012) 777 final, fn 24.

796 ECONOMIC POLICY COORDINATION streamlined the internal procedure for the adoption of measures ‘in the field of coordination and surveillance of the economic and budgetary policies of the Member States, in particular of the euro area’.44 27.23

In December 2017, the Juncker Commission presented its vision for the position of a ‘European Minister of Economy and Finance’ which would be at the same time Vice- President of the Commission and Chair of the Eurogroup.45 This Minister would, according to the Commission, be entrusted with important functions both within and outside the Commission. The Member States have, however, given a rather cold reception to these ambitious ideas that, in the long-term, would require some amendments to the institutional provisions of the EU Treaties.46

D. The European Fiscal Board 27.24

In October 2015, the Juncker Commission established an independent advisory European Fiscal Board, entrusted with the task of assisting the Commission for the fulfilment of its competences of economic policy coordination.47 The mission of this Board is to contribute in an advisory capacity to the exercise of the Commission’s functions in the multilateral fiscal surveillance as set out in Articles 121, 126, and 136 TFEU as far as the euro area is concerned. The Board is tasked to provide the Commission with an evaluation of the implementation of the Union fiscal framework, in particular regarding the horizontal consistency of the decisions taken and the implementation of budgetary surveillance, cases of particularly serious non-compliance with the rules, and the appropriateness of the actual fiscal stance at euro area and national level. In this evaluation, the Board may also make suggestions for the future evolution of the Union fiscal framework. The Board also advises the Commission on the prospective fiscal stance appropriate for the euro area as a whole based on an economic judgment. The Board cooperates with the national fiscal councils as referred to in Article 6(1)(b) Directive 2011/85/EU. It publishes an annual report of its activities.48 Some authors have made a parallel between the Board and the successful networks of the Body of European Regulators for Electronic Communications (BEREC) and the Agency for the Cooperation of Energy Regulators (ACER).49 More time will be needed before a final assessment can be made of its added-value for the European economic governance. While it was originally established for internal advice only, the first public report 44 Article 12(5) of the Rules of Procedure of the Commission, as amended by European Commission Decision of 9 November 2011 amending its Rules of Procedure (2011/737/EU, Euratom) [2011] OJ L296/58. 45 Commission, ‘A European Minister of Economy and Finance’ COM (2017) 823 final. 46 The function of a ‘Minister’ acting in full autonomy would derogate to the principle of collegiality of the Commission. If he or she chairs configurations of the Council, this would also require explicit provisions in the Treaties, as it is the case for the High Representative of the Union for Foreign Affairs and Security Policy (Article 18 TEU). 47 Commission Decision (EU) 2015/1937 of 21 October 2015 establishing an independent advisory European Fiscal Board [2015] OJ L282/37. 48 Puetter, The European Council and the Council (n 39) 155ff; and see European Fiscal Board, ‘Annual Report 2019’ accessed 4 February 2020 for the latest annual report. 49 Alexandre de Streel, ‘EU Fiscal Governance and the Effectiveness of its Reform’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), Constitutionalization of European Budgetary Constraints: Comparative Analysis and Interdisciplinary Perspectives (Hart Publishing 2014) 85, 97.

Actors of the Union Economic Governance 797 issued by the Board shows that it is keen to play a bigger role in the implementation and design of the Union fiscal rules.50

E. The European Council Through its frequent meetings at the height of the crisis, the European Council has also played a prominent—albeit informal—role in the economic governance of the Union. There has been a clear shift in favour of the European Council throughout the crisis.51 This institution has tried more and more to assume the role of the legislative initiator to the detriment of the Commission.52 The existence of a permanent presidency has played a major role in this evolution. While this way of acting was possibly acceptable during the most difficult moments of the crisis, in order to achieve consensus within very short deadlines, it is worrying to see that the European Council keeps acting the same way even for less urgent files.53 This pattern is detrimental to the right of initiative of the Commission and puts pressure on the legislative work of the European Parliament.

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F. The bodies of the euro area In parallel with the institutional structure of the European Union, an alternative structure has emerged over the last years for the euro area. The recent years have seen a progressive but continuous reinforcement of this so-called ‘eurofilière’, both within and outside the EU framework (Euro Summits, Eurogroup, and Euro Working Group). It is striking to note that this evolution has been mostly limited to the executive power. Experience of the crisis has shown that there was a need for strong bodies at that level, because the composition of the euro area is and will remain different from the whole EU for a very long period of time. In the absence of formal euro area institutions, Euro Summits and especially the Eurogroup have de facto played a crucial role, in particular for negotiating financial assistance packages. This tendency was reinforced by the fact that the composition of the Board of Governors of the European Stability Mechanism is similar to the Eurogroup’s composition, ie the Finance Ministers of the euro area Member States.54 The Euro Summits were even granted formal recognition in the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG) and therefore ‘internationally institutionalised’.55

50 European Fiscal Board, ‘Annual Report 2018’ accessed 4 February 2020. 51 See generally, Puetter, The European Council and the Council (n 39) 68ff. 52 Mark Dawson and Floris De Witte, ‘Constitutional balance in the EU after the euro-crisis’ (2013) 76 The Modern Law Review 817, 830–31 (hereafter Dawson and De Witte, ‘Constitutional balance in the EU after the euro-crisis’). 53 See the direct involvement of the European Council in the setting up of the Single Supervisory Mechanism and Single Resolution Mechanism (For a good summary, see ‘European Council Conclusions—A Rolling Check- List of Commitments to Date’ (European Parliamentary Research Service, December 2017) accessed 5 February  2020. 54 See Case T-786/14 Eleni Pavlikka Bourdouvali and Others v Council of the European Union and Others [2018] ECLI:EU:T:2018:487, para 121. 55 Christian Calliess, ‘From Fiscal Compact to Fiscal Union: New Rules for the Eurozone’ (2012) 14 Cambridge Yearbook of European Legal Studies 101, 109 (hereafter Calliess, ‘From Fiscal Compact to Fiscal Union’).

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798 ECONOMIC POLICY COORDINATION By contrast, there has been no parallel reinforcement of control mechanisms over the work of these bodies. Parliamentary control has remained largely fragmented between national assemblies, even if some dialogue between the European Parliament and the President of the Eurogroup is now provided for by the EU legislation.56 Interparliamentary cooperation with the European Parliament remains ineffective. 27.27

This new structure raises a number of legal questions. Some of these new bodies are largely informal; some do not have a decision-making power of their own. They are not part of the EU legal framework. Consequently, the political control of their activities is weak and often decentralized at the level of national parliaments. The jurisdictional control has also remained very limited so far. Concerning in particular the Eurogroup, the Court of Justice (Grand Chamber) confirmed that ‘the term “informally” is used in the wording of Protocol No 14 on the Eurogroup, annexed to the FEU Treaty’ and ‘the Eurogroup is not among the different configurations of the Council of the European Union enumerated in Annex I to its Rules of Procedure . . . the list of which is referred to in Article 16(6) TEU. Accordingly, . . . the Eurogroup cannot be equated with a configuration of the Council or be classified as a body, office or agency of the European Union within the meaning of Article 263 TFEU’.57

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However, more recently, the General Court decided that: Article 137 TFEU and Protocol No 14, of 26 October 2012, on the Euro Group . . . , annexed to the TFEU, make provision, inter alia, for the existence, the composition, the procedural rules and the functions of the Euro Group. In that last regard, Article 1 of that protocol provides that the Euro Group is to meet to discuss questions related to the specific responsibilities [the ministers composing it] share with regard to the single currency’. Those questions concern, under Article 119(2) TFEU, the activities of the European Union for the purposes of the objectives set out in Article 3 TEU, which include the establishment of an economic and monetary union whose currency is the Euro. It follows that the Euro Group is a body of the Union formally established by the Treaties and intended to contribute to achieving the objectives of the Union. The acts and conduct of the Euro Group in the exercise of its powers under EU law are therefore attributable to the European Union.58

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It remains to be seen whether the Court of Justice will support this rather creative decision of the General Court.59

G. The Euro Summit 27.30

The importance and influence of this euro area structure have continuously grown over time. At the top of it is the Euro Summit, which is the informal meeting of the Heads of State 56 Article 2-ab Regulation (EC) 1466/97, as amended by the ‘six-pack’; Article 15 Regulation (EC) 473/2013 (‘two-pack’). 57 Joint Cases C-105/15 P to C-109/15 P Mallis and Others v Commission and ECB [2016] ECLI:EU:C:2016:702, para 61. 58 Case T-680/13 Chrysostomides & Co LLC and Others v Council of the European Union and Others [2018] ECLI:EU:T:2018:486, para 113. 59 The Council has appealed the judgment of the General Court. See Case C-597/18 P Council v K Chrysostomides & Co and Others.

Actors of the Union Economic Governance 799 or Government of the euro area Member States. Its existence is recent. Such summits were first organized informally, on a case-by-case basis, during the financial crisis. Some will recall that they adopted in 2011 an ambitious ‘Euro Plus Pact—Stronger Economic Policy Coordination for Competitiveness and Convergence’.60 The Euro Plus Pact was supposed to create a strong annual political monitoring of the policies of the euro area Member States.61 However, this commitment was not pursued in practice. Thereafter Article 12 TSCG gave an explicit recognition to Eurosummit meetings. This provision provides that the Heads of State or Government of the euro area Member States meet ‘together with the President of the European Commission’ and that the President of the ECB ‘shall be invited’ as well. Other contracting parties to the TSCG may also participate in discussions on specific topics (Article 12(3)). The Euro Summit adopted rules for the organization of its proceedings on 14 March 2013.62 They codify previous practices (for instance on the frequency and venue of the meetings, agenda setting, conduct of proceedings, adoption of Euro Summit statements) and contain some practical arrangements on secretariat, budget and security. The Euro Summit has a president appointed by the Heads of State or Government of the euro area Member States by simple majority at the same time as the European Council elects its president and for the same term of office (two and a half years). The president of the European Council, Herman Van Rompuy, was also appointed president of the Euro Summit. On 30 August 2014, Mr Donald Tusk was appointed President of the Euro Summit for the period from 1 December 2014 to 31 May 2017. He was re-appointed until 30 November 2019 at the same time as he was re-appointed president of the European Council. Mr Charles Michel is currently President until 31 May 2022. Meetings of the Euro Summit should take place ‘when necessary, and at least twice a year’. In practice, the prominence of the Euro Summit and the frequency of its meetings have decreased over the last years but its new President could change that evolution. The mandate of the Euro Summit is larger than the one of the Eurogroup.63 Like the Eurogroup, it discusses questions relating to the specific responsibilities which the euro area Member States share with regard to the euro. Moreover, it is also tasked to discuss ‘other issues concerning the governance of the euro area and the rules that apply to it, and strategic orientations for the conduct of economic policies to increase convergence in the euro area’ (Article 12 TSCG). Its practical importance is nevertheless smaller than the one of the Eurogroup which meets on a more frequent basis.

H. The Euro group The European Council established the Eurogroup as an informal body in 1997. The Lisbon Treaty gave it further prominence through Article 137 TFEU and Protocol No 14.64 Article 137 TFEU provides that arrangements for meetings between ministers of euro area

60 See Ruffert, ‘The European Debt Crisis and European Union Law’ (n 6) 1797. 61 Hattenberger in Schwarze (ed), EU-Kommentar (n 5) Article 121 TFEU, para 13. 62 accessed 5 February  2020. 63 See generally, Ulrich Palm in Eberhard Grabitz and others (eds), Das Recht der Europäischen Union: Kommentar (CH Beck 2017) Article 137 TFEU, para 9 (hereafter Palm in Grabitz and others (eds), Das Recht der Europäischen Union). 64 See generally, Christoph Herrmann in Helmut Siekmann (ed), EWU— Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 137 TFEU.

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800 ECONOMIC POLICY COORDINATION Member States are laid down in Protocol No 14. According to this protocol, the Eurogroup is an informal65 meeting of the Ministers of the euro area Member States together with the Commission and the ECB. The Eurogroup has no decision-making power but discusses ‘questions related to the specific responsibilities [the Ministers] share with regard to the single currency’. Article 12 TSCG also recognizes the existence of the Eurogroup; it tasks it with the preparation of and follow-up of to the Euro Summit meetings. The Eurogroup has de facto become a prominent body in the field of economic coordination where important orientations are decided. It meets the day before the meetings of the ECOFIN. The Eurogroup is chaired by a president elected for two and a half years by a majority of the Members. The proceedings of the Eurogroup are submitted to Working Methods that are regularly updated but are not public.66 The work of the Eurogroup is often criticized for its lack of transparency.67 In particular, since the Eurogroup is not a configuration of the Council, it is not submitted to the publicity obligation imposed on the Council by Article 16(8) TEU. Its meetings are not public.68 The Euro Working Group (EWG) prepares the work of the Eurogroup.

I. The evolution of the institutional balance within the Union 27.32

It is probably too early to make a final assessment as regard evolutions in the balance between the different EU institutions. Some evolutions can nevertheless be identified. Failure of the Commission and especially the Council to fully adhere to the rules of the Stability and Growth Pact has led to the introduction of more automaticity in the EU decision-making process, especially within the Council. The reversed qualified majority voting procedure was created for facilitating the adoption by the Council of the Commission’s proposals for financial sanctions.69 The application of the same procedure between the Contracting Parties of the TSCG was agreed in the framework of the excessive deficit procedure.70 The Council is also bound by a ‘comply-or-explain’ principle in the EMU field that makes more difficult any amendment to the proposals and recommendations of the Commission.71 Even within the Commission, new internal procedures have been put in place in order to protect from political interference the objectivity of the analytical base that supports the Commission’s proposals. All these evolutions are in principle positive since they have the objective of making the EU decision-making process more effective. At the same time, it should be recognized that this shift of power from the Council to the Commission will probably require a more direct political control by the Parliament on the action of the Commission.

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Views are contrasted among commentators regarding the evolution of the role of the European Parliament in the implementation of the economic governance. Dawson and De

65 On the informal nature of the Eurogroup, see Puetter, The European Council and the Council (n 39) 158–59. 66 Palm in Grabitz and others (eds), Das Recht der Europäischen Union (n 63) Article 137 TFEU, paras 6–7. 67 Stefan Kadelbach, ‘Lehren aus der Finanzkrise—Ein Vorschlag zur Reform der politischen Institutionen der Europäischen Union’ (2013) 5 Europarecht 489, 499. 68 See Uwe Puetter, ‘Governing informally: the role of the Eurogroup in EMU and the Stability and Growth Pact’ (2004) 11 Journal of European Public Policy 854, 858. 69 Articles 4(2), 5(2), and 6(2) Regulation (EU) 1173/2011; Article 3(3) Regulation (EU) 1174/2011 (‘six-pack’). 70 Article 7 TSCG. 71 Article 2-ab(2) Regulation (EC) 1466/97 (as amended by the ‘six-pack’).

The European Semester 801 Witte argue that there was a decrease of power of the EP, which has been relegated as mere observer into a forum of limited accountability.72 We do not share that view. On the contrary, it can be considered that the EP has gained influence over the last years by comparison with its nearly total absence in EMU affairs at the time of entry into force of the Maastricht Treaty. To date, a general ‘economic dialogue’ involves the EP;73 the Commission is legally bound to inform the EP during the preparation and implementation of the assistance programmes;74 exchanges of views may be organized before the EP;75 etc. The emerging multi-speed Europe that has appeared with the intergovernmental instruments has also started to contaminate the EU. Some measures still apply to all Member States, but in many other fields measures are restricted to a sub-group of Member States and the growing tendency is neither the application to the euro area Member States only nor the activation of the enhanced cooperation mechanisms: the main evolution takes the form of mechanisms to which all euro area Member States participate but that remain at the same time open for voluntary participation of willing non-euro area Member States.76 The TSCG model was thereafter replicated in the Regulations establishing the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). This flexibility allows the Union to move forward but creates a high degree of complexity in the EU system and makes it much less transparent. It also goes against the basic principle that the EU is a global project and not a menu to pick and choose from.

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IV. The European Semester A. Definition The European Semester was introduced in 2010 in the wake of the euro crisis and was revised and streamlined in 2015. It is a procedural mechanism aiming to ensure that the coordination of budgetary, economic and employment policies takes place in parallel and in a consistent way.77 It brings together different processes of fiscal surveillance (the Stability and Growth Pact), surveillance of macroeconomic imbalances (the Macroeconomic Imbalances Procedure), employment coordination (the European Employment Strategy) and promotion of structural reforms (the Lisbon Strategy and Europe 2020). That process of integrated surveillance allows for consistent policy guidance at European level within a timetable permitting that guidance to inform the national setting of policy in good times.

72 Dawson and De Witte, ‘Constitutional balance in the EU after the euro-crisis’ (n 52) 833. 73 Regulation (EC) 1466/97, as amended by Regulation 1175/2011. 74 Article 7 Regulation (EU) 472/2013. 75 Ibid. 76 See here also Armstrong, ‘The New Governance of EU Fiscal Discipline’ (n 16). 77 For a more detailed assessment of the functioning of the European Semester, see Amy Verdun and Jonathan Zeitlin, ‘Introduction: the European Semester as a new architecture of EU socioeconomic governance in theory and practice’ (2018) 25 Journal of European Public Policy 137–48; Manuel López Escudero, ‘La nueva gobernanza económica de la Unión europea: ¿Una auténtica Unión económica en formación?’ (2015) 19 Revista de Derecho Communitario Europeo 361, 371; James D Savage and David Howarth, ‘Enforcing the European Semester: The Politics of Asymmetric Information in the Excessive Deficit and Macroeconomic Imbalance Procedures’ (2018) 25 Journal of European Public Policy 212.

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802 ECONOMIC POLICY COORDINATION According to Article 2-a(1) Regulation 1466/97, the Semester includes the following components: – the formulation, and the surveillance of the implementation, of the broad guidelines of the economic policies of the Member States and of the Union (broad economic policy guidelines) in accordance with Article 121(2) TFEU; – the formulation, and the examination of the implementation, of the employment guidelines that must be taken into account by Member States in accordance with Article 148(2) TFEU (employment guidelines); – the submission and assessment of Member States’ stability or convergence programmes under Regulation 1466/97; – the submission and assessment of Member States’ national reform programmes supporting the Union’s strategy for growth and jobs; – the surveillance to prevent and correct macroeconomic imbalances under Regulation (EU) 1176/2011.

B. Country specific recommendations 27.36

While the European Semester as such is more about method than about substance, it has increased the visibility and the clarity of the guidance provided to the Member States at Union level. The main objective of the Semester is to establish a regular process for each individual Member States, merging together procedures that were until then pursued separately and at different points in time. This allows addressing to each Member State an annual single set of recommendations, the ‘Country-specific Recommendations’ (CSR), encompassing all policies and sectors.78 This streamlined process reinforces the consistency of the Union messages.79 It also gives EU institutions a more assertive role in setting priorities for the Member States and sometimes influences, within the Member States, the relations between the national parliament and the government.80

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The CSR include first an opinion for most Member States (all of them except Member States subject to a macroeconomic adjustment programme) on their Stability or Convergence Programme. The opinion of the Council on the fiscal Stability and Convergence Programmes notified by the Member States is encapsulated into the recitals and the first recommendation of each CSR. At the same time, the scope of the CSR is larger than fiscal policy and provides guidance to Member States on how to increase growth and jobs and to promote sustainable public finances.81 The legal basis for this legal instrument are Articles 121(2) and 148(4) TFEU, as well as Articles 5(2) or 8(2) Regulation 1466/97 and, possibly, 78 Previously the Council adopted only Broad Economic Policy Guidelines (BEPG) that were multi-annual and addressed to all Member States (see, for instance, European Commission, ‘European Economy—The broad economic policy guidelines (for the 2005–2008 period)’ accessed 5 February 2020). 79 Kenneth Armstrong has described the European Semester as a framework with ‘co-ordinates co-ordination’ (n 16) 613. 80 Valentin Kreilinger, ‘Scrutinising the European Semester in National Parliaments: What are the Drivers of Parliamentary Involvement?’ (2018) 40 Journal of European Integration 325– 40; Mette B Rasmussen, ‘Accountability Challenges in EU Economic Governance? Parliamentary Scrutiny of the European Semester’ (2018) 40 Journal of European Integration 341–47. 81 Cf Armstrong, ‘The New Governance of EU Fiscal Discipline’ (n 16) 614–15.

The European Semester 803 the provisions of the preventive arm of the excessive imbalances procedure (Articles 6 and 7 Regulation 1176/2011 on the prevention and correction of macroeconomic imbalances). This allows the CSR to contain a single set of signals on the fiscal, structural, employment and other economic policies of the Member State.

C. Successive steps The European Semester is an annual process extending from November of the preceding year to the month of July. It starts in November with the so-called ‘autumn package’:

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– The Commission adopts and makes public its Annual Growth Survey (AGS). This document was redenominated ‘Annual Sustainable Growth Strategy’ for the first time in 2020. In that document, the Commission presents its assessment of the economic situation in the European Union and sets out its priorities and guidance for the coming year in terms of the economic and budgetary policies and reforms to boost growth and employment. – At the same time (since the European Semester 2016), the Commission proposes to the Council to adopt formal recommendations for the euro area as a whole. That common timing reflects common challenges of the euro area ahead of country specific discussions. – In addition, the Commission adopts the Alert Mechanism Report (AMR) under the Macroeconomic Imbalances Procedure.82 The AMR identifies which Member States deserve an in-depth review of their economic situation because they may be affected, or may be at risk of being affected, by imbalances.83 At the end of February, the Commission’ services publish ‘Country Reports’, for all Member States. Those reports, in the form of Staff working documents, analyse Member States’ economic and social developments. They identify key macroeconomic and structural challenges and assess progress in advancing reforms. They also analyse more specifically the existence and the extent of possible macroeconomic imbalances for those Member States selected as requiring an in-depth review based on the reading of the Alert Mechanism Report. The main objective of the Country reports is to provide guidance for national authorities in the preparation of their national fiscal and economic plan.

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The Council discusses the AGS and the euro area recommendations and it reports its conclusions to the European Council. On that basis, the European Council issues in March general policy guidance for the Member States, generally broadly endorsing the economic priorities identified by the Commission.

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On that basis, Member States submit two sets of documents to the Commission in April:

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– A Stability or Convergence Programmes (SCPs) outlining their public finance plans;84 and

82 On this procedure, see Chapter 29. 83 Article 5(1) European Parliament and Council Regulation (EU) 1176/2011 of 16 November 2011 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/25. 84 For more details on the fiscal surveillance of the Member States, see Chapter 28.

804 ECONOMIC POLICY COORDINATION – A National Reform Programme (NRPs) which outlines their economic plans and report on progress made over the past year. 27.42

Based on the Country Reports and upon examining the NRPs and SCPs, the Commission transmits a text of Country Specific Recommendations covering the relevant policy areas to the Council for adoption. Various committees and Council working groups review these texts and three different formations of the Council—EPSCO, ECOFIN, and GAC—are involved. After preparatory works, the Council submits to the European Council a draft report on the basis of the Commission’s recommendation. The European Council discusses and adopts conclusions on the draft reports in June.

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In July, based on the Commission’s proposals, the ECOFIN Council then adopts, for each Member State, a single set of Country-Specific Recommendations. The Council acts by qualified majority. All the members of the Council participate in the vote, including the one to which the recommendation is addressed. As CSR are adopted on the basis of recommendations by the Commission, the Council may deviate from the substance of said recommendations by qualified majority but is bound to explain the changes publicly (the ‘comply-or-explain’ obligation). The European Semester ends when the Council informs the European Parliament on its recommendations.85

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For the euro area Member States, the Union surveillance continues after the closure of the European Semester, in the second part of the year, in accordance with the provisions of the ‘two-pack’.86

D. Main procedural features 27.45

An important procedural element of the European Semester is the so-called ‘comply or explain’ principle. According to that principle, in line with Article 2-ab Regulation 1466/ 97, the Council is ‘expected to, as a rule, follow the recommendations and proposals of the Commission or explain its position publicly’. Even if this rule is not formulated as a strict legal obligation, the Council applies it consistently and provides explanation in a written public document when amending the Commission’s text. The scope of application of this rule is even larger than the European Semester, strictly speaking. In practice, its application creates a strong presumption that the Council will follow the Commission’s line, unless any divergence from it can be backed-up by strong public explanations. Consequently, the Council departs from the Commission’s recommendations only in exceptional circumstances and to the smallest extent possible, and the rule effectively prevents Member States from making secret deals between themselves regarding their respective texts. This rule was introduced as a counterpart given to the Parliament in the negotiations of the ‘six-pack’.

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It is also worth mentioning that each single set of Country-specific recommendations potentially combines four different legal bases, namely:

85 See Fabian Amtenbrink and Jakob de Haan, ‘Economic Governance in the European Union: Fiscal Policy Discipline versus Flexibility’ (2003) 40 Common Market Law Review 1075, 1080. 86 See Chapter 28, 28.108.

The Dialectic Between the Eu and the Euro 805 – Regulation 1466/97 for the recommendation linked to the fiscal surveillance; – the MIP Regulation for the recommendation(s) related to the macroeconomic imbalances of the Member State; – Article 121 TFEU for the structural reforms recommended; as well as – Article 148 TFEU for the guidance on employment policy.

V. The Dialectic Between the European Union and the Euro Area At the time of the Maastricht Treaty, it was considered that some Member States would remain outside of the euro area for a limited period only87 and, therefore, there was no need to create a strong institutional system for the euro area. Thereafter, experience has revealed that it would take time before all Member States would join the euro and that in the meantime there was a need for stronger coordination of the economic policies between the euro area. This has led to a progressive differentiation between euro and non-euro area Member States.88 The Lisbon Treaty introduced a number of specific provisions for the euro area. According to the second sub-paragraph of Article 5(1) TFEU, ‘Specific provisions shall apply to those Member States whose currency is the euro’. Thereafter, the legislator adopted further provisions on the basis of an extensive reading of the scope of Article 136 TFEU.

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A. A ‘semi-intergovernmental’ method for the euro area89 For a long time, it could be said that the EU institutions played their traditional role in EMU.90 This has however changed over time. Intergovernmental action has developed dramatically in the EMU field over the last years,91 with important institutional implications. The reasons for this development are well known, mostly the need for very quick action, the lack of legal basis within the EU Treaties,92 and the veto of the United Kingdom against further Union competences.

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Intergovernmental action may be considered in principle an acceptable option from a legal point of view, at least if it respects the primacy of EU law, does not encroach on exclusive EU competences and does not set up competing institutions.93 In particular, the conclusion of

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87 Tuori and Tuori, The Eurozone Crisis (n 13) 28. See also Thomas Beukers and Marjin van der Sluis, ‘The Variable Geometry of the Euro-Crisis: A Look at the Non-Euro Area Member States’ (2015) EUI Working Papers LAW 2015/33, 2–3. Cf Paul Craig, ‘The Financial Crisis, the EU Institutional Order and Constitutional Responsibility’ in Federico Fabbrini and others (eds), What Form of Government for the European Union and the Eurozone? (Hart Publishing 2017) 27 (hereafter Craig, ‘The Financial Crisis’). 88 See eg Ulrich Häde, ‘Die Wirtschafts-und Währungsunion im Vertrag von Lissabon’ (2009) 2 Europarecht 200, 203ff. 89 On this, see also Jean-Paul Keppenne, ‘Institutional Report’ in Ulla Neergaard and others (eds), The Economic and Monetary Union: Constitutional and Institutional Aspects of the Economic Governance within the EU (Djøf Publishing 2014). 90 Lastra and Louis, ‘European Economic and Monetary Union’ (n 2) 71. 91 On this trend see Edoardo Chiti and Pedro Gustavo Texeira, ‘The Constitutional Implications of the European Responses to the Financial and Public Debt Crisis’ (2013) 50 Common Market Law Review 683–708 (hereafter Chiti and Texeira ‘The Constitutional Implications’); Sergio Fabbrini, ‘Intergovernmentalism in the European Union. A Comparative Federalism Perspective’ (2017) 24 Journal of European Public Policy 580–97. 92 See Calliess, ‘The Governance Framework of the Eurozone’ (n 23) 48ff. 93 Chiti and Texeira ‘The Constitutional Implications’ (n 91) 693.

806 ECONOMIC POLICY COORDINATION international treaties between some Member States is allowed under EU law as long as the parties respect their EU obligations. The Court of Justice has clarified in the Pringle case that the ESM Treaty was compatible with EU law because of the absence of provisions in the EU Treaties conferring a specific power on the Union to establish a stability mechanism similar to the ESM.94 As regards the TSCG, most of its provisions contain additional commitments, like the Fiscal Compact, that do not interfere with the coordination of national economic policies within the Union institutions. However, the Member States could not use the TSCG provisions to enter into a day-to-day coordination of their policies because that would inevitably lead to contradictions with or circumvention of the Community method. Moreover, the intergovernmental arrangements should not create any disruption of the EU decision-making process. From that point of view, the legality of the voting arrangements contained in Article 7 TSCG might be questioned since they necessarily interfere with the balance of powers within the Council.95 27.50

What we have seen in the area of EMU is the emergence of what could be called a form of a ‘semi-intergovernmental’ method. It is intergovernmental in the sense that it takes place outside the institutional framework of the Union, using instruments of private (EFSF) or public international law (ESM, TSCG). At the same time, a number of factors indicate a strong link and even interdependence with Union law.96

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The degree of exercise by the Union of its competence in the same field has increased so dramatically in parallel that all the measures adopted by the Member States in this intergovernmental set up had to be clearly and explicitly related to the coordination of economic policies done at the level of the Union. In particular, primacy of Union measures was recognized, often explicitly,97 and consistency with Union policy was pursued.

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There is a high degree not only of participation of EU institutions in intergovernmental actions but also of intergovernmental bodies in EU actions. The Union institutions are involved in the negotiation, adoption and/or implementation of intergovernmental instruments. In particular, the Commission holds the pen during the negotiation of the ESM Treaty; the Commission, ECB, and Court of Justice play important roles in the functioning of the EFSF and the ESM and in the implementation of the TSCG. This presence of the EU institutions is based on a set of different and sometimes complex legal constructions. As far as the Court of Justice is concerned, the Member States have limited themselves to rely on the possibility offered by Article 273 TFEU.98 By contrast, the tasks performed by the Commission sometimes were based on an explicit so-called ‘Bangladesh mandate’ based 94 Pringle (n 28) para 64. 95 For a defense of the legality of Article 7 TSCG, see Calliess, ‘From Fiscal Compact to Fiscal Union’ (n 55) 108. 96 In national legal orders these intergovernmental measures are also often treated as concerning EU matters (for Germany, see Katharina Berner, ‘Sovereignty of parliament under the Grundgesetz: How the German Constitutional Court discovers parliamentary participation as a means of controlling European integration’ (2013) 19 European Public Law 249, 255; for Finland see, Päivi Leino and Janne Salminen, ‘The euro crisis and its constitutional consequences for Finland: is there room for national politics in EU decision-making?’ (2013) 9 European Constitutional Law Review 451, 458. 97 Preamble of the EFSF Framework Agreement; Article 13(3) subpara 2d ESM Treaty; Article 2 TSCG. This primacy of EU law over agreements between Member States derives both from EU law itself and from principles of international law (Article 26 1969 Vienna Convention). 98 See, however, the very creative use of Article 273 TFEU made in the TSCG. See generally, Steve Peers, ‘Towards a New Form of EU Law?: The Use of EU Institutions outside the EU Legal Framework’ (2013) 9 European Constitutional Law Review 37, 61.

The Dialectic Between the Eu and the Euro 807 on a decision of the representatives of the governments of the twenty-seven EU Member States99 (EFSF, ESM) and some other times were considered as part of its normal EU law competences (TSCG).100 In the Pringle case, the Court noticed that the tasks entrusted to the Commission in the ESM were ‘outside the framework of the Union’ but at the same time that, ‘[b]‌y its involvement in the ESM Treaty, the Commission promotes the general interest of the Union’.101 As regards its own competence under Article 273 TFEU, the Court stated that ‘a dispute linked to the interpretation or application of the ESM Treaty is likely also to concern the interpretation or application of provisions of European Union law’.102 In the TSCG, the link is even closer since it is considered that the tasks performed by the Commission under this Treaty are ‘within the framework of its powers, as provided by the TFEU, in particular Articles 121, 126 and 136 thereof ’.103 Interestingly, the frontier between intergovernmental and Union bodies tends to disappear. The most striking example is the Eurogroup Working Group (EWG) which is used as preparatory body for the (rather intergovernmental) Eurogroup while being formally a sub-group of the Economic and Financial Committee set up by Article 134 TFEU. Its president used to be an official of a national administration but is now employed by the EU institutions. Another example is the Euro Summit and its president who happens to be also the president of the European Council. The function was created by the TSCG which provides that he has to report to the European Parliament after each Euro Summit. The Euro Summit and its president are also assisted by the General Secretariat of the Council. There are also an increasing number of cross- references between the substantive provisions of the intergovernmental acts and those of the EU instruments, thus creating strong interdependent legal relations between them.104 If we take the example of the ESM the Court of Justice has emphasized that ‘the conditions to be attached to the grant of [ESM stability] support to a Member State are, at least in part, determined by European Union law’.105 As noticed by D’Sa, the intergovernmental agreements ‘may become, over a period of time, so closely connected with EU issues strictly so- defined that it might no longer be possible effectively to distinguish one from the other’.106 The participation of Member States in these intergovernmental mechanisms is directly connected to their status within the Union. In particular, a Member State that enters the euro

99 This decision should probably be seen as an agreement in simplified form. 100 For a very critical assessment of this role of the Union institutions, see Paul Craig, ‘Pringle and the use of EU institutions outside the EU legal framework: foundations, procedure and substance’ (2013) 9 European Constitutional Law Review 263–84. 101 Pringle (n 28) paras 158 and 164. 102 Pringle (n 28) para 174. 103 See Recital (10) TSCG. For a similar conclusion based on an analysis of the powers entrusted to the Commission, see Calliess, ‘From Fiscal Compact to Fiscal Union’ (n 55) 112–13. This explains why a ‘Bangladesh mandate’ was not considered necessary for the TSCG, thus avoiding any discussion as to whether the unanimous agreement of all Member States was needed or not for such mandate (the UK was not ready to agree on it, this time). 104 See for instance Articles 3(2) and 13 TSCG, referring to EU law and in particular the Stability and Growth Pact. In the other direction, see European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1 (‘two-pack’) which constantly refers to the financial assistance instruments of the EFSF and ESM. The economic partnership programmes have been first envisaged by the TSCG and thereafter set up by Regulation (EU) 473/2012, etc. 105 Pringle (n 28) para 174. 106 Rose M D’Sa, ‘The legal and constitutional nature of the new international treaties on economic and monetary union from the perspective of EU law’ (2012) 5 European Current Law Issue 11, 15.

27.53

808 ECONOMIC POLICY COORDINATION area is also supposed to join the ESM107 and, in order to benefit from ESM assistance, it must thereafter ratify the TSCG. 27.54

A possible repatriation of intergovernmental instruments within the ambit of EU law is sometimes explicitly envisaged.108

27.55

From all that, it can be concluded that, while the intergovernmental method is often seen as a threat to the ‘Community method’, this Community method also invades the intergovernmental scene: in other words, the contamination plays in both directions.109 At the beginning, recourse to the intergovernmental method was not based on a willingness to exclude the Union institutions. From a positive angle, one could even see the development of this semi-intergovernmental method in the EMU as an expression of the duty of sincere cooperation to which both the Union and its Member States are bound by virtue of Article 4(3) TEU.110

27.56

This evolution is nevertheless a source of concern because of its negative institutional consequences at the European level: The intergovernmental mechanisms imperil the delicate balance upon which the EU model rests. The balance between the European Parliament, the Council and the Commission serves to provide checks and balances and act as a last- instance guarantee ensuring that EU process is the product of equilibrium or settled consensus between particular actors in order to ensure legitimacy and stability.111 This balance is lost when finance ministers agree between themselves, without a Commission proposal and using alternative voting arrangements on fundamental questions related to redistributive policies throughout the Union.112

27.57

More importantly, the creation or reinforcement of permanent intergovernmental bodies constitutes a long-term threat for the unity and homogeneity of the Union. With the ESM being established as a permanent body, its operational budget and staff have started to grow in size and ambition. The temptation to intrude in the territories of EU competences has grown at the same speed. The Euro Summits have also received an official recognition in the TSCG and have even adopted their own rules of procedure. The EWG has been reinforced, inter alia, with a full-time president. With the development of such bodies, institutional rivalry could be a danger in the near future. The functioning of the EU institutions could be affected.113

27.58

Another danger associated with the intergovernmental mechanisms is that they induce a ‘participation à la carte’ of the Member States, with all the ensuing inconsistencies, lack of clarity, priority given to the defense of national interests, etc. The field of intergovernmental 107 See Preamble ESM Treaty, para 7. 108 See Article 16 TSCG. 109 Viterbo and Cisotta, quoted by Lastra and Louis, ‘European Economic and Monetary Union’ (n 2) 197. 110 Calliess, ‘From Fiscal Compact to Fiscal Union’ (n 55) 106. See also the promotion by Chancellor Merkel of the ‘Unionsmethode’ as a mix of governmental coordination and the old ‘Community method’, in her speech on the occasion of the opening of the Academic year of the College of Europe in Bruges, 2 November 2010. 111 Dawson and De Witte, ‘Constitutional balance in the EU after the euro-crisis’ (n 52) 829; Chiti and Texeira ‘The Constitutional Implications’ (n 91) 689; See also Craig, ‘The Financial Crisis’ (n 87) 35. 112 For an analysis of the consequences of the intergovernmental method in the EMU sector see Paolo Ponzano, ‘Méthode intergouvernementale ou méthode communautaire: une querelle sans intérêt?’ (2011) Les brefs de Notre Europe No 23. 113 See for example the impact of Eurogroup’s meetings on the work of the ECOFIN and the voting commitments adopted under the TSCG for EDP decisions to be taken within the Council.

Future Evolution 809 economic governance has become the place where a multi-speed Europe is standard practice. All measures are restricted to a sub-group of Member States, usually euro area Member States, sometimes open for the voluntary participation of willing non-euro area Member States. This pattern has started to contaminate the EU framework (SSM, SRM), thus making the enhanced cooperation mechanism de facto nearly obsolete in that area.114

VI. Future Evolution A number of plans have been tabled over the years in order to improve the functioning of the EMU and to move towards a ‘deep and genuine EMU’. The EU institutions have launched the debate in particular with the Barroso Commission’s Blueprint of 2012,115 the December 2012 report by the President of the European Council and the five Presidents report in June 2015.116 An ever-increasing number of alternative proposals by the civil society and academics followed these moves.117 Over the last years, the Juncker Commission has also launched a number of initiatives as presented in its ‘Reflection Paper on the Deepening of the EMU’ of May 2017.118 On 6 December 2017, the Juncker Commission adopted an ambitious package of concrete proposals ‘towards completing the EMU’:119 – a proposal for the establishment of a European Monetary Fund anchored in the Union legal framework;120 the objective was to include the current intergovernmental European Stability Mechanism within the Union framework; – a proposal to integrate the substance of the TSCG into the Union legal framework;121 – a Communication on new budgetary instruments for a stable euro area within the Union framework;122 this communication was followed in May 2018 by two legislative proposals for the establishment of a Reform Support Programme and of a European Investment Stabilisation Function;123

114 One has to recognize, however, that the Treaty-based enhanced cooperation mechanism is not an adequate instrument for setting up measures for the euro area. In the long-term, a revision of Article 136 TFEU would be desirable in order to expand the scope of what can be set up for the euro area only. Another useful amendment would be to permit the adoption of specific measures for Member States that are close to entering the euro area. 115 COM (2012) 777 final. 116 Commission, ‘Completing Europe’s Economic and Monetary Union (The Five Presidents’ Report)’ (22 June 2015). 117 See, amongst others, Tommaso Padoa-Schioppa, ‘Group Report: Completing the Euro. A road map towards fiscal union in Europe’ (26 June 2012), the Euro Treaty called for by the Glienicker Group, ‘Towards a Euro Union’ (17 October 2013); Ashoka Mody, ‘A Schuman compact for the Euro Area’ (Bruegel Essay and Lecture Series 2013) (hereafter Mody, ‘A Schuman compact for the Euro Area’). 118 Commission, ‘Reflection Paper on the Deepening of the Economic and Monetary Union’ COM (2017) 291 final. 119 Commission, ‘Further Steps towards completing Europe’s Economic and Monetary Union: A Roadmap’ COM (2017) 821 final. 120 Commission, ‘Proposal for a Council Regulation on the establishment of the European Monetary Fund’ COM (2017) 827 final. 121 Commission, ‘Proposal for a Council Directive laying down provisions for strengthening fiscal responsibility’ COM (2017) 824 final. 122 Commission, ‘New budgetary instruments for a stable Euro Area within the Union Framework’ COM (2017) 822 final. 123 Commission, ‘Proposal for a Regulation of the European Parliament and the Council on the establishment of the European Investment Stabilisation Function’ COM (2018) 387 final; and Commission, ‘Proposal for a Regulation of the European Parliament and the Council on the establishment of the Reform Support Programme’ COM (2018) 391 final.

27.59

810 ECONOMIC POLICY COORDINATION – a Communication on a European Minister of Economy and Finance.124 27.60

So far, these initiatives have not yet made their way throughout the legislative process. The euro area Member States have instead agreed on a reform of the European Stability Mechanism while maintaining it as an intergovernmental body.125 Leaders also gave a mandate to the Eurogroup for further work on a budgetary instrument for convergence and competitiveness for the euro area, in the context of the 2021–27 multiannual financial framework. The idea of an European Minister of Economy and Finance seems de facto abandoned.

27.61

The need for amendment of EU law will of course depend very much on political choices that remain to be made. It is, therefore, largely premature to engage in a thorough legal analysis when all the options are still under discussion. Some broad lines can nevertheless be emphasized. The starting point is that what has been achieved both under EU law and through the intergovernmental method since the beginning of the crisis has gone more or less to the limits of what is permissible under the current Treaties. As recalled by the Court of Justice in the Pringle case, as far as economic policy is concerned the competences of the Union are of coordination only while the policies themselves remain national. The extensive use of Article 136 TFEU allowed going further than the open method of coordination that was used until then on the basis of Article 121 TFEU. However, Article 136 TFEU is not a basis allowing the Union to exercise its own economic policy, and the institutional framework in place in any case is not robust and democratic enough to support a transfer of economic policy at the level of the Union.

A. Centralization or reinforced coordination 27.62

A choice will be need between setting up an integrated economic policy at EU level or keeping a decentralized model but with reinforced harmonization of the rules, along the line of the TSCG. Building up an integrated economic policy at EU level is the model that was advocated for the long-term by the Barroso and Juncker Commission. It is based on the assumption that a common currency union needs a centralized budget with redistributive features and some fiscal power. It would require deep and major Treaty changes, in order to allow some form of debt mutualization (redemption fund, eurobills, or eurobonds, etc); EU veto power on national budgets; a sizable euro area budget; and the integration of the ESM in the EU. That would in turn require an enlarged budgetary power, with taxation powers. From an institutional point of view, this requires the establishment of a European Monetary Fund that would substitute the current ESM. As recalled above, the Commission adopted a legislative proposal to that effect in December 2017,126 but the Member States are still reluctant to move forward in that direction. The Commission is also envisaging the setting up of new budgetary instruments with the objective of stabilizing the euro area and reinforcing its cohesion within the Union.127 As part of the proposals for the Multiannual Financial 124 COM (2017) 823. 125 Euro Summit (14 December 2018) accessed 5 February 2020. 126 COM (2017) 827. 127 COM (2017) 822.

Future Evolution 811 Framework 2021–27, the Commission tabled a proposal for a Regulation on the establishment of a European Investment Stabilisation Function128 and a proposal for a Regulation on the establishment of the Reform Support Programme.129 Another approach aims at preserving the current decentralized model while reinforcing its effectiveness. The main idea is that implementation of economic and fiscal policy would remain national, but that more discipline and more stringent common rules would frame the political agendas. The model of the directive on national fiscal frameworks and of the TSCG could be expanded by creating a legal basis at the EU level for exhaustive harmonization of national budgetary frameworks and of fiscal targets.

27.63

Another option would be to promote further intergovernmental agreements by which the Member States would agree on common principles for their national policies.130 This model might be politically more attractive in the short-term. However, it raises strong questions in relation to its democratic desirability. Targets for budget deficits cannot be harmonized the same way as harmonization has taken place in the EU in relation with the free movement of goods or workers.

27.64

B. The Union and the euro area Two rather conflicting visions of the EMU are at stake in this regard. The first one insists on the fact that all Member States (except Denmark) will join the euro area sooner than later and that the current situation is a transitory one. The process is thus one of a multi-speed integration, in which Member States seek to achieve the same goal but according to different timeframes. Under this scenario, there would be no need to proceed to major institutional changes. Only small limited adaptations are needed. A good example of such adaptation is the current rule reserving to euro area members a voting right within the Council for a number of decisions that concern only the euro area.131 It is considered that this solution is to be preferred to any reinforcement of the Eurogroup. In the same vein, the European Parliament could create its own internal euro committee and the Commission could delegate some of its competences to a dedicated Commissioner in charge of the economic governance of the euro area, etc. This view was broadly speaking the view of the Barroso and Juncker Commission as well as of the European Parliament.132 It was also the view of the drafters of the Maastricht Treaty, who constructed the EMU ‘in such a way to harmoniously fit within the institutional framework of the EU’.133 Different legal mechanisms have been used until now to preserve this model while accommodating the sometimes uneasy coexistence of the euro area and the Union. Among many examples one could think of are the setting up of the Supervisory Board within the ECB, the extension to non-euro area Member States of euro area measures through the use of Article 352 TFEU, agreements concluded 128 COM (2018) 387. 129 COM (2018) 391. 130 See Mody, ‘A Schuman compact for the Euro Area’ (n 116). 131 Articles 136(2) and 139(4) TFEU. 132 European Parliament Resolution of 12 December 2013 on constitutional problems of a multitier governance in the European Union (2012/2078(INI)), especially paras 64–66 (hereafter ‘European Parliament Resolution on constitutional problems’). 133 Chiti and Texeira ‘The Constitutional Implications’ (n 91) 693.

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812 ECONOMIC POLICY COORDINATION between the ECB and the NCBs,134 etc. The European Parliament has also envisaged other instruments, such as using Article 352 TFEU in conjunction with Article 20 TEU, using the bridging clause of Article 48(7) TEU, or concluding an interinstitutional agreement ‘of a binding nature’.135 These mechanisms represent a pragmatic way of reconciling the Union and the euro area. However, they progressively increase the complexity and even the opacity of the EU decision-making process. 27.66

By contrast, a second vision considers that equating the Union and the euro area, even in the long-term, is not realistic. Using Sweden as an example, some say that entering the euro area is actually voluntary, even in legal terms.136 Consequently, they favour more radical changes through the creation of a formal ‘euro filière’. This line is already behind the TSCG, which has institutionalized the euro summits. The ESM is also trying to reinforce its position in the field of economic governance. A group of German academics, the so- called ‘Glienicker Group’,137 promoted a Euro-Treaty setting up a Euro-government and a Euro-Parliament: The Euro-government would have reinforced intrusive powers into the national budgetary autonomy; it would have a budget for conducting its policy; the Euro- Parliament would be composed from deputies of the EP or from members of national parliaments. The creation of such competing new institutions whose relations with the Union institutions would be complex might nevertheless open a Pandora’s Box for the future.

134 John A Usher, ‘The evolution of economic and monetary union—some legal issues’ in Anthony Arnull and others (eds), Continuity and Change in EU Law: Essays in Honour of Sir Francis Jacobs (Oxford Scholarship Online 2008) 297, 305–06 (hereafter Usher, ‘The evolution of economic and monetary union’). 135 European Parliament Resolution on constitutional problems (n 132). 136 John A Usher, ‘Proportionality in the context of economic and monetary union’ (2008) 35 Legal Issues of Economic Integration 245, 251; Usher, ‘The evolution of economic and monetary union’ (n 134) 303. 137 accessed 5 February 2020.

28

EU FISCAL GOVERNANCE ON THE MEMBER STATES The Stability and Growth Pact and Beyond Jean-Paul Keppenne*

I. General Principles A. B. C. D. E. F.

Surveillance of fiscal policies Degree of judicial review Responsible institutions Applicable rules Recent evolutions Effectiveness of the SGP

II. The Preventive Arm of the SGP A. Legal basis and main features B. Procedure

III. Corrective Arm: The Excessive Deficit Procedure A. B. C. D. E. F.

Legal basis and main features The reference values Evolution of the EDP General comments on the procedure Publicity of the procedure Steps in the procedure

IV. EDP Statistics

A. General Principles

28.1 28.1 28.3 28.5 28.6 28.15 28.20 28.25 28.25 28.31 28.41 28.41 28.46 28.48 28.51 28.52 28.53 28.72 28.72

B. Responsible authorities C. Applicable rules

V. Financial Sanctions as Enforcement Mechanism A. EDP financial sanctions B. Statistical fines

VI. Budgetary Frameworks of the Member States: An Embryo of Harmonization

A. Directive 2011/85/EU on requirements for budgetary frameworks of the Member States B. Integration of the Fiscal Compact within EU law

VII. Reinforced Fiscal Surveillance of the Euro Area Member States A. Legal basis: Article 136 TFEU B. ‘Six-Pack’ Regulations C. ‘Two-Pack’ Regulations

28.74 28.76 28.83 28.83 28.88

28.96 28.98 28.100 28.103 28.104 28.107 28.108

I. General Principles A. Surveillance of fiscal policies As explained in the previous chapter,1 the Maastricht Treaty put in place a mild system of coordination in the area of economic policy, in particular fiscal policy. The Member States keep conducting their fiscal policy, particularly the adoption of budgets and the exercise of taxation power which are at the core of the sovereignty of the states. The Member States

* Director, Legal Service of the European Commission. All opinions are purely personal and need not reflect those of the European Commission. 1 See Chapter 27. Jean-Paul Keppenne, 28 EU Fiscal Governance on the Member States In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0034

28.1

814 EU FISCAL GOVERNANCE ON THE MEMBER STATES thus remain largely sovereign with regard to the conduct of their budgetary policies given that their annual budget, as well as their longer-term fiscal planning are still decided by the national authorities. The Union has no competence to interfere directly in this area acting in place of the national authorities. Notably, no veto right is provided, and the Union could not somehow prevent the adoption of national budgets. 28.2

However, the Union is entrusted with strong surveillance competences, especially in the area of fiscal policy, where its competence extends the most within the general framework of coordination of the national economic policies. The economic rationale for this surveillance is that, in an economic union, individual behaviour of states may have spillover effects on others, above all when they share a currency.2 This top-down fiscal control has dramatically increased since the financial crisis of 2008.

B. Degree of judicial review 28.3

This competence relies on specific instruments and procedures that depart from the usual rules regulating the application of European Union (EU) law.3 In the area of fiscal policy, the Member States are not subject to directly applicable provisions of Union law that could be enforced by national administrative or judicial authorities. Moreover, the coordination framework concerns solely public authorities and does not confer any rights to individuals which the national courts would be bound to protect.4 Neither Articles 121 and 126 of the Treaty on the Functioning of the European Union (TFEU) nor the applicable secondary law contain provisions that could be directly invoked by individuals, at least in actions for annulment.5 The existence of a set of derogations as well as the large margin of discretion conferred on the institutions imply that it is only through specific decisions taken by the institutions that the discipline may be implemented. National judges are in principle not concerned. Experience shows that the EU institutions have largely made use of this discretionary power. The evolution of the economic situation and the broader political landscape have over time considerably affected the way in which the substantive provisions are implemented. The legal framework is not seen as a static set of rules to be mechanically applied to any given event, but as a flexible system of governance driven by long-term macroeconomic purposes. Consequently, there is a relatively low degree of judicial control over the implementation of the EU provisions.6 First, Member States and institutions are reluctant to go to court. Second, the discretion conferred upon the institutions would in any case imply a 2 On the ‘economic spillover’, see Martin Heipertz and Amy Verdun, ‘The Stability and Growth Pact—Theorizing a Case in European Integration’ (2005) 43 Journal of Common Market Studies 985, 996–97. For a more theoretical discussion on the motives and methods of the SGP, see Roel Beetsma, ‘Does EMU Need a Stability Pact?’ in Anne Brunila and others (eds), The Stability and Growth: The Architecture of Fiscal Policy in EMU (Palgrave Macmillan 2001) 23. 3 Namely, the infringement procedure and the direct application by national courts. 4 In that sense, see Case C-9/73 Carl Schlüter v Hauptzollamt Lörrach [1973] ECR-1135, para 39. 5 See order of the General Court in Case T-541/10 ADEDY and Others v Council [2012] ECLI:EU:T:2012:626 rejecting as inadmissible an action for annulment against Council decisions 2010/320/EU and 2010/486/EU addressed to Greece. 6 Cf with the increase in domestic judicial review see, Frederico Fabbrini, ‘The Euro- Crisis and the Courts: Judicial Review and the Political Process in Comparative Perspective’ (2014) 32 Berkeley Journal of International Law 64. See also Alicia Hinarejos, The Euro Area Crisis in Constitutional Perspective (OUP 2015) 121ff.

General Principles 815 limited standard of judicial review. The only relevant case finds its origin in the action initiated by the Commission against the Council in January 2004 in relation with the excessive deficit procedures that were ongoing at the time against France and Germany. In its judgment, the Court of Justice focused on procedural issues without addressing the substance of the position followed by the Council.7 The initiation of the infringement procedure before the Court of Justice is also largely excluded since Article 126(10) TFEU excludes most measures adopted under the excessive deficit procedure from the competence of the Court. At the time when this system was set up, it was considered that the specific set of sanctions provided under this excessive deficit procedure was sufficient, and that it was more appropriate to reserve its application to political institutions, namely the Commission and Council. A complementary control by the Court was therefore considered superfluous, if not inappropriate given the political nature of the whole process. Experience has, however, shown that the political institutions could not establish a fully credible practice in the use of these sanctions. As a result, the idea to restore full competence for the Court of Justice was put forward and supported, among others, by the Commission.8 Some arguments could be put forward in favour of such a change. It is worth noting, firstly, that when new mechanisms of financial sanctions—based on the Excessive Deficit Procedure (EDP) model—were set up by the ‘six-pack’ for the euro area Member States (particularly those related to the macroeconomic imbalance procedure), nobody considered that there would be any conflict between their application and the normal competence of the Court of Justice. Secondly, when negotiating the Treaty on Stability, Coordination and Governance in the EMU (TSCG),9 the participating Member States also considered it necessary to confer strong powers on the Court of Justice, similar to the one conferred by Articles 258–260 TFEU for the infringement procedure, excluding, however, its enforcement by the Parties. These evolutions show that a larger judicial control could be envisaged in the field of EMU. Therefore, if and when the Treaties are amended, deleting paragraph 10 of Article 126 TFEU could be considered as an option that would contribute to enhanced legitimacy of the decisions adopted in this field.

28.4

C. Responsible institutions The Union institutions are therefore the ones responsible for applying the rules. The Treaty has entrusted the Council and the Commission with the responsibility to coordinate and monitor the fiscal situation of the Member States. The Council is the main body in charge: ‘responsibility for making the Member States observe budgetary discipline lies essentially with the Council’.10 This reflects the willingness of the Member States to keep control of this coordination instrument. As recognized by the Commission in its 2015 7 Case C-27/04 Commission v Council [2004] ECR-I6649 (hereafter Commission v Council). See Section III.C. 8 See Section 4.3 of Commission, ‘Blueprint on a deep and genuine Economic and Monetary Union (Communication)’ COM (2012) 777 final (hereafter Commission, ‘Blueprint on a deep and genuine Economic and Monetary Union’). 9 Outside the framework of the EU Treaties, twenty-five Member States have concluded in 2012 a Treaty on Stability, Coordination and Governance in the EMU (the TSCG) whose most important aspect is the so-called ‘Fiscal Compact’ by which contracting states agreed to incorporate a budget-balanced rule in their national legal framework. 10 Commission v Council (n 7) para 76.

28.5

816 EU FISCAL GOVERNANCE ON THE MEMBER STATES Communication on ‘Making the best use of the flexibility within the existing rules of the Stability and Growth Pact’,11 ‘[t]‌he Pact is a rule-based system . . . where the Commission proposes and the Council decides’. With its right of initiative based on a thorough assessment of the conduct and of the fiscal situation of the Member States, the Commission has nevertheless a considerable influence on the implementation of the surveillance framework.12 In particular, when the Commission refrains from acting under the excessive deficit procedure, it has the last word and prevents the Council from expressing its views on the situation of the Member State concerned.13 There is inevitably a degree of power struggle between the two institutions in the implementation of the rules. This is more evident at the stage of designing the policy. A good example of this is the respective positions of the two institutions regarding the so-called ‘flexibility’ within the Stability and Growth Pact (SGP): on this issue, the Commission adopted its own Communication in January 2015 and the Council quickly followed with a distinctively different approach in its own ‘Commonly agreed position on flexibility within the SGP’.14 By contrast, at the stage of the implementation of the rules, over the last years, the Council has usually endorsed the Commission’s proposals or recommendations without substantive modifications.

D. Applicable rules 28.6

The EU fiscal governance is based primarily on the SGP. More recently, an additional set of rules has been developed through secondary Union law and intergovernmental instruments. That latter set of rules aims to create directly within the national legal system of the Member States some form of internal control and internal substantives rules, thus interfering with the national institutional framework that governs fiscal policy.15 This second set of rules, which is not explicitly provided for by the Treaties, goes beyond the mere ‘coordination’ process that was originally envisaged. We discuss it later in this chapter.16

28.7

The SGP is the budgetary pillar of the Economic and Monetary Union. This Pact was originally comprised of three elements: a resolution of the European Council17 and two Council Regulations—1466/97 and 1467/97—adopted for the implementation of Articles 121 and

11 Commission, ‘Making the best use of the Flexibility within the existing Rules of the Stability and Growth Pact (Communication)’ COM (2015) 12 final provisional (hereafter Flexibility Communication). 12 See Ulrich Häde, ‘Die Wirtschafts-und Währungsunion im Vertrag von Lissabon’ (2009) 2 Europarecht 200, 202 (hereafter Häde, ‘Die Wirtschafts-und Währungsunion’). 13 See, for instance, the case of Italy at the end of 2018. Commission, ‘Report: Italy’ COM (2018) 809 final, the Commission concluded that ‘[o]‌verall, the analysis suggests that the debt criterion as defined in the Treaty and in Regulation (EC) 1467/1997 should be considered as not complied with, and that a debt-based EDP is thus warranted’. However, following further contacts with the Italian authorities and ensuing changes to the Italian budget for 2019, the Commission decided thereafter, on its own motion, not to step in the procedure. 14 Published as Annex 15 in the 2018 edition of the Commission, ‘Vade Mecum on the Stability and Growth Pact 2018 Edition’ (2018) European Economy Institutional Paper 075 (hereafter Commission, ‘Vade Mecum on the Stability and Growth Pact’). 15 Sideek M Seyad, ‘A Critical Evaluation of the Revised and Enlarged European Stability and Growth Pact’ (2012) 27(5) Journal of International Banking Law and Regulation 421, 422 (hereafter Seyad, ‘A Critical Evaluation of the Revised and Enlarged European Stability and Growth Pact’). 16 See Section VI. 17 Resolution of the European Council on the Stability and Growth Pact of 17 June 1997 [1997] OJ C236/1.

General Principles 817 126 TFEU.18 This Pact reinforces the substantive and procedural fiscal provisions contained in Articles 121 and 126 TFEU.19 This reference is now used to cover all Union law provisions that regulate the monitoring of the Member States’ fiscal situation by the Union Institutions in the form of external control of their fiscal policies. This external control takes the form of peer pressure, recommendations and ultimately, sanctions. We refer to it as ‘external’ in the sense that it does not interfere directly with the conduct of the fiscal policy within the Member States. The primary law provisions related to the surveillance of the fiscal policies of the Member States can be found in Articles 121 and 126 TFEU,20 as well as in Protocol No 12. While these legal provisions have remained largely unchanged over the years, their significance has greatly evolved through their inclusion within the broader set of rules of the SGP. The SGP has two arms, a preventive one, tracking the structural fiscal position of the Member States, and a corrective one, of a more nominal nature.21 All Member States are subject to the ‘preventive arm’ of the Pact, while the ‘corrective arm’ only applies to those Member States whose financial situation is a source of concern for the Union.

28.8

Article 121 TFEU refers generally to the coordination of the Member States’ economic policies, but the Council focused its application on the surveillance of their fiscal policies through the adoption of Regulation 1466/97. Together, Article 121 TFEU and Regulation 1466/97 form the preventive arm of the SGP, which is mostly based on secondary law provisions. Going beyond the requirements of Article 126 TFEU and the famous reference value of 3 per cent of deficit, it provides for a commitment of the Member States to respect a mid-term objective for a budgetary position close to balance or in surplus, in order to prevent the application of the corrective arm of the SGP. It also organizes a regular annual surveillance exercise of the fiscal situation which applies to all Member States.

28.9

The corrective arm is regulated by Article 126 TFEU, laying down the so-called ‘excessive deficit procedure’, together with Protocol No 12 annexed to the Treaties on the excessive deficit procedure and Regulation 1467/97.22 This procedure is not regular and is activated against a specific Member State only when the available information shows that its fiscal position is becoming unsustainable by reference to the reference values provided by the TFEU.

28.10

The Commission and the Council are responsible for implementing the SGP enjoying, according to the case law, a degree of ‘discretion’.23 On the basis of experience and expertise, their margin of appreciation has been framed over time through the more

28.11

18 Council Regulation (EC) 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1997] OJ L209/1 and Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6. 19 The Council Resolution on the Stability and Growth Pact and the Report of the Economic and Financial Affairs Council, ‘Improving the implementation of the Stability and Growth Pact’, endorsed by the European Council in its conclusions of 22 March 2005, also form part of the Pact. 20 See generally Doris Hattenberger in Jürgen Schwarze and others (eds), EU-Kommentar (3rd edn, Nomos 2012) Article 121 and 126 TFEU (hereafter Hattenberger in Schwarze and others (eds), EU-Kommentar). 21 Given the existence of headline target in nominal terms, the so-called ‘reference values’. 22 See generally, Hattenberger in Schwarze and others (eds), EU-Kommentar (n 20) Article 126 TFEU, paras 8ff. 23 As confirmed by the Court of Justice in Commission v Council (n 7) para 80.

818 EU FISCAL GOVERNANCE ON THE MEMBER STATES precise and predictable parameters of soft law instruments. These instruments represent the common understanding of the respective rules within the Council and/or the Commission. They aim to provide predictability to Member States and to ensure horizontal consistency in the assessments made by the institutions. As a result, they must in principle be respected by the institutions unless compelling justifications for any derogation exist. 28.12

The most important among these soft law instruments are the following: – the so-called ‘Code of conduct’, informally agreed between the Commission and the Council: this Code is entitled ‘Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format and content of the Stability and Convergence Programmes’. Its successive versions have been endorsed by the ECOFIN Council. This Code of conduct is regularly updated. In particular, it contains a methodology for calculating the Member States’ medium-term objective (MTO) as well as a definition of ‘economic good times’ for the application of the Preventive arm, and a clarification of the conditions for abeyance and guidance on assessing ‘effective action’ for the application of the corrective arm.24 – The Commission’s and Council’s texts on the flexibility of the SGP.25 – More recently, in December 2016, the Council endorsed an agreement reached at the Economic and Financial Committee, which aims to improve the predictability and transparency of the SGP.26 This agreement provides for a stronger focus on the expenditure benchmark and further clarification mainly regarding the preventive arm.27

28.13

A number of other informal guidance documents endorsed at services’ level by the Council and/or the Commission also complement the Pact. They are analytical or assessment papers that generally remain confidential.

28.14

Since 2013, the Commission has published on a yearly basis its Vade Mecum on the Stability and Growth Pact. This document is no more than a technical document, prepared by the Commission’s services (Directorate- General for Economic and Financial Affairs/ DG ECFIN). It provides a detailed and updated description of the applicable rules and their implementation by the Commission and the Council. It aims to increase transparency and explain the rules in a structured and pedagogical way. It is interesting to note that this document evolves year after year, even when no formal amendment of the legal framework occurs. This clearly shows the importance of the soft law rules informally agreed and changed overtime through discussions between the Commission’s services and the Member States’ representatives (mainly within the EFC). The fact that this Vade Mecum exceeds 200 pages also illustrates the complexity of the applicable set of rules.

24 The latest version dates from May 2017 accessed 5 February 2020. 25 See above (n 7) and (n 8). 26 accessed 5 February  2020. 27 Published as Annex 16 in Commission, ‘Vade Mecum on the Stability and Growth Pact’ (n 14) and as Annex 3 to the May 2017 Code of Conduct of the Stability and Growth Pact accessed 5 February  2020.

General Principles 819

E. Recent evolutions The SGP has been formally amended twice since its inception. The first amendment occurred in 2005 with a view to making the Pact more ‘intelligent’, ie more flexible,28 by taking better account of economic circumstances and country-specific characteristics and by making the rules more ‘growth-oriented’.29 While these changes allowed a more tailor-made application of the rules, at the same time they increased the complexity of the Pact and augmented the degree of discretion of the institutions, thus decreasing the predictability of the rules.30

28.15

The financial crisis that erupted in 2008 has made clear that it was not sufficient to focus solely on the fiscal position of the Member States. The further modification of the rules has therefore extended the scope of the Union surveillance beyond mere budgetary surveillance, in particular through the adoption of the macroeconomic imbalances procedure. However, the fiscal surveillance remains the main pillar of the Union coordination policy and has been further reinforced through the adoption of the so-called ‘six-pack’.31 The changes mainly aim to enforce fiscal discipline on Member States at an earlier stage. They include a new expenditure benchmark complementary to the change in the structural balance and a new procedure under the preventive arm in case of significant deviation from the adjustment path towards the medium-term budgetary objective (MTO). They also create new mechanisms of financial sanctions against euro area Member States in order to reinforce the effectiveness of the surveillance of their economic and budgetary policies. Financial sanctions are imposed in a gradual way, from the preventive arm to the latest stages of the excessive deficit and excessive imbalance procedures, and may eventually reach 0.5 per cent of Gross Domestic Product (GDP).32 A reversed-qualified-majority voting (RQMV) is introduced for the adoption of most sanctions, therefore, increasing their likelihood. RQMV implies that a recommendation or a proposal of the Commission is considered adopted in the Council unless a qualified majority of Member States votes against it within the Council. Finally, a Directive provides certain provisions for the fiscal framework of the Member States.

28.16

28 Rosa M Lastra and Jean-Victor Louis, ‘European Economic and Monetary Union: History, Trends, and Prospects’ (2013) 32 Yearbook of European Law 57, 116f (hereafter Lastra and Louis, ‘European Economic and Monetary Union’). 29 See Häde, ‘Die Wirtschafts-und Währungsunion’ (n 12) 205; Jean-Victor Louis, ‘The Review of the Stability and Growth Pact’ (2006) 43 Common Market Law Review 85 (hereafter Louis, ‘The Review of the Stability and Growth Pact’). 30 For a detailed description of these reforms, see Antonio Estella, Legal Foundations of EU Economic Governance (CUP 2018) 138–57 (hereafter Estella, Legal Foundations of EU Economic Governance). 31 Within the EU framework, the legislator adopted the so-called ‘six-pack’ in 2011, a set of five Regulations and one Directive, to reinforce and enlarge the surveillance of the economic and fiscal policy of the Member States, see OJ L306/1ff (November 2011). Two Regulations amend the preventive and corrective arms of the Stability and Growth Pact, ie Regulations (EC) 1466/97 and (EC) 1467/97. A third Regulation sets up a new ‘excessive imbalance procedure’. Two other Regulations ((EU) 1173/2011 and (EU) 1174/2011) are addressed to euro area Member States only. See Kenneth A Armstrong, ‘The new governance of EU fiscal discipline’ (2013) 38 European Law Review 601–17; Estella, Legal Foundations of EU Economic Governance (n 30) 168–79; Seyad, ‘A Critical Evaluation of the Revised and Enlarged European Stability and Growth Pact’ (n 15) 202. 32 Carlino Antpöhler, ‘Emergenz der europäischen Wirtschaftsregierung— Das Six Pack als Zeichen supranationaler Leistungsfähigkeit’ (2012) 72 Zeitschrift für ausländischen öffentlichen Recht und Völkerrecht 353, 367 (hereafter Antpöhler, ‘Emergenz der europäischen Wirtschaftsregierung’).

820 EU FISCAL GOVERNANCE ON THE MEMBER STATES 28.17

Fiscal surveillance is also increasingly used to foster structural reforms in the Member States. In its Communication on the flexibility of the Stability and Growth Pact,33 the Commission announced that it will accept to make a more flexible assessment of the rules of the Pact in the case that a Member State implements structural reforms. More specifically: – Under the preventive arm of the Pact, if a Member State presents a dedicated structural reform plan providing detailed and verifiable information, as well as credible timelines for adoption and delivery, the Commission allows for a deviation from the medium- term objective of that Member State (‘the investment clause’).34 – The same applies with regard to the corrective arm of the Pact: in order to apply Article 2 Regulation 1467/97, the Commission should check whether a similar structural reform plan is provided when recommending a deadline or the duration of any extension to that deadline for the correction of the excessive deficit.

28.18

Therefore, under the guise of budgetary monitoring, the Communication on the flexibility of the SGP allows the Institutions to have a say as regards the structural reforms to be undertaken by the Member States. The EU institutions have managed to use instruments of fiscal control as a basis to develop some additional competence in order to induce Member States to apply structural reforms.

28.19

Another striking evolution is the development of a set of euro area-specific rules. When the Maastricht Treaty was adopted, the provisions on the coordination of the economic policies of the Member States did not differentiate between euro area and non-euro area Member States, except as regards the ‘coercive means of remedying excessive deficits’.35 It was expected that all Member States would quickly fulfil the conditions for joining the euro area.36 Experience has shown, however, that the interdependence between the members of the Monetary Union was much stronger and that a reinforced set of rules was needed; hence Article 136 TFEU was introduced by the Lisbon Treaty and a substantive set of rules was adopted on the basis of this provision specifically for the euro area Member States.37

F. Effectiveness of the SGP 28.20

The experience so far can help to identify some deficiencies of the Pact. First, compliance with the rules has been disappointing. Once Member States joined the euro area, there was no perceived risk of being effectively sanctioned and the financial markets did not exercise the expected pressure on the individual Member States. This contributed to apparently poor

33 See above (n 7). 34 See Section II.A, paragraph 28.29. 35 See Article 139(2)(b) TFEU. 36 Kaarlo Tuori and Klaus Tuori, The Eurozone Crisis: a Constitutional Analysis (CUP 2014) 28 (hereafter Tuori and Tuori, The Eurozone Crisis). 37 Christoph Ohler in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 136 TFEU (hereafter Ohler in Siekmann (ed), EWU); Tuori and Tuori, The Eurozone Crisis (n 36) 168ff.

The Preventive Arm of the SGP 821 compliance38 while the EU Institutions have also implemented the rules in a soft manner.39 The SGP had nevertheless a deterrent effect which is hard to measure.40 Second, in order to grasp the economic situation correctly, the complexity of the Pact has increased over time to such an extent that only a small group of experts could claim to understand the whole edifice. The nominal value contained in Protocol No 12 has no strong economic justification. It makes more sense to ensure the sustainability of public finances over the medium-term through the monitoring of the structural deficit, net of one-offs. However, this is based on complex and uneasy calculations.41 Over recent years, many voices have raised concerns regarding that trend and calls for simplification have been made. A recurring demand is to differentiate between public expenditure for productive investment and other expenditure. This has started to take shape through the ‘flexibility’ of the SGP. It is expected that a simplification exercise will be launched in the coming years.

28.21

Third, a suitable balance between discretionary power for the EU institutions and predictability for the Member States remains to be found. Due to the complexity of the facts to be determined and of the economic analysis to be performed, these provisions necessarily leave a substantial margin of appreciation to the Commission and the Council.

28.22

Fourthly, the preventive arm of the Pact has been reinforced to such a level that there might be situations where a Member State benefits from a more lenient treatment in the Excessive Deficit Procedure (EDP) rather than out of it. This could lead to paradoxical situations of Member States slightly missing the EDP targets voluntarily and thereby remaining within the corrective arm in order to avoid the harshness of the preventive arm.

28.23

Fifth, the SGP suffers from a lack of national ownership. The national authorities do not integrate the rules and do not see the system as sufficiently constraining. For this reason, the idea of complementing the external control of the SGP by an internal control has been developed and implemented over time.42

28.24

II. The Preventive Arm of the SGP A. Legal basis and main features The preventive arm is based on Article 121 TFEU and Council Regulation 1466/97 of 7 July 1997, on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, as amended. Article 121 TFEU does not contain any explicit reference to the surveillance of the fiscal situation of the Member States and only 38 Alexandre de Streel, ‘EU Fiscal Governance and the Effectiveness of its Reform’ in Maurice Adams, Federico Fabbrini, and Pierre Larouche (eds), Constitutionalization of European Budgetary Constraints: Comparative and Interdisciplinary Perspectives (Hart Publishing 2014) 85, 95. 39 As was suspected already at the time of the introduction of the SGP. See eg Fabian Amtenbrink, Jakob De Haan, and Olaf Caspar Slijpen, ‘The Stability and Growth Pact: Placebo or Panacea’ (1997) 8 European Business Law Review 202–11, and thereafter Fabian Amtenbrink and Jakob De Haan, ‘Economic governance in the European Union: Fiscal policy discipline versus flexibility’ (2003) 40 Common Market Law Review 1057, 1075. 40 Estella, Legal Foundations of EU Economic Governance (n 30) 187–90, and the authors cited. 41 Ibid, 96. 42 See Section VI.

28.25

822 EU FISCAL GOVERNANCE ON THE MEMBER STATES refers to their economic policies in general. However, Regulation 1466/97 made operational the implementation of this Article to the fiscal policy of the Member States. Regulation 1466/97 was amended twice, by Regulation (EC) 1055/2005 and Regulation (EU) 1175/ 2011. For the euro area Member States, the additional provisions of Regulation 473/2013 also apply.43 28.26

The objective of the preventive arm of the SGP is to promote sound and sustainable public finances in the Member States.44 Compliance with the preventive arm should avoid the opening of the excessive deficit procedure (the corrective arm). The Preventive Arm applies to all Member States (other than those under a macroeconomic adjustment programme45), irrespective of whether they are in the excessive deficit procedure (corrective arm) or not. It involves an annual assessment of Member States’ programmes by reference to the substantive rules contained in particular in Article 5 Regulation 1466/97.

28.27

The substance of the preventive arm is based on two main concepts, the ‘medium-term budgetary objective (MTO)’ and the ‘expenditure benchmark’. The Commission and the Council make an overall assessment taking into account both of these elements, which allows them to enjoy a degree of discretion.

28.28

The MTO is specific to each Member State.46 It is the budgetary position target, set in structural terms, which should ensure sustainable finances over time. By setting a budgetary target in structural terms—ie cyclically adjusted and net of one-off and other temporary measures—the preventive arm of the Pact aims to ensure that the underlying fiscal position of Member States is conducive to medium-term sustainability, while allowing for the operation of the automatic stabilizers. The country-specific MTOs are set to take account of the respective debt levels, the country-specific sustainability challenge posed by the costs of an ageing population and the specific dynamics of the automatic stabilizers. The MTOs are presented by the Member States themselves and the Commission assesses whether they are sufficient to ensure sustainable finances over time. The MTOs should be set to provide a safety margin with respect to the 3 per cent of GDP deficit limit and ensure sustainability or rapid progress towards sustainability.47 Regulation 1466/97 further specifies that euro area and ERM2 Member States must have an MTO that corresponds to at least –1 per cent of GDP. The MTOs are updated every three years, taking into account the latest economic and budgetary costs of ageing.48 For Member States that diverge from their MTO, an appropriate adjustment path towards it should be defined and adhered to. This path should follow an annual improvement of the budget balance, higher in economic good times and more limited in economic bad times, with 0.5 per cent of GDP as a benchmark for euro area and ERM2 Member States.49 For Member States with debt in excess of 60 per cent of GDP or with pronounced risks of overall debt sustainability, a faster adjustment path, ie above

43 See Section VII. 44 Ohler in Siekmann (ed), EWU (n 37) Article 121 TFEU, paras 26ff. 45 See Article 10(1) European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1. 46 See here Louis, ‘The Review of the Stability and Growth Pact’ (n 29) 92ff. 47 Article 2a Regulation (EC) 1466/97. 48 Article 2a(3) Regulation (EC) 1466/97. 49 Article 5(1) Regulation (EC) 1466/97.

The Preventive Arm of the SGP 823 0.5 per cent of GDP, is expected. Since 2016, the ‘Commonly agreed position on flexibility within the SGP’ endorsed by the ECOFIN Council50 clarifies and specifies the required annual adjustments—the so-called ‘matrix of requirements’—to take the economic cycle as well as the debt level and sustainability needs of each Member State more adequately into consideration. However, already in the autumn 2017 fiscal exercise, the Commission took the view that it was entitled to use its discretion and, if necessary, depart from the commonly agreed matrix.51 In all cases, revenue windfalls and shortfalls should be taken into account. The Regulation allows a Member State to deviate from its normal adjustment path towards its medium-term budgetary objective in two cases, by taking into account the implementation of structural reforms and investments and the impact of adverse economic events: – The so-called ‘structural reform clause’: Member States implementing major structural reforms may deviate temporarily from the MTO or the adjustment path towards it, if those reforms have positive budgetary effects in the long-term, including by raising potential growth.52 The Member State must remain in the preventive arm, an appropriate safety margin with respect to the 3 per cent of GDP deficit reference value must be preserved and the budgetary position should be expected to return to the MTO within the programme horizon. The Commission and the Council have both provided further guidance on this through their respective texts on the flexibility within the SGP.53 When assessing the stability and convergence programmes (the SCP), the Council accepts the temporary deviation from the MTO or the adjustment path towards it, following a proposal from the Commission based on an overall assessment of the situation of the Member State concerned. If a Member State fails to implement or reverses the agreed reforms, the temporary deviation from the MTO or from the adjustment path towards it will no longer be considered as warranted. The Commission considers that growth-enhancing public investments aiming at major structural reforms, may also, under certain conditions, justify a temporary deviation from the MTO or from the adjustment path towards it.54 The view of the Commission is that the temporary deviation under the structural reform clause need not to be directly linked to the actual budgetary costs of the reform. – The impact of adverse economic events: Since the ‘six-pack’ reform of the Stability and Growth Pact in 2011, the Commission and Council may take into account two categories of events. They have never relied on the first category, which refers to ‘periods of severe economic downturn for the euro area or the Union as a whole’. The second category concerns an ‘unusual event outside the control of the Member State concerned which has a major impact on the financial position of the general government’.55 When such an event is present, Member States may be allowed temporarily to depart from the targets, provided that the temporary deviation results from an unusual event (this requires an element of exceptionality, in order to avoid a multiplication of

50 51 52 53 54 55

Published as Annex 15 in Commission, ‘Vade Mecum on the Stability and Growth Pact’ (n 14). See Annex 19 of Commission, ‘Vade Mecum on the Stability and Growth Pact’ (n 14). Article 5(1) subparagraph 7 Regulation (EC) 1467/97. See Section I.C. See Flexibility Communication (n 11) para 2.2. Article 5(1) last subparagraph Regulation (EC) 1466/97.

28.29

824 EU FISCAL GOVERNANCE ON THE MEMBER STATES such circumstances and to minimize the risk of moral hazard), that is outside the control of the Member State, with a major impact on the financial position of the general government (there has never been any quantification, formal or informal, of the degree of financial impact requested for the activation of the clause) and does not endanger fiscal sustainability in the medium-term. The clause is activated on the basis of individual case-by-case assessments. Typically, that clause had been considered to apply in the case of events such as natural disasters. In recent years, the incremental budgetary costs related to the exceptional refugee inflows towards the Member States and security costs to tackle the terrorist threat in specific Member States were considered as ‘unusual events’ capable of activating the clause.56 28.30

Apart from their MTOs, the Member States must also respect a so-called ‘expenditure benchmark’ which sets an upper limit for the net growth of government expenditure. In substance, expenditure growth must not be higher than revenue growth. Member States adhering to their MTO must ensure that government expenditure grows at most in line with a medium-term rate of potential GDP growth—which is the rate that ensures adherence to the MTO over time—unless any excess growth is matched by discretionary revenue measures yielding additional revenues. Member States on the adjustment path towards the MTO must ensure that their expenditure grows at a rate below that medium-term rate of potential GDP growth—the difference in growth rate is known as the convergence margin—unless the excess growth is matched by additional funds from discretionary revenue measures.57 This does not limit or determine the size of government spending. All that is required is that any excess expenditure growth over the benchmark rate is funded by equivalent discretionary revenue-increasing measures.

B. Procedure 28.31

Regulation (EC) 1466/ 97 sets up a specific yearly procedure in order to allow the Commission and the Council to perform both an ex ante and an ex post surveillance of the fiscal situation of the Member States. This annual procedure has evolved over time with the progressive establishment of the European Semester, which broadly corresponds to the first six months of every calendar year.58 Adherence to the MTO or the adjustment path towards it is the cornerstone of the budgetary analysis. It is assessed on an ex post basis for the past year, an in-year basis for the year that is underway and on an ex ante basis for the following three years.

28.32

The Regulation determines the information that the Member States must communicate to the Commission and make public within a binding deadline (in April each year).59 It contains two separate but parallel sets of rules for the euro Member States (its Section 2) and

56 See for instance point 13 Commission, ‘Opinion of 22 November 2017 on the Draft Budgetary Plan of Italy’ C (2017) 8019 final. 57 Article 5(1) Regulation (EC) 1466/97. 58 The Semester was extended over the last years. Now, it starts in November of the preceding year with the adoption by the Commission of the Annual Growth Survey (renamed ‘Annual Sustainable Growth Strategy’ COM (2019) 650). 59 Article 4 Regulation (EC) 1466/97.

The Preventive Arm of the SGP 825 the non-euro area Member States (its Section 3) respectively. The euro area Member States must transmit annually their so-called ‘stability programmes’ while the non-euro must transmit their ‘convergence programmes’ (together ‘the stability and convergence programmes’ or ‘SCP’). A range of economic and budgetary data must be included in the SCPs, as set out in the tables annexed to the Code of Conduct on the SGP.60 The programmes must in principle cover five years, namely the preceding year, the current one and the next three years.61 The forecasts contained in the SCPs must be prepared in a sound and realistic manner, consistent with the requirements of Directive 2011/85/EU on the requirements for budgetary frameworks of the Member States, and should therefore be based on the most likely macro-fiscal scenario or on a more prudent one.62 Euro area Member States63 must also base their Stability Programmes on macroeconomic forecasts produced or endorsed by an independent body.64 The Council and the Commission must examine the programmes within at most three months from their submission.65 The Council may, if necessary, adopt an opinion on the programmes. If it considers that the objectives and the content of the programme should be strengthened with particular reference to the adjustment path towards the MTO, it invites the Member State concerned to adjust its programme, acting on the basis of a Commission recommendation.66 In the past, these ‘opinions’ were adopted by the Council as self-standing opinions. Since the setting up of the European Semester, these ‘opinions’ are nowadays integrated into the so-called ‘Country Specific Recommendations’ (CSRs).67 The ‘fiscal’ opinion that the Council may address on the basis of Regulation 1466/97 has thus become a regular feature of the annual Semester. Under a constant practice, it is now the first recommendation (the ‘fiscal recommendation’) of the broader ‘country-specific recommendation’ (CSR)68 which is addressed by the Council to each Member State in July. By derogation, the CRSs addressed to Member States that already adhere to their MTO do not contain a specific ‘fiscal recommendation’. For Member States that are under the EDP the annual ‘fiscal recommendation’ is limited to a confirmation that the EDP recommendations they have previously received should be respected.

28.33

The analysis of budgetary policy in the SCPs aims to deliver, for each Member State, an overall assessment of compliance with the requirements of the preventive arm, in terms of being at or on the adjustment path towards the MTO, on an ex post, in-year and ex ante basis. The assessment of compliance contains three key elements: Is the MTO set at an appropriate level? Is the Member State at the MTO or on the adjustment path towards the

28.34

60 See Annex 1 in the latest version from May 2017 accessed 5 February 2020. 61 Article 3(3) Regulation (EC) 1466/97. 62 Article 3(2a) Regulation (EC) 1466/97. 63 For euro area Member States, a set of additional rules have been put in place through the ‘six-pack’ as a strong complement to the preventive arm, see Section VII. 64 Article 4(1) Regulation (EU) 473/2013. 65 Article 5(2) Regulation (EC) 1466/97. 66 Articles 5(2) and 9(2) Regulation (EC) 1466/97. 67 See Chapter 27. 68 The CSRs are based not only on Regulation (EC) 1466/97 (as far as its ‘fiscal’ dimension is concerned; usually the first recommendation included in the CSR is the fiscal one) but also on Article 121 TFEU (that legal basis is the basis for more structural recommendations) and, when relevant, on the ‘macro-economic imbalances’ Regulation (EU) 1173/2011.

826 EU FISCAL GOVERNANCE ON THE MEMBER STATES MTO, by considering the position of the structural balance? Are expenditure plans in line with the expenditure benchmark? 28.35

Through the adoption of the CSRs, the Commission and the Council make an overall assessment of compliance of the Member State for the past and for the future (the so-called ‘ex ante and ex post analysis’), using the criteria mentioned in Regulation (EC) 1466/97.69

28.36

Building on the possibility of a Commission warning, as provided for in Article 121(4) TFEU, the legislator has also put in place an additional procedure in case it is observed that a Member State has significantly deviated from its obligations (the so-called ‘significant deviation procedure’).70 The purpose of the significant deviation procedure is to ensure that the Member State concerned returns to an appropriate adjustment path towards its MTO, ultimately correcting the occurred significant deviation. It is also an early warning to prevent the Member State from slipping into an excessive deficit. Compared with the EDP, the significant deviation procedure is a short-term procedure that is supposed to produce its full effect over a short period of time (between seven and eight months) and which cannot be put ‘in abeyance’ like the EDP. If it does not succeed, it should logically be followed by the opening of an EDP. The significant deviation procedure consists of the following steps: – If a significant deviation from the adjustment path towards the MTO, including the assessment of compliance with the expenditure benchmark, is observed, the Commission must address a warning to the Member State concerned, thereby launching the procedural steps under Article 121(4) TFEU.71 – At the same time or very shortly after, the Commission must adopt a recommendation for a Council recommendation. – Within one month from the warning, the Council must examine the situation in the Member State and adopt the recommendation recommended by the Commission under Article 121(4) on necessary policy measures, including a new adjustment path towards the MTO. The Regulation leaves some discretion to the institutions regarding the content of the measures that may be recommended to the Member State concerned. The Council recommendation must set a deadline of no more than five months for the Member State to address the deviation. If the Commission judges that the situation is particularly serious and warrants urgent action, the deadline can be reduced to three months. On a proposal from the Commission, the Council makes the recommendations it issues public.72 – Following the Council recommendation, the Member State in question must report to the Council on action taken, within the set deadline.73 – If the Member State takes effective action, the Commission will inform the Council accordingly. – If, by contrast, the Member State fails to take appropriate action within that deadline, the Commission will immediately recommend the Council to adopt, by qualified majority, a decision establishing that no effective action has been taken. The Commission

69

Articles 6(3) and 10(3) Regulation (EC) 1466/97. Articles 6(2) and 10(2) Regulation (EC) 1466/97. 71 Articles 6(2) subparagraph 1 and 10(2) Regulation (EC) 1466/97. 72 Articles 6(2) subparagraph 2 and 10(2) Regulation (EC) 1466/97. 73 Articles 6(2) subparagraph 3 and 10(2) Regulation (EC) 1466/97. 70

The Excessive Deficit Procedure 827 may recommend the Council to adopt a revised recommendation under Article 121(4) TFEU on the appropriate measures to be taken.74 For euro area Member States, the imposition of sanctions in the form of an interest-bearing deposit are possible at that stage.75 If the Council does not adopt the decision on no effective action, and the lack of appropriate action by the Member State in question persists, the Commission will make a new recommendation for a Council decision on no effective action within one month of the previous one. That new recommendation will be subject to reverse simple majority voting in the Council, meaning that a majority of Member States must vote against its adoption in order for it not to be adopted. If there is no majority against the Commission recommendation, the Council decision is adopted.76

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Because of the wording of Regulation 1466/97, the institutions seem to have a legal obli- 28.38 gation to initiate the first two steps of the procedure (the Commission’s warning and the Council’s recommendation) when the conditions are met. By contrast, at the next stage, the Council seems to have a discretionary power in the adoption of the decision on non- effective action, recommended by the Commission. In all Council legal acts in the context of the significant deviation procedure, only euro area Member States vote on decisions concerning other euro area participants, and the vote of the Member State concerned is not taken into account in any case. The Council submits a report to the European Council on all decisions taken.

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So far, the Commission has initiated the significant deviation procedure only against non- 28.40 euro area Member States, namely in 2017 against Romania77 and in 2018 against Romania and Hungary.78

III. Corrective Arm: The Excessive Deficit Procedure A. Legal basis and main features Article 126 TFEU contains a specific procedure for the avoidance of excessive deficits in the public finances of the Member States. That provision must be read together with Protocol No 12 on the excessive deficit procedure (EDP) and with Regulation (EC) 1467/97 on speeding up and clarifying the excessive deficit procedure, as amended twice, and, for euro area Member States, Regulation 1173/2011.79 74 Articles 6(2) subparagraph 4 and 10(2) Regulation (EC) 1466/97. 75 See Section V.A, paragraph 28.85. 76 Articles 6(2) subparagraph 5 and 10(2) Regulation (EC) 1466/97. 77 Council Recommendation with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania (999/17 ECOFIN 495 UEM 187, Luxembourg, 12 June 2017) accessed 5 February 2020. 78 Council Recommendations of 22 June 2018 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Hungary [2018] OJ C223/1 and Council Recommendation of 22 June 2018 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania [2018] OJ C223/3. 79 See Section V.A, paragraph 28.84.

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828 EU FISCAL GOVERNANCE ON THE MEMBER STATES 28.42

The rule is that excessive deficits must be avoided, even if there is no monetary financing. The Treaty contains a sophisticated procedure under which the Union institutions, namely the Commission and the Council, check the deficit and debt levels of the Member States. Deficits are supposed to stay below 3 per cent of the GDP and debt levels should normally remain below 60 per cent of the GDP. The EDP ought not to be thought of as being part of the normal budgetary procedure in the Member States. It follows a specific and irregular timeline that is not aligned with the steps of the Semester and depend heavily on the economic situation. The number of Member States under an EDP fell from 25 in 2011, at the height of the crisis, to zero in 2019.

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The justification for that procedure is that establishing clear limits to a Member State’s deficit and debt is necessary, given the spillover effects and interdependence between Member States especially within the euro area.80 The spillover effects from unsound fiscal policy constrain monetary policy and render its role more difficult. Large deficits can also have a destabilizing and inflationary impact. By constraining the general government deficit to represent at most 3 per cent of GDP and by requiring debt reduction towards 60 per cent of GDP, the Treaty seeks to reduce such risks. The limit on debt also stems from the fact that very high debt levels can have major adverse consequences. High public-sector debt levels are in general associated with high interest payments as a percentage of GDP, which could crowd out investments; moreover, high levels of debt impose constraints on the use of countercyclical fiscal policy in recessions and the ability to absorb the indebtedness of other sectors at times of stress, which could both represent an obstacle to growth. Increased debt levels also lead to higher interest payments, not just because of the level of the debt itself, but also because increased debt also raises the risk of default with the result that governments face higher interest rates on the amount borrowed. That phenomenon can lead to the so- called ‘snowball effect’, where the effect of debt on interest rate drives debt levels up and they then drive interest rates higher, resulting in a vicious spiral towards unsustainability.

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The corrective arm of the Pact implements the steps set out under Article 126 TFEU and Protocol No 12 on the Excessive Deficit Procedure. The current reference values on which the deficit and debt criteria are based are defined in Protocol No 12. The inclusion of the EDP in the Treaties gives a quasi-constitutional status to that procedure as well as to the reference values on which it is based. Article 126(14) TFEU nevertheless allows Protocol No 12 to be replaced by a unanimous Council decision. Its second subparagraph allows the adoption of provisions replacing the Protocol on the excessive deficit procedure annexed to the Treaties, by unanimous decision of the Council. According to its third sub-paragraph detailed rules and definitions may be adopted for the application of the provisions of that Protocol. The Excessive Deficit Procedure is set out in Council Regulation (EC) 1467/ 97 and its subsequent amendments. It is interesting to note that Regulation 1467/97 was adopted on the basis of the second subparagraph of Article 104c of the Treaty establishing the European Community (TEC) (now Article 126 TFEU) even though it was not formally replacing the Protocol but only ‘speeding up and clarifying the implementation of the excessive deficit procedure’. The Council took the view that this Regulation constitute a kind of supra-legislative act whose provisions ‘constitute, together with those of Protocol (No 80 See Martin Heipertz and Amy Verdun, ‘The Dog that Would Never Bite? What We Can Learn from the Origins of the Stability and Growth Pact’ (2004) 11 Journal of European Public Policy 765, 767.

The Excessive Deficit Procedure 829 5) [today: Protocol No 2] to the Treaty, a new integrated set of rules’.81 For that reason, when as part of the ‘six-pack’ it was decided to amend this regulation, the same procedure requiring unanimity within the Council was followed.82 Details relating to the implementation of the EDP are further specified in the Code of Conduct on the SGP, revised for the last time in May 2017.83 Even if that text has no legal value per se, it is nevertheless an important instrument for interpreting the legislation, given that it is supposed to reflect the common view of the two institutions that are responsible for applying the EDP.

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B. The reference values The corrective arm comprises the various ‘steps’ that should be taken when Member States’ deficits or debt levels are considered excessive. The obligation for Member States to avoid ‘excessive government deficits’, as mentioned in Article 126(1) TFEU, must be understood as covering both deficits and debts, since paragraph 2 of the same Article makes clear that the budgetary discipline is based both on a deficit criterion and on a debt criterion. Consequently, the notion of ‘deficit’ throughout all the paragraphs of Article 126 should be understood as referring to the deficit and/or the debt of the Member State concerned.

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The assessment is based on ‘reference values’ set up in Protocol No 12 for deficit and debt levels. In both cases, non-respect of those values does not necessarily lead to the Member State being placed in EDP, as other factors may be taken into account. With regard to the deficit, it is considered as excessive if its value is greater than 3 per cent of GDP, unless either the ratio has declined substantially and continuously and has reached a level close to 3 per cent84 or the excess is only exceptional and temporary. Article 2(1) of Regulation 1467/97 further determines whether an excess may be considered exceptional and temporary. With regard to the debt, the reference value corresponds to a debt in excess of 60 per cent of GDP and not sufficiently diminishing towards that level. Article 2(1a) Regulation 1467/97 further defines the notion of ‘sufficient diminution’. The debt requirement was operationalized with the 2011 amendment of the SGP—commonly referred to as the ‘six-pack’—through the so-called ‘debt reduction benchmark’. At that time, a number of Member States were already in EDP and, consequently, had their fiscal consolidation paths already defined. In order to ensure that those Member States had time to adapt their structural adjustments to comply with the new debt benchmark, Article 2(1a) provides for a transition period of three years after the correction of their excessive deficit. During that period, those Member States must make sufficient progress towards compliance with the debt benchmark rather than actually be compliant with the formula that applies outside the transition period

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81 Recital (1) Regulation (EC) 1467/97. 82 Council Regulation (EU) 1177/2011 of 8 November 2011 amending Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2011] OJ L306/33. 83 Code of Conduct of the Stability and Growth Pact accessed 5 February  2020. 84 There is no formal definition of the meaning of a level being ‘close to three per cent’ but according to a constant practice, a difference of more than 0.5 per cent is no longer close.

830 EU FISCAL GOVERNANCE ON THE MEMBER STATES

C. Evolution of the EDP 28.48

We will only recall the key steps in the evolution of the EDP over time, without examining in detail its successive features.85 The original EDP entered into force on 1 January 1999 in the beginning of the third stage of EMU, and the Commission quickly opened a number of excessive deficit procedures, in particular concerning Germany and France. However, when the Commission proposed the Council to adopt decisions stating that those two Member States had not taken effective action, in accordance with Article 104(8) TEC (now Article 126(8) TFEU), the Council did not adopt those decisions but rather a set of conclusions holding the excessive deficit procedures in abeyance. Following an action initiated by the Commission, the Court of Justice delivered its judgment on 13 July 2004.86 The Court decided that failure by the Council to adopt the decisions recommended by the Commission did not constitute an act that is challengeable under an action for annulment but it annulled the Council’s conclusions since such measures were not provided for by the legal framework and did not respect the right of initiative of the Commission. That judicial episode prompted a revision of Regulation 1467/9787 with the adoption of Regulation 1056/2005, which increases the ‘flexibility’ in the implementation of the EDP by differentiating for individual Member States ‘to take into account of the diversity of economic and budgetary positions and developments’.88

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The financial crisis that started in 2008 put some extra pressure on the application of the EDP. While the EDP was initiated against many Member States, the flexibility of the legal framework was stretched to its maximum to avoid stepping up and imposing sanctions on the Member States.

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Thereafter, the EDP has been again reinforced through the so-called ‘six-pack’ legislation that entered into force in December 2011.89 The new rules aim at strengthening the SGP in order to prevent unsustainable fiscal positions, and to correct such positions promptly, should they emerge. The reform affects both the preventive arm of the SGP—the procedures to promote surveillance and coordination of economic policies and ensure that excessive deficits are avoided—and its corrective arm. New enforcement mechanisms, including financial disincentives and fines, apply to non-compliant euro area Member States. Moreover, the ‘six-pack’ introduced new provisions regarding the debt criterion of the SGP. It is now possible to initiate an EDP on the basis of the debt criterion alone.90

85 For a detailed description, see Lastra and Louis, ‘European Economic and Monetary Union’ (n 28) 112–19. 86 Commission v Council (n 7). For a case note, see Imelda Maher, ‘Economic Policy Coordination and the European Court: Excessive Deficits and ECOFIN Discretion’ (2004) 29 European Law Review 831; Dimitrios Doukas, ‘The Frailty of the Stability and Growth Pact and the European Court of Justice: Much Ado about Nothing?’ (2005) 32 Legal Issues of Economic Integration 293. 87 See Louis, ‘The Review of the Stability and Growth Pact’ (n 30) 86–88; Sideek M Seyad, ‘Destabilisation of the European Stability and Growth Pact’ (2004) 19(7) Journal of International Banking Law and Regulation 239. 88 Recital (5) Regulation (EC) 1055/2005. 89 Council Regulation (EU) 1177/2011. 90 In addition, the ‘six-pack’ introduced a new Macroeconomic Imbalances Procedure (MIP). See further Chapter 29.

The Excessive Deficit Procedure 831

D. General comments on the procedure As stated by the Court of Justice, the EDP is a procedure ‘in stages’.91 Those ‘stages’ (or ‘steps’ according to the usual Commission’s terminology) are set out in Article 126 TFEU and are further specified in Regulation 1467/97. A few preliminary comments are warranted: – First, the steps provided for by Article 126 TFEU are successive in the sense that they must be followed one by one in the right order. The institutions are not allowed to move to a step that is not the consecutive one in the procedure.92 – Second, the Regulation establishes detailed arrangements and successive deadlines for that procedure, which are largely based on the assumption that an excessive deficit must be corrected in the year following its identification.93 However, in practice, many excessive deficit procedures have been multiannual, thus making it more difficult to apply strictly the Regulation. – More generally, deadlines have often not been respected. This is partly due to the fact that there is no fixed deadline in the Treaty or the legislation for each and every step in the procedure (for instance there is no fixed deadline for the adoption of an Article 126(3) TFEU report by the Commission). Moreover, the deadlines are not always binding (for instance the Council must open an EDP ‘as a rule’ within four months of the reporting dates established in Regulation 479/200994). Overall, one has to recognize that the ‘speeding up’ pursued by Regulation 1467/97 has not been achieved. However, the Court of Justice confirmed that an expiry of EDP deadlines does not preclude the institutions from acting.95 – All the steps of the excessive deficit procedure as described below may apply to euro area Member States. By contrast, for non-euro area Member States, the procedure stops with a Council decision based on paragraph 8 of Article 126 TFEU. The coercive means for remedying excessive deficits envisaged at paragraphs 9 and 11 of that Article do not apply to them.96 For that reason, when the Council decides, in accordance with Article 126(8) TFEU, that a non-euro area Member State has not taken effective action, it may only address to it a revised recommendation in accordance with paragraph 7 of that Article. – The provisions applicable to euro area Member States must be read together with the more recent rules of Regulation 1173/2011, which provide for financial sanctions at earlier stages of the EDP. However, in practice, the Council has not activated such sanctions, nor the ultimate steps of the EDP also leading to sanctions on the Member States concerned, because the Commission has never submitted such proposals to the Council.

91 Commission v Council (n 7) para 77. 92 On one occasion, though, the Council went directly to Article 126(9) TFEU without adopting first an Article 126(8) decision on non-effective action but it would no longer be possible to do so under the current legal framework (Council Decision 2006/344/EC of 14 March 2006 giving notice to Germany, in accordance with Article 104(9) of the Treaty establishing the European Community, to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit [2006] OJ L126/20). 93 See Article 3(4) Regulation (EC) 1467/97. 94 Article 3(3) Regulation (EC) 1467/97. 95 Commission v Council (n 7) para 33. 96 Article 139(2)(b) TFEU.

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832 EU FISCAL GOVERNANCE ON THE MEMBER STATES – Voting arrangements within the Council are governed by Article 126(14) TFEU and Article 139(4)(b) TFEU. As an additional feature, Article 7 of the TSCG imposes on the euro area Member States the obligation under public international law to support the Commission’s proposals or recommendations under the EDP that are related to a breach of the deficit criterion. That obligation of unanimous support can only be waived if it is established, through a pre-vote, that a qualified majority of those Member States opposes the decision that is proposed or recommended. Because of their interference with the normal voting modalities within the Council, these additional provisions are not easy to reconcile with the rules of the TFEU and even less with the spirit of these rules. – Finally, Article 10a Regulation 1467/97 provides for a system of ‘surveillance missions’ by the Commission in the Member States in EDP.

E. Publicity of the procedure 28.52

The Treaty does not say much about the public nature of the EDP documents. Moreover, because of their non-legislative nature, those documents do not benefit from the special publicity applicable to legislative documents. While Article 126 TFEU provides for a confidential procedure in principle,97 a practice of full transparency has progressively developed over time in order to increase the peer pressure effect. The first formal trace of that transparency dates back to the 1997 Resolution of the European Council.98 Today, all EDP documents are available on the Commission website. Regulation 1467/97 and the Code of Conduct have made the EDP public, with the objective of increasing the pressure on the Member States concerned. The public nature of the EDP documents allows the so-called ‘economic dialogue’99 with the European Parliament ‘to discuss Council decisions under Article 126(6) TFEU, Council recommendations under Article 126(7) TFEU, notices under Article 126(9) TFEU, or Council decisions under Article 126(11) TFEU’.100 It is also the basis for the so- called ‘comply or explain’ rule, which means that the Council must explain its position publicly if it deviates from the Commission’s recommendations or proposals.

F. Steps in the procedure 28.53

According to Article 126(2) TFEU, the Commission monitors the development of the budgetary situation of the Member States and of the stock of their government debt. The Commission exercises that task by using statistics notified on a regular basis by the Member States.101

97 See paragraphs 7 and 8 of Article 126 TFEU. 98 ‘The Member States . . . 2. are invited to make public, on their own initiative, the Council recommendations made to them in accordance with Article 103 (4); . . . 6. are invited to make public, on their own initiative, recommendations made in accordance with Article 104c’. 99 For a critical account of the ‘economic dialogue’, see Cristina Fasone, ‘European Economic Governance and Parliamentary Representation. What Place for the European Parliament?’ (2014) 20 European Law Journal 164. 100 Article 2a Regulation (EC) 1467/97. 101 See Section IV.A.

The Excessive Deficit Procedure 833 Following a breach of the deficit criterion, identified on the basis of outturns (ex post), plans (planned deficit) or forecast data (risk of an excessive deficit), or following a breach of the debt criterion identified on the basis of outturn data (ex post), the Commission must prepare a report pursuant to Article 126(3) TFEU. The Code of Conduct clarifies that the Commission shall always prepare a report when certain conditions are met. The Commission may also prepare one if it is of the opinion that there is a risk of an excessive deficit or debt in a Member State. In the report, the Commission assesses the case for launching an EDP, based on a consideration of all factors pertinent to such a decision. Article 2(3) Regulation 1467/97 gives the Commission a large margin of discretion as regards the relevant factors to be taken into account.

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As a second step, Article 126(4) TFEU requires that the Economic and Financial Committee (EFC) formulates an opinion on the Commission report. The EFC must adopt its opinion within two weeks of the adoption of the Commission’s report.102 Those opinions are not made public.

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Following the Commission’s report and the ensuing opinion from the EFC, if the Commission considers that an excessive deficit exists or may occur, it issues an opinion addressed to the Member State concerned under Article 126(5) TFEU. At the same time, the Commission adopts:

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– a proposal for an Article 126(6) TFEU Council decision on the existence of an excessive deficit; and – a recommendation for a Council recommendation based on Article 126(7) TFEU, which sets a time limit to correct the Member State’s public finance imbalances and to be compliant with both the deficit and the debt requirements. The Commission must also inform the European Parliament.103 The Council adopts the 126(6) decision and the 126(7) recommendation at the same time. It acts by qualified majority and without taking into account the vote of the Member State concerned (Article 126(13) TFEU). Regulation 1467/97 provides that the Council has an obligation to decide on the existence of an excessive deficit within a certain deadline.104 The adoption of the Article 126(6) decision by the Council is usually referred to as the ‘opening of the EDP’. The decision that an excessive deficit exists means either that an excessive deficit is reported or that it is planned by the Member State concerned. To date, the EDP has never been opened for a planned breach of the debt criterion. The discretion of the Council and the Commission when deciding to open or not an EDP is limited by the specifications of Article 2(4) Regulation 1467/97.

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The opening of an EDP may have additional specific consequences for a euro area Member 28.58 State. The Commission must also recommend that a sanction be set in the form of a non- interest-bearing deposit if the Member State has already lodged an interest-bearing deposit under the preventive arm or in case of ‘serious non-compliance with the budgetary policy obligations in the SGP’.105

102

Article 3(1) Regulation (EC) 1467/97. Article 3(2) Regulation (EC) 1467/97. 104 Article 3(3) Regulation (EC) 1467/97. 105 Article 5(1) Regulation (EU) 1173/2011. See Section V.A, paragraph 28.86. 103

834 EU FISCAL GOVERNANCE ON THE MEMBER STATES 28.59

The Article 126(7) recommendation contains annual deficit targets both in nominal and in structural terms which are linked by an underlying macroeconomic scenario set on the basis of the Commission forecasts. The targets must be consistent with a minimum annual improvement of at least 0.5 per cent of GDP as a benchmark, net of one-off and temporary measures.106 It is worth noting that sometimes the Article 126(7) recommendations contain a budgetary target for the final year that is set at a level slightly below –3 per cent, in order to guarantee an effective and lasting achievement of the correction within the requested deadline. In principle, the Council recommendation also contains a quantification of the policy response required to attain those targets, in terms of the total amount of measures to be taken (the required fiscal effort). The Council fixes for the Member State concerned a maximum deadline for effective action. According to Regulation (EC) 1467/97, that deadline should be within six months, or within three if the situation is judged to be particularly serious. The Council also establishes a deadline for the correction of the excessive deficit.

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Following the Council decision under Article 126(6) TFEU and the adoption of the Article 126(7) TFEU recommendation, the Member State must show that it has taken action to address its excessive deficit within the deadline set in the recommendation. The Member State must make its report public.

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Following the expiry of the three or six month deadline given by the Council, the Commission must undertake a first assessment, which looks at whether the Member State is on track to correct its excessive deficit, ie if it has taken effective action, following the submission of the Member State’s report on action taken. The Commission and the Council have agreed a complex methodology for assessing whether a Member State has taken effective action, implying in particular a so-called ‘careful analysis’:107 – First, the changes in the nominal and structural balances are assessed. When a Member State achieves both its headline deficit target and the recommended improvement in the structural balance, the Member State is considered to have delivered effective action; a deficit-based EDP cannot be stepped up if the Member State achieves its intermediate headline deficit target, even when the recommended change in the structural balance is not achieved. – When it is not achieved, the Commission engages in a more detailed examination, known as a careful analysis. The careful analysis first uses the expenditure benchmark to assess fiscal effort.

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Depending on the outcome of that assessment, the procedure may be held ‘in abeyance’ or stepped up. The procedure is held in abeyance if the Commission considers that the Member State concerned acts in compliance with the Council’s recommendation.108 The Commission must inform the Council accordingly and does so in practice by addressing a communication to it. Thereafter, an EDP ‘in abeyance’ is subject to continuous monitoring

106 Article 3(4) Regulation (EC) 1467/97. 107 For more details, see Commission, ‘Vade Mecum on the Stability and Growth Pact’ (n 14) and the Economic and Financial Committee, ‘Improving the assessment of effective action in the context of the excessive deficit procedure: a specification of the methodology’ (ecfin.cef.cpe(2016)4275398, Brussels, 29 November 2016). 108 On one occasion, the Commission took a more ambiguous stance. It decided that the procedure against France should be held in abeyance because it was not established that there was no effective action (COM (2015) 326). This position was criticized in Council.

The Excessive Deficit Procedure 835 by the Commission. However, Regulation 1467/97 does not provide specific deadlines within which the Commission must make a new assessment. The Commission may activate again the procedure if its monitoring shows the Member State concerned is not on course to comply with the recommendation. With the ‘two-pack’, the continuous monitoring for euro area Member States is based—on a request by the Commission—on regular reports submitted by them every six months. At any point in the EDP process, the Commission may issue an autonomous recommendation if it perceives a risk of non-compliance with the deadline to correct the excessive deficit.

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The 2005 reform of the SGP introduced, among other matters, a possibility of extending the deadline for correcting the excessive deficit without necessarily stepping up the EDP. That novelty, referred to as ‘conditional compliance’, can be found in Articles 3(5) and 5(2) Regulation 1467/97 and remained unchanged after the 2011 reform of the SGP. As long as a Member State is judged as having taken effective action, it may be issued with revised Article 126(7) recommendations, including the possibility of extending the deadline for correction, if unexpected adverse economic events with a major impact on public finances impede its ability to correct its excessive deficit by the deadline initially recommended, despite its action. Consequently, a Member State can stay in the same stage of the EDP as long as it remains on the structural adjustment path by taking effective action. Such extension has been frequently granted over the last years, given the impact of the financial crisis that started in 2008. The institutions have not quantified the notion of ‘major impact on public finances’. The extension of the deadline should be ‘by one year as a rule’.109 However, in practice, the Commission has frequently either recommended to the Council extending the deadline by more than one year or adopted consecutive one-year extension proposals. A similar extension is also possible ‘in the case of a severe economic downturn in the euro area or in the Union as a whole’. That scenario has not been considered applicable so far.

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If the Commission considers, at the end of the six (or three) month deadline for effective action that the Member State concerned has not taken effective action, it must recommend the Council to adopt a decision stating the lack of effective action in accordance with Article 126(8) TFEU. The Council must adopt its decision ‘immediately after’ the expiry of that deadline for effective action and report to the European Council accordingly.110 Thereafter, the Council and the Commission continue to monitor the Member States in EDP regularly and must step up the procedure whenever they do not act as recommended.

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For euro area Member States whose EDP has been stepped up, the Council, at the same time as the Article 126(8) decision on non-effective action, also issues a separate ‘notice’ under Article 126(9) TFEU. The notice takes the form of a decision. It mirrors the Article 126(7) recommendation since it includes a time limit for correcting the excessive deficit as well as annual nominal and structural balance targets, which are linked by an underlying macroeconomic scenario. In addition, the notice contains a series of measures—and the corresponding timetable for their implementation—that are conducive to the achievement of the nominal and structural targets. For euro area Member States, a Council decision stating the

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109 110

Article 3(5) Regulation (EC) 1467/97. Article 4 Regulation (EC) 1467/97.

836 EU FISCAL GOVERNANCE ON THE MEMBER STATES lack of effective action is also the next trigger for the imposition of sanctions in the form of a fine corresponding to 0.2 per cent of GDP in the preceding year as a rule.111 28.67

For non- euro area Member States, following an Article 126(8) decision stating a lack of effective action, the Council simply addresses to them revised Article 126(7) recommendations.

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Following a notice under Article 126(9) TFEU or a revised Article 126(7) TFEU recommendation, an assessment of whether a Member State is on track to correct its excessive deficit, ie if it has taken effective action, can again lead to either maintaining/putting the procedure in abeyance or to a decision on a lack of effective action. With the ‘two-pack’, the regularity of the reports to be submitted by euro area Member States increases to every three months when subject to a notice under Article 126(9) TFEU. The possibility of revising the notice or the recommendation and extending the deadline also remains, as long as the Member State is found to have taken effective action but has faced unexpected adverse economic circumstances with a major impact on its public finances.

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Where the Commission concludes that effective action has not been taken to comply with the requirements of an Article 126(9) notice, the procedure is stepped up to Article 126(11) TFEU for euro area Member States. Under that step, the Council may apply or intensify different measures listed in Article 126(11) TFEU: obligation to publish additional information before issuing bonds and securities, invitation to the EIB to reconsider its lending policy towards the Member State concerned and financial sanctions in the form of non- interest-bearing deposit or fine. Regulation 1467/97 has reinforced that rule by providing for an obligation for the Council to impose a fine within a certain deadline when the conditions are met.112 For as long as the Member State continues not to comply with its notice under Article 126(9) TFEU, it faces in principle an annual fine equal to 0.2 per cent of its GDP in the preceding year plus a variable component determined by the magnitude of its excessive deficit, up to a maximum of 0.5 per cent of GDP.113 However, in practice, the Council has never imposed such sanctions.

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For non-euro area Member States, a new decision under Article 126(8) followed by a new recommendation under Article 126(7) is undertaken for as long as the Member State is not on track to correct its excessive deficit and has not taken effective action.

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In accordance with Article 126(12) TFEU, the last step of the EDP is the abrogation when the excessive deficit has been corrected. The Code of Conduct clarifies that the excessive deficit must be corrected in a durable manner and the correction must be confirmed by outturn data. In all cases, abrogation requires a correction of the deficit that is lasting and compliance with the debt rule on a forward-looking basis. The Council adopts the abrogation decision under Article 126(12) TFEU by a qualified majority vote, based on a Commission recommendation.

111

See Section V.A, paragraph 28.86. Articles 6(2), 7, and 11 Regulation (EC) 1467/97. 113 Article 12 Regulation (EC) 1467/97. 112

EDP Statistics 837

IV. EDP Statistics A. General Principles A key element for the proper implementation of the Stability and Growth Pact is the availability of complete, reliable, timely and consistent data concerning the fiscal situation of the Member States.114 In the absence of such data, the Commission and Council cannot effectively ensure the control of the fiscal situation of the Member States. The case of Greece perfectly illustrates that issue because it has significantly revised its deficit and debt figures a posteriori.115 For that reason, the Union has put in place and reinforced over time a system of notification and assessment of national data, in particular data on government debt and deficit reported under the Excessive Deficit Procedure (EDP). The legislator has also put in place a system of financial sanctions in case of manipulation of EDP statistics.116

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Member States must notify EDP statistics to the European level. According to Article 3 of Protocol No 12 on the excessive deficit procedure, they have an obligation to report to the Commission their planned and actual deficits and the level of their debts ‘promptly and regularly’. The central legal framework for the production and notification of EDP statistics is Regulation 479/2009 of 25 May 2009, on the application of the Protocol on the excessive deficit procedure annexed to the TEC. That Regulation, as amended by Regulation (EU) 679/2010 and Commission Regulation (EU) 220/2014, develops further the notification obligation of the Member States.

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B. Responsible authorities At national level, the national statistical authorities are responsible for ensuring that re- 28.74 ported data complies with legal provisions. According to Article 16 Regulation 479/2009, Member States must ensure that the actual data reported to the Commission (Eurostat) are provided in accordance with the principles established by Article 2 Regulation (EC) 223/ 2009. In that regard, the responsibility of the national statistical authorities is to ensure the compliance of reported data with Article 1 of this Regulation and the underlying ESA 2010 accounting rules. Those national statistical authorities must be provided with access to all relevant information necessary to perform those tasks while they are accountable and must act in accordance with the principles established by Article 2 Regulation (EC) 223/2009. At the Union level, in the specific context of the EU fiscal surveillance system and of the EDP exercise, the Commission is responsible for regularly assessing the quality both of actual data reported by Member States and of the underlying government sector accounts

114 See generally, James D Savage and David Howarth, ‘Enforcing the European Semester: The Politics of Asymmetric Information in the Excessive Deficit and Macroeconomic Imbalance Procedures’ (2018) 25 Journal of European Public Policy 212; James D Savage and Amy Verdun, ‘Strengthening the European Commission’s Budgetary and Economic Surveillance Capacity since Greece and the Euro Area Crisis: A Study of Five Directorates-General’ (2016) 23 Journal of European Public Policy 101. 115 See, for instance, Commission, ‘Towards a European Governance Strategy for Fiscal Statistics (Communication)’ COM (2004) 832 final. 116 See Section V.B.

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838 EU FISCAL GOVERNANCE ON THE MEMBER STATES compiled according to the European System of Accounts. It is also responsible for providing the data to be used for the EDP. Within the Commission, that task is undertaken by the Directorate-General of Eurostat, acting on behalf of the Commission. Eurostat benefits from a particular status of professional independence within the Commission.117 Commission Decision 97/281/EC establishes the institutional setting of Eurostat and the way it operates within the Commission. The legislature also guarantees its existence and independence.118 Eurostat fulfils its coordination role as set out in Regulation (EC) 223/2009. Eurostat is assisted by a Committee on monetary, financial and balance of payments statistics established by Council Decision 2006/856/EC of 13 November 2006. It conducts its mission in conformity with the Code of Practice for European Statistics,119 which provides in particular for professional independence, objectivity and impartiality. It maintains a continuous dialogue with all relevant institutions in the Member States, and provides in particular for bilateral advice for specific past and future transactions. Eurostat also maintains a permanent dialogue with users through the interface of the European Statistical Advisory Committee. In addition, Eurostat has sole competence within the Commission for the statistical methodological basis on which the data for the EDP are compiled. Eurostat undertakes regular visits to Member States, during which the EDP statistics data are reviewed, as well as the implementation of the national accounts rules (ESA 2010) and Eurostat’s other methodological documentation relating to the government sector.

C. Applicable rules 28.76

The Commission (Eurostat) provides the data for the EDP. When doing so, it may express a reservation on the quality of the actual data reported by the Member States and make those reservations public.120 The Commission (Eurostat) may also amend actual data reported by Member States and provide the amended data and a justification of the amendment where there is evidence that actual data reported by Member States do not comply with the requirements.121 Eurostat makes a regular use of such power and Member State are probably entitled to challenge the validity of such decisions before the Court of Justice.122

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Finally, Eurostat has received investigative powers with a view to reinforcing budgetary surveillance in the euro area.

117 The status of Eurostat, combining integration within the Commission and functional independence, can be compared with the status of the European Antifraud Office (OLAF). 118 See, in particular, Articles 6 and 6a Regulation (EC) 223/2009 of 11 March 2009 on European statistics [2009] OJ L87/164. 119 ECOFIN Council, ‘Code of best practice on the compilation and reporting of data in the context of the excessive deficit procedure’ (18 February 2003) based on Commission, ‘Communication of the commission on the need and the means to upgrade the quality of budgetary statistics’ COM (2002) 670 final. 120 Article 15(1) Regulation (EC) 479/2009. 121 Article 15(2) Regulation (EC) 479/2009. 122 See inadmissibility order in Case T-148/05 Comunidad autónoma de Madrid and Madrid, infraestructuras del transporte (Mintra) v Commission of the European Communities [2006] ECR II-61. See also Case T-177/06 Ayuntamiento de Madrid et Madrid Calle 30 SA (Madrid) v Commission [2007] ECR II-88; and Case T-403/06 Belgium v Commission [2008] ECLI:EU:T:2008:99. The General Court closed the latter case by a simple order following the withdrawal of the Belgian application.

Financial Sanctions as Enforcement Mechanism 839 Regulation 479/2009 requires that Member States report EDP-related data to Eurostat twice per year, at the end of March and the end of September. Member States must also inform the Commission (Eurostat) of any major revision in their actual and planned government deficit and debt figures already reported, as soon as it becomes available. The data must be reported in harmonized tables designed specifically to provide a consistent framework. On that basis, Eurostat publishes deficit and debt data on a quarterly basis.

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The definitions of ‘government’, ‘deficit’ and ‘investment’ are laid down in Article 2 of the Protocol on the excessive deficit procedure by reference to the ‘European System of Integrated Economic Accounts’ (ESA), which was replaced by the European system of national and regional accounts in the Community, the so-called ‘ESA 2010’.123 Therefore, the EDP statistics are strongly linked to ESA. European Government Finance Statistics differ from the budget or public accounting presentations, which are national-specific in terms of their scope of entities and the applicable principles for recording transactions.

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The notification applies to the planned and actual government deficits and to the level of debts.

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The EDP debt is defined in Article 1(5) Regulation 479/2009 as the total general government consolidated gross debt at nominal value outstanding at the end of the year. General government consists of central government, state government (if applicable), local government and social security funds (if applicable). Consolidation refers to the exclusion of government debt held as assets by other general government units. Gross debt is consolidated both within and between sub-sectors of general government, implying that general government gross debt is less or equal to the sum of subsectors debt. Substantial consolidation amounts occur for example for social security funds’ holdings of government bonds.

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Following the provisions of Article 9 Regulation 479/2009, as amended, in 2014 the new ESA2010-based EDP Inventory of the methods, procedures and sources used to compile actual deficit and debt data and the underlying government accounts has been adopted. All Member States are required to complete that EDP Inventory. Availability of detailed and comprehensive EDP Inventories is of vital importance for the quality assessment of the EDP statistics and the Government Finance Statistics (GFS) data and for identifying possible risks in their reliability and thus of the government deficit and debt data.

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V. Financial Sanctions as Enforcement Mechanism A. EDP financial sanctions For Member States in EDP, Article 126 TFEU and Regulation 1467/97 substitutes the usual infringement procedure before the Court of Justice with a system of financial sanctions. Regulation 1467/97 provides for an obligation for the Council to impose a fine against a non-compliant Member State within a certain deadline when certain conditions are met.124 123 Council Regulation (EC) 2223/96 of 25 June 1996 on the European system of national and regional accounts in the Community [1996] OJ L310/1. 124 Articles 6(2), 7, and 11 Regulation (EC) 1467/97.

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840 EU FISCAL GOVERNANCE ON THE MEMBER STATES For as long as the Member State continues not to comply with its notice under Article 126(9) TFEU, whether the non-compliance includes the deficit and/or the debt criterion, it faces in principle an annual fine equal to 0.2 per cent of its GDP in the preceding year plus a variable component, up to a maximum of 0.5 per cent of GDP.125 That system, which has not been amended since 1997, has never been activated.126 One of the reasons is that it provides for sanctions at a very late stage in the EDP, when the financial situation of the Member State concerned has already deteriorated. 28.84

For that reason, the legislator has recently set up a whole new set of financial sanctions for the euro area Member States, as part of the so-called ‘six-pack’. Regulation 1173/2011 provides for financial sanctions both in the preventive arm and the corrective arm of the SGP. In order to increase the automaticity of those mechanisms, the Commission is under the obligation to recommend to the Council the adoption of those sanctions within a certain deadline. Moreover, the sanction is ‘deemed to be adopted by the Council’ unless it decides by a qualified majority to reject the Commission’s recommendations within ten days (the so-called ‘reversed qualified majority voting’).

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In the preventive arm, an interest-bearing deposit amounting to 0.2 per cent of its GDP is imposed on the euro area Member State which receives a Council decision establishing that it failed to take action following a so-called ‘significant deviation procedure’.127 While the default is for the deposit to equal 0.2 per cent of GDP, the amount may vary. In order for such an adaptation to occur, the Member State in question must issue a reasoned request to the Commission within ten days of the Council decision on non-effective action. Following the receipt of that request, the Commission may recommend that the Council reduces the amount or cancels the interest-bearing deposit. The interest-bearing deposit will bear a rate of interest which reflects the Commission’s credit risk and the relevant investment period. It will be returned to the Member State with the interest accrued, once the situation that led to a decision of non-effective action relative to the Council recommendations under Article 121(4) TFEU no longer exists. The Council decision to return the deposit and the accrued interest is taken on the basis of a Commission recommendation, although the Council may amend that Commission recommendation by qualified majority voting. If, however, a Member State enters the Excessive Deficit Procedure having lodged an interest-bearing deposit, the default situation will be for that deposit to be turned into a non-interest-bearing deposit following the Council decision on the existence of an excessive deficit.

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In the Corrective arm of the SGP, sanctions are also provided: – where the Council adopts a Article 126(6) TFEU decision that an excessive deficit exists, the Member State concerned must lodge within the Commission a non-interest- bearing deposit amounting to 0.2 per cent of its GDP in the preceding year;128 – where the Council adopts a Article 126(8) decision that a euro area Member State has not taken effective action, the Member State must pay a fine amounting in principle to 0.2 per cent of its GDP in the preceding year.129 125 Article 12 Regulation (EC) 1467/97. 126 On sanctions, see Iain Begg, ‘Hard and Soft Economic Policy Coordination under EMU: Problems, Paradoxes and Prospects’ (2003) Center for European Studies Working Paper Series No 103, 8. 127 Article 4 Regulation (EU) 1173/2011. 128 Article 5 Regulation (EU) 1173/2011. 129 Article 6 Regulation (EU) 1173/2011.

Financial Sanctions as Enforcement Mechanism 841 Those sanctions are, in principle, to be activated much earlier than those provided for in the TFEU and they are more automatic. That system has been used twice far, in the case of Spain and Portugal.130 After the Council adopted decisions for those two Member States stating that non-effective action was taken concerning the EDP, it adopted on 8 August 2016 decisions on the basis of Regulation 1173/2011, but the gesture remained symbolic: the Council decided that a cancellation of the fine of 0.2 per cent of GDP was warranted.

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B. Statistical fines Regulation 1173/2011 sets up a system of financial sanctions against euro area Member States that intentionally or by serious negligence misrepresent deficit and debt date. That Regulation is complemented by Commission Delegated Decision 2012/678/EU of 29 June 2012 on investigations and fines related to the manipulation of statistics as referred to in Regulation 1173/2011.131 In accordance with that system, the Council may impose on Member States fines that are effective, dissuasive and proportionate to the nature, seriousness and duration of the misrepresentation they have committed. The amount of those fines cannot exceed 0.2 per cent of GDP of the Member State concerned. Under Article 14 Commission Delegated Decision 2012/678/EU, the amount of the fine is established using a two-step methodology. First, the Commission determines the reference amount, which shall be equal to 5 per cent of the larger impact of the misrepresentation on the level of either the general government deficit or the debt of the Member State for the relevant years covered by the notification in the context of the excessive deficit procedure. Second, the Commission may modify that reference amount upwards or downwards, taking into account the following factors: the seriousness and the wider effects of the misrepresentation, in particular, the impact of the misrepresentation on the functioning of the strengthened economic governance of the Union; the fact that the misrepresentation has been shown to be the result of serious negligence or, alternatively, the misrepresentation has been shown to be intentional; the fact that the misrepresentation was the work of one entity acting alone or, alternatively, the misrepresentation was the result of a concerted action by two or more entities; the repetition, frequency or duration of the misrepresentation by the Member State concerned; the degree of diligence and cooperation, alternatively the degree of obstruction, shown by the Member State concerned in the detection of the misrepresentation and in the course of the investigations.

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The procedure for imposing a fine contains the following steps:

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First, the Commission adopts a decision initiating the investigation in accordance with Article 8(3) of the Regulation when it finds that there are serious indications of the existence of facts liable to constitute a misrepresentation of deficit or debt data. The General

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130 Council Implementing Decision (EU) 2017/2350 of 9 August 2016 on imposing a fine on Portugal for failure to take effective action to address an excessive deficit [2017] OJ L336/24 and Council Implementing Decision (EU) 2017/2351 of 9 August 2016 on imposing a fine on Spain for failure to take effective action to address an excessive deficit [2017] OJ L336/27. 131 Commission Delegated Decision of 29 June 2012 on investigations and fines related to the manipulation of statistics as referred to in Regulation (EU) 1173/2011 of the European Parliament and of the Council on the effective enforcement of budgetary surveillance in the euro area [2012] OJ L306/21.

842 EU FISCAL GOVERNANCE ON THE MEMBER STATES Court has confirmed that such act is a preparatory measure that does not adversely affect the Member State concerned. An action for annulment against such a decision is, therefore, inadmissible.132 28.91

Thereafter, it conducts the investigations necessary when it finds that there are serious indications of the existence of facts liable to constitute a misrepresentation. It may request the Member State to provide information and it may conduct on-site inspections and access the accounts of all government entities at central, state, local, and social-security level. On that basis, the Commission adopts a report containing the result of its investigation. The Commission, where it exercises that power, must respect fully the rights of defence of the Member State concerned. More specifically, it must take into account any comments submitted by that Member State during the investigation and hear it before submitting a proposal for a decision to the Council, so that the proposal is based only on facts on which the Member State has been able to comment.

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Second, upon completion of the investigation, the Commission recommends the Council to adopt a decision imposing a fine and the Council decides on that recommendation by qualified majority of the euro area Member States and without taking into account the vote of the Member State concerned.

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The Council has imposed statistical fines on euro area Member States on two occasions:

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On 13 July 2015, the Council adopted Implementing Decision (EU) 2015/1289 imposing a fine of 18.93 million euro on Spain for the manipulation of deficit data in the Autonomous Community of Valencia.133 By judgment of 20 December 2017, the Court of Justice rejected the action for annulment submitted by Spain against that decision.134

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In May 2018, the Council impose a fine on Austria for manipulation of debt data in the county of Salzburg.135

VI. Budgetary Frameworks of the Member States: An Embryo of Harmonization 28.96

Beyond the mere fiscal surveillance framework established by the Treaties, the Union and Member States have recently embarked on a new policy of harmonization of national laws in the budgetary field. The idea was to complement the rules-based fiscal framework at Union level by binding provisions at the national level to increase national ownership of fiscal rules. That new set of rules should foster sound budgetary policies in the Member States and act as a lasting mechanism against the emergence of excessive deficits. As a first 132 Case T-676/14 Spain v Commission [2015] ECLI:EU:T:2015:602. 133 Council Decision (EU) 2015/1289 of 13 July 2015 imposing a fine on Spain for the manipulation of deficit data in the Autonomous Community of Valencia [2015] OJ L498/19 and Corrigendum to Council Decision (EU) 2015/1289 of 13 July 2015 imposing a fine on Spain for the manipulation of deficit data in the Autonomous Community of Valencia [2015] OJ L291/10. 134 Case C-521/15 Spain v Council [2017] ECLI:EU:C:2017:982. For a discussion of the case, see Merijn Chamon, ‘Fining Member States under the SGP, or how enforcement is different from implementation under Article 291 TFEU: Spain v. Council’ (2018) 55 Common Market Law Review 1495. 135 Council Implementing Decision (EU) 2018/818 of 28 May 2018 imposing a fine on Austria for the manipulation of debt data in Land Salzburg [2018] OJ L137/23.

Budgetary Frameworks of the Member States 843 step, the Council adopted a Directive requesting Member States to adapt their national fiscal frameworks.136 Thereafter, the Member States went one step further, through the conclusion of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the TSCG). The TSCG requires the transposition of a balanced budget rule in national law as well as correction mechanisms and the establishment of independent authorities. Regulation 473/2013 also imposes the establishment of independent fiscal councils with an extensive monitoring role.137 The Commission has recently proposed to integrate the content of the TSCG within EU law.138 The putting into place of such a system of internal control through measures of Union law has been challenging. The Union legal framework was not built for such a system. In particular, it provides no explicit bases for harmonization measures.

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A. Directive 2011/85/EU on requirements for budgetary frameworks of the Member States As part of the November 2011 legislative package that amended the SGP, the Council adopted Directive 2011/85/EU of 8 November 2011, on requirements for budgetary frameworks of the Member States, which had to be effectively incorporated into national budgetary processes following a two-year transposition period. That directive sets out essential requirements on national budgetary frameworks.

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Council Directive 2011/85/EU lays down detailed rules concerning the characteristics of the budgetary framework of the Member States. As stated in Article 1, those rules were considered necessary to ensure the Member States’ compliance with the excessive deficit procedure. The use of the third subparagraph of Article 126(14) TFEU as a basis for the adoption of a Directive is an interesting element. It was indeed not obvious that that provision was a sufficient legal basis for harmonizing national budgetary procedures with the goal of assuring ‘uniform compliance with budgetary discipline’ (Recital (28) of the Directive). It is also striking that the United Kingdom, when it was still a Member State, was exempted from the obligation to have in place numerical fiscal rules because of its partial exemption as set out in Protocol No 15 to the Treaties (Recital (17) and Article 8 of the Directive).139

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B. Integration of the Fiscal Compact within EU law At the height of the financial crisis, it was agreed that an enhanced level of discipline should be imposed on the euro area Member States. In particular, following the German model, the Member States attempted to move from the existing external discipline (especially

136 Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41. 137 On this Regulation, see Section VII.C, paragraph 28.111. 138 See Section VI.B, paragraph 28.102. 139 The UK has managed to be exempted from quite a number of Union law instruments, for reasons that are not always easy to justify from a legal point of view (see for example the exemption from macro-conditionality in the Structural Funds Regulation).

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844 EU FISCAL GOVERNANCE ON THE MEMBER STATES the excessive deficit procedure) towards an ‘internalization’ of the fiscal discipline within each Member State through the adoption of commonly agreed domestic rules. During the December 2011 meeting of the European Council, objections raised by the United Kingdom prevented the adoption of those rules at Union level, given the need for unanimity within the Council. That project was therefore continued on an intergovernmental basis, through the conclusion of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), a treaty of international public law concluded between twenty-five Contracting Parties, all of which are EU Member States. They parties signed the TSCG on 2 March 2012, which entered into force on 1 January 2013. 28.101

According to the most important provisions of that Treaty, the so-called ‘Fiscal Compact’ contained in its Title III, Member States must include a binding ‘balanced-budget’ rule in cyclically-adjusted terms (also called the ‘Golden Rule’)140 directly in their constitutional order or in provisions binding upon the budget authorities.141 According to that rule, Contracting Parties must have their budgetary position in balance or in surplus, with a lower limit for the structural deficit of 0.5 per cent of GDP, which can become 1 per cent of GDP for Member States with a debt level significantly below 60 per cent of GDP and with low risks for the long-term sustainability of public finances. That Treaty also provides, in Article 8, the possibility for any of its Contracting Parties to bring a case to the Court of Justice in case it considers that another party has not complied with that ‘transposition’ obligation. The substance of that obligation to have a balanced-budget is relatively close to the pre-existing rules of the Stability and Growth Pact. It mirrors the requirement found at the heart of the preventive arm of the SGP, namely the medium-term budgetary objective. However, that set of rules presents a real novelty because of its specific status. The Golden Rule is supposed to form part of the constitutional basis of each participating Member State. From a democratic point of view, that evolution can be seen from two very different perspectives. On the one hand, it could be considered that those provisions have been imposed through a hasty and non-democratic negotiation process and that they unduly constrain the sovereign rights of national parliaments to decide on budgetary issues. On the other hand, since that Treaty was ratified by each national assembly of the Contracting Parties, in accordance with their national procedures, it can be seen as a strict but nevertheless democratically endorsed rule.

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The Parties considered that that intergovernmental approach should be provisional and agreed to seek integration of the substance of the TSCG into Union law at most within five years of the date of its entry into force, ie by 1 January 2018 (Article 16 TSCG). Following on that objective, the Commission adopted on 6 December 2017 a proposal for a Council Directive laying down provisions for strengthening fiscal responsibility and the medium- term budgetary orientation in the Member States.142 Those provisions follow a teleological approach. They do not mechanically duplicate the provisions of the Fiscal Compact but request the Member States to adopt a framework of numerical fiscal rules ensuring that their annual budgets comply with a medium-term objective, which itself ensures that the 140 See generally Federico Fabbrini, ‘The Fiscal Compact, the “Golden Rule” and the Paradox of European Federalism’ (2013) 36 Boston College International and Comparative Law Review 1. 141 See Chapter 12. 142 Commission, ‘Proposal for a Council Directive laying down provisions for strengthening fiscal responsibility and the medium-term budgetary orientation in the Member States’ COM (2017) 824 final.

Reinforced Fiscal Surveillance 845 ratio of government debt to GDP does not exceed 60 per cent of GDP or approaches it at a satisfactory pace. The Member States should also have a fiscal planning for the term of the national legislature and independent national bodies should be competent for assessing the adequacy of and compliance with that fiscal planning.

VII. Reinforced Fiscal Surveillance of the Euro Area Member States The financial crisis of 2008 has shown that stronger coordination was needed between the members of the monetary union. It has led to a completely new system of binding measures and sanctions for the euro area Member States, adopted on the basis of Article 136 TFEU.

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A. Legal basis: Article 136 TFEU143 The Lisbon Treaty has introduced new provisions in the Treaties in relation with the euro area, in particular Article 136 TFEU. Article 136(1) refers to the adoption of measures specific to the euro area Member States. It is drafted in a very complex and ambiguous way, probably reflecting opposite views expressed during the works of the Convention.144 For those reasons, a literal interpretation does not allow the reader to fully understand its scope.145 The determination of its scope raises fundamental issues related to the very nature of the euro area: Is Article 136(1) TFEU only a variation of the usual method of open coordination envisaged in Article 121 TFEU? Or does it confer more intrusive competences to the Union as regards the euro area Member States? In the affirmative, how far can the Union intrude into national sovereignty? In the academic circles the majority has so far advocated for a literal, hence restricted, interpretation of Article 136(1).146 According to that reading, Article 136(1) provides for nothing more than a kind of enhanced cooperation between the euro area Member States. That enhanced cooperation would marginally differ from the ‘normal’ enhanced cooperation regulated by Article 20 TEU and Articles 326–334 TFEU. First, it automatically covers all euro area Member States and not only those willing to participate. Second, it can be applied immediately and not as a last resort. To support that restrictive interpretation, one could refer to the fact that the Council may act only ‘in accordance with the relevant provisions of the Treaties’. The voting arrangements within the Council are also very similar to those provided for by Article 330 TFEU. Article 136(1) TFEU could be seen, therefore, as a mere procedural provision, simply facilitating within the euro area the use of existing Union competences. It would not be a proper legal basis allowing the adoption of additional measures. That restrictive interpretation is, however, 143 See also Jean-Paul Keppenne, ‘Institutional Report’ in Ulla Neergaard, Catherine Jacqueson, and Jens Hartig Danielsen (eds), The Economic and Monetary Union: Constitutional and Institutional Aspects of the Economic Governance within the EU (Djøf Publishing 2014). 144 See successive versions in European Convention Documents CONV 727/03, CONV 805/03, CONV 802/03 and CONV 850/03. 145 Antpöhler, ‘Emergenz der europäischen Wirtschaftsregierung’ (n 32) 372–73. 146 Matthias Ruffert, ‘The European debt crisis and European Union law’ (2011) 48 Common Market Law Review 1777, 1800ff; Christian Calliess, ‘From Fiscal Compact to Fiscal Union: New Rules for the Eurozone’ (2012) 14 Cambridge Yearbook of European Legal Studies 101, 103.

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846 EU FISCAL GOVERNANCE ON THE MEMBER STATES disputable because it leaves Article 136(1) without much added value. Most of the measures envisaged under Articles 121 and 126 TFEU are individual measures addressed to a specific Member State and enhanced cooperation for such measures makes little sense. Moreover, other Treaty provisions already regulate the voting rights within the Council for measures addressed to euro area Member States.147 Therefore, and also because the euro area crisis required an urgent response, the Union institutions have made a more dynamic and teleological interpretation of that provision. They considered that Article 136(1) was a proper legal basis allowing the adoption of measures of a new nature, which could not have been adopted otherwise.148 That interpretation can be supported by the objective of the provision (ensuring the proper functioning of EMU) and the nature of the envisaged measures (to strengthen the coordination and surveillance of the budgetary discipline of euro area Member States). Binding measures going further than what is envisaged by Articles 121 and 126 are, therefore, possible on that basis, provided that they remain adequate and proportionate. All this is thus based essentially on subparagraph (a) of Article 136(1) TFEU. Subparagraph (b) of that provision remains largely useless (the term ‘orientations’ indicate that no binding measures can be based on that part of Article 136(1) TFEU). 28.105

Article 136 TFEU is also pretty unclear with regard to the procedure it provides for the adoption of the measures. The first paragraph is quite exceptional since it does not provide for a specific procedure but refers to an adoption ‘in accordance with the relevant procedure from among those referred to in Articles 121 and 126, with the exception of the procedure set out in Article 126(14)’. The notion of ‘relevant procedure’ is not clear, especially if one considers that Article 136(1) allows the adoption of measures that could not be adopted on the basis of Articles 121 or 126. The institutions have, therefore, considered that they were allowed to choose the procedure that could reasonably be considered the most appropriate taking into account the objective and the nature of the act to be adopted. For measures of a general nature, it was considered appropriate to have recourse to the ordinary legislative procedure referred to in Article 121(6) TFEU.149 By contrast, binding acts addressed to specific Member States were adopted following the procedure of Article 126(6) TFEU, which is the only provision that constitutes a basis for the adoption of a decision. Much flexibility is thus left to the institutions as regards the choice of the procedure.150 However, that choice should not be considered as arbitrary and could probably be controlled by the Court of Justice. That large interpretation of Article 136(1) has allowed the adoption of individual measures as well as measures of a general nature.

147 Articles 139(2)(a), (b), and 139(4) TFEU already restrict the voting rights within the Council in favour of the euro area Member States as regards the adoption of those measures. 148 In favour of an extensive interpretation, see the European Parliament Resolution of 12 December 2013 on constitutional problems of a multitier governance in the European Union (2012/2078(INI)) (hereafter European Parliament Resolution). 149 This means that the literal wording of Article 136(1), which refers to an adoption by the Council alone had to be disregarded in order to allow the participation of the European Parliament. It creates, however, an asymmetry between the two institutions. Within the Council, only the euro area Member States have a voting right, in accordance with paragraph 2 of Article 136, while all members of the European Parliament may vote whatever their country of election. The European Parliament takes the view that this asymmetry ‘is fully coherent with the principles of differentiation and does not reduce but, on the contrary, enhances the legitimacy of those measures’ (European Parliament Resolution (n 148) para 30). 150 It is not the only provision of the Treaties that give some discretion as regards the choice of the procedure. For example, Article 352 TFEU permits to choose between a legislative and a non-legislative procedure.

Reinforced Fiscal Surveillance 847 As regards the measures of general scope, four regulations have been adopted by the legislator through the ordinary legislative procedure, two of them in 2011 as part of the ‘six-pack’ and two others in 2013 (the ‘two-pack’) (see Section VII.C). Individual decisions directly addressed to specific euro area Member States have also been adopted by the Council directly on the basis of Article 136(1) TFEU. Such decisions were adopted as regards Greece,151 Spain,152 and Cyprus.153 Those decisions are very far-reaching. They directly intrude into the budgetary and economic sovereignty of the Member State concerned and take control of most of its policies for a limited period of time. Once again, there is a clear link between those decisions and the intergovernmental assistance provided to the concerned Member States. The Union considered that, although no financing was coming from the Union budget, the conditionality associated with the intergovernmental assistance had nevertheless to be framed by the Union and could not be decided solely by the lenders. For that reason, the broad lines of the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) programmes were first adopted by the Council through such individual decisions. After the entry into force of Regulation 472/2013, similar decisions were adopted on the basis of that text and no longer directly on the basis of Article 136(1) TFEU.

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B. ‘Six-Pack’ Regulations As a first step, through the ‘six-pack’, the legislator adopted a new system of additional fines against non-compliant euro area Member States, in particular for breach of the fiscal rules of the SGP.154

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C. ‘Two-Pack’ Regulations In 2013, two Regulations based on Article 136 TFEU applying only to the euro area entered into force. Although those Regulations—commonly referred to as the ‘two-pack’—do not add to the SGP policy requirements, they bring about important changes to the surveillance cycle as far as euro area Member States are concerned.155

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Regulation (EU) 472/2013 of the European Parliament and of the Council of 21 May 2013 strengthens the economic and budgetary surveillance of euro area Member States experiencing or threatened with serious difficulties with respect to their financial stability. It streamlines the requirements placed on financially fragile countries and embeds those provisions

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151 Council Decision 2010/320/EU of 10 May 2010 addressed to Greece with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit [2010] OJ L145/6, and Council Decision of 12 July 2011 addressed to Greece with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit [2011] OJ L296/38. 152 Council Decision 2012/443/EU of 23 July 2012 addressed to Spain on specific measures to reinforce financial stability [2012] OJ L202/17. 153 Council Decision 2013/236/EU of 25 April 2013 addressed to Cyprus on specific measures to restore financial stability and sustainable growth [2013] OJ L141/32. 154 See Section V.A. 155 See also, Michael Ioannidis, ‘EU Financial Assistance Conditionality after “Two Pack” ’ (2014) 74 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 61, 82ff.

848 EU FISCAL GOVERNANCE ON THE MEMBER STATES in the Union framework for policy coordination and surveillance. In particular, for Member States under a macroeconomic adjustment programme, it suspends the reporting requirements under the SGP and integrates the budgetary targets of the programme into the applicable recommendations and decisions under the SGP. By doing so, the Regulation also repatriates within the ambit of the European Union most of the management of the conditionality linked to intergovernmental financial assistance programmes and previously carried out by the ‘Troika’ without clear legal framework. With those provisions, if a euro area Member State requests financial assistance, its macro-economic adjustment programme will be prepared by the Member State concerned on the basis of an agreed procedure. That procedure reflects more or less the past practice (intervention of the troika, for instance) with a view to bringing it within the institutional framework of Union law. The Commission must inform the European Parliament during the preparation and implementation of the programme. Approval of the programme by the Council is also required. Exchanges of views between all parties may be organized both before the national and the European parliaments.156 Hence, it becomes very difficult to argue that the Commission’s negotiating and monitoring activities are carried out completely outside the Union context and that they are therefore beyond the scope of the European Parliament’s political control as guaranteed by the EU Treaty. The European Parliament will hold the executives, and in particular the Commission, accountable for their conduct, including in respect of surveillance.157 The Regulation foresees that the Parliament has to be informed, in a timely manner, of not only decision-making but also the outcome of the economic surveillance process. The European Parliament can also organize debates in the context of an economic dialogue with other Union institutions as well as the Member State concerned. In parallel, because most financial stability decisions are crucial for the Member States themselves and their national constituents, the Regulation foresees that national parliaments will have to be duly informed. The national parliament of the assisted Member State may for instance invite representatives from the Commission to come and discuss the implementation of the adjustment programme. All in all, it may be considered that this legal framework has been relatively quickly put in place in order to achieve a sufficient level of democratic control over the management of the conditionality linked to financial assistance programmes. 28.110

If, in accordance with that Regulation, the Council were to decide that the beneficiary Member State does not comply with policy requirements contained in the adjustment programme, that Union decision would dramatically affect the disbursement of assistance to that Member State under the intergovernmental programme.

28.111

The second text of the ‘two-pack’ is Regulation (EU) 473/2013 of the European Parliament and of the Council of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit for the Member States of the euro area. That Regulation complements the surveillance cycle for all euro area Member States by setting up a common budgetary timeline and at the same time increases the reporting and monitoring requirements for Member States under EDP. Building on

156 Article 7 Regulation (EU) 472/2013. 157 See here Deidre Curtin, ‘Democratic Accountability of EU Executive Power: A Reform Agenda for Parliaments’ in Federico Fabbrini and others (eds), What Form of Government for the European Union and the Eurozone? (Hart Publishing 2015).

Reinforced Fiscal Surveillance 849 Directive 2011/85/EU, Regulation 473/2013 also gives independent fiscal institutions a key role in preparing and monitoring macroeconomic forecasts and budgetary decisions and in supervising the operation of national fiscal rules. According to the common budgetary timeline, euro area Member States must notify to the Commission and the Eurogroup their so-called ‘draft budgetary plans’ by 15 October. At the same time, they must make public their draft budget. As a result, the Commission has the opportunity to express its opinion on Member States’ fiscal planning before the adoption of the annual budgets by the national parliaments, thus increasing the pressure on the governments. The specification of the content of the draft budgetary plans is set out in a harmonized framework established by the Commission in cooperation with the Member States. That harmonized framework is the Code of Conduct on the ‘two-pack’ entitled ‘Specifications on the implementation of the ‘two-pack’ and guidelines on the format and content of draft budgetary plans, economic partnership programmes and debt issuance reports’.158

28.112

In practice, Member States that do not have a government with full power in place because of their electoral cycle, must notify a ‘no policy change plan’ by mid-October and send an updated plan as soon as the new government is in place. The Commission postpones its opinion until it receives that updated plan.

28.113

In principle, the Commission must adopt its opinion on those plans at the latest by the end of November of the same year. However, in case of an exceptional situation of particularly serious non-compliance, it may ask the Member State to notify a revised draft budget. So far, the Commission has never used that power, which could have deep political impact.

28.114

As regards the content of the Commission’s opinions, the logic of the procedure seems to imply that the Commission remains bound by the indications given by the Council in the CSRs adopted in July of the same year.

28.115

The Regulation also provides that the national budget must, in principle, be adopted by 31 December.

28.116

It is interesting to note that a complex relationship exists between the ‘two-pack’ and the measures agreed by the Member States outside the framework of the EU Treaties. Regulation 473/2013, which is part of the ‘two-pack’, incorporates some elements of the TSCG into Union law, such as the creation of independent forecast authorities, the obligation for Member States in excessive deficit to draw up economic partnership programmes detailing structural reforms necessary to ensure an effective and lasting correction of the deficit, and the ex ante coordination of debt issuance plans.

28.117

158 accessed 5 February 2020.

29

NON-F ISCAL SURVEILLANCE OF THE MEMBER STATES Leo Flynn*

I. Introduction II. Structural Reforms

A. Role of the European Semester— macrostructural policy guidance B. Euro area recommendations C. Economic dialogue

III. The Macroeconomic Imbalances Procedure (MIP) A. B. C. D. E.

Genesis and scope of the MIP Screening under the MIP In-depth reviews under the MIP Preventive action under the MIP Corrective action under the MIP

29.1 29.4 29.6 29.20 29.27 29.30 29.31 29.34 29.37 29.44 29.51

F. G. H. I.

Macroconditionality and the MIP The MIP and fiscal surveillance Concluding remarks on the MIP Complementing the MIP: the role of the ESRB

IV. Emerging Approaches

A. General B. The Structural Reform Support Programme C. The (proposed) Reform Support Programme D. National Productivity Boards E. Euro Plus Pact

29.70 29.73 29.75 29.79 29.84 29.84 29.85 29.95 29.107 29.111

I. Introduction 29.1

This chapter looks at how the European Union (EU) and its institutions carry out their tasks of economic surveillance of the Member States outside the field of fiscal policy (covered in Sections I and II of this chapter).

29.2

As earlier chapters make clear, while the Union law rules governing the fiscal policies of the Member States operate primarily through mechanisms that rely on peer-pressure and encouragement, that regime has over time given an increased role to sanctions (at least in theory).1 In relation to non-fiscal surveillance, by contrast to the realm of budgetary policies, soft coordination mechanisms remain very much in the ascendant, with limited space for sanctions. What is notable in that field of non-fiscal surveillance is a new and continuously growing reliance on financial and other tools, both to facilitate convergence in economic performance between Member States and to foster resilience in economies at the levels of individual Member States, of the euro area and of the EU as a whole.

* Leo Flynn, Legal Adviser, Legal Service, European Commission. All views expressed are personal to the author. 1 See further, Chapters 27 and 28. Leo Flynn, 29 Non-Fiscal Surveillance of the Member States In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0035

Structural Reforms 851 This chapter focuses on the themes visible in how country-specific recommendations (‘CSRs’) treat aspects of non-fiscal surveillance, in particular as regards structural policies as well as public administration and the business environment. It will also see how the euro area’s counterpart to CSRs, the euro area recommendations, treat those same topics. It will then examine the procedure underpinning the macroeconomic imbalances procedure, the mechanism that generates those non-fiscal recommendations, before turning to the recently established and emergent tools that the Union has developed to foster economic convergence within the Union and increase competitiveness, particularly in the euro area.

29.3

II. Structural Reforms The Union has a long-standing preoccupation with structural reforms. In March 2000, the European Council, meeting in Lisbon, set the Union a strategic goal of transforming its economy into ‘the most competitive and dynamic knowledge-based economy in the world’ within a decade, using the so-called ‘open method of co-ordination’ (OMC) to do so.2 The OMC does not result in Union legislation, but is a method of soft governance that aims to spread best practice and achieve convergence towards Union goals in those policy areas in which the Member States are the primary actors.3

29.4

The roots of the OMC can be traced back to the 1992 Maastricht Treaty where a similar type of governance was used in economic coordination (with the Broad Economic Policy Guidelines4 (BEPGs)), as well as to the 1997 Amsterdam Treaty where it was used in employment policy (the so-called ‘Luxembourg process’ or European Employment Strategy (EES)). The OMC was to take the form of national action plans, agreed between the Commission and individual Member States. The European Council relaunched the Lisbon Strategy in 2005, reducing the number of objectives it would pursue and bringing together the BEPGs and EES into a set of ‘integrated guidelines’ that the Council would adopt annually. Even so, when the Lisbon Strategy came to its expiry date after the outbreak in 2008 of the financial and sovereign debt crisis, the Lisbon Strategy had not achieved its goals and there was a consensus that the tools used to promote structural reforms had not been up to the task.5

29.5

2 For an initial evaluation of the OMC as a form of Union policy-making, see Joanne Scott and David M Trubek, ‘Mind the Gap: Law and New Approaches to Governance in the European Union’ (2002) 8 European Law Journal 1; Dermot Hodson and Imelda Maher, ‘The Open Method as a New Mode of Governance: The Case of Soft Economic Policy Co-ordination’ (2001) 39 Journal of Common Market Studies 719. See also Kenneth Armstrong, ‘Governance and Constitutionalism after Lisbon 2’ (2008) 46 Journal of Common Market Studies 415. 3 On soft governance, see Kenneth Armstrong, ‘The New Governance of EU Fiscal Discipline’ (2013) 38 European Law Review 601; and Mark Dawson, ‘Three Waves of New Governance in the European Union’ (2011) 36 European Law Review 208. 4 Article 121(2) TFEU. On the mechanics of BEPGs, see Servaas Deroose, Dermot Hodson, and Joost Kuhlmann, ‘The Broad Economic Policy Guidelines: Before and After the Re-launch of the Lisbon Strategy’ (2008) 46 Journal of Common Market Studies 827. 5 See, for example, European Parliament Resolution of 16 June 2010 on economic governance [2011] OJ C236 E/65, point 16: [R]‌rather than the continuing to rely on the open method of coordination in the economic policy field, broader use of binding measures is necessary to make the new [Europe 2020] strategy a success. For an earlier, more mixed, assessment, see Commission, ‘EMU@10: successes and challenges after 10 years of Economic and Monetary Union (Communication)’ COM (2008) 238 final:

852 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES

A. Role of the European Semester—macrostructural policy guidance 29.6

Against that background, in 2010 the Commission proposed to create a ‘European Semester’ as a new architecture for the Union’s economic governance.6 The Semester would be used to bring together the Stability and Growth Pact process with that to achieve the goals of Europe 2020 (the latter being the successor to the Lisbon Strategy). The Semester would provide stronger macroeconomic country surveillance integrating all relevant economic policy areas. In the Semester, the Union institutions would look at fiscal policy jointly with growth-enhancing structural reforms, while also identifying harmful macroeconomic imbalances to prevent or, in the last resort, sanction them. The ECOFIN Council gave political backing to the new governance architecture on 7 September 2010, and the European Semester started to operate in January 2010.

29.7

Regulation (EU) 1175/2011, the part of the ‘six-pack’ that amended Regulation (EC) 1466/ 97, provided a legislative underpinning to the European Semester.7 It inserted Article 2-a Regulation (EC) 1466/97, whose first paragraph establishes that as an integral part of the European Semester the Council shall conduct multilateral surveillance in order to ensure closer coordination of economic policies and sustained convergence of the economic performance of the Member States. Article 2-a(2) sets out the constituent elements of the Semester, marking it as a procedure that brings together scrutiny mechanisms established in a series of instruments laid down in Union primary and secondary law.

29.8

The Semester includes the formulation, and the surveillance of the implementation, of the BEPGs; the formulation, and the examination of the implementation, of the employment guidelines under Article 148(2) of the Treaty on the Functioning of the European Union (TFEU); the submission and assessment of Member States’ stability or convergence programmes (SCPs) under Regulation (EC) 1466/97; the submission and assessment of Member States’ national reform programmes (NRPs) supporting the Union’s strategy for growth and jobs; and surveillance to prevent and correct macroeconomic imbalances under Regulation (EU) 1176/2011. Regulation (EU) 1176/2011 provides the principal procedural foundations of the European Semester as regards non-fiscal surveillance, and the following section will examine them. The remainder of this section concentrates therefore on the material content of non-fiscal surveillance within the Semester.

29.9

Non-fiscal surveillance of the Member States is an integral part of the Semester process, and it gives effect to common principles that the TFEU sets out in relation to the economic policies of the Union and of the Member States. Article 119 TFEU lays down a series of principles and guidelines that the chapter on economic policy (Articles 120–126 TFEU) develops further, particularly in Article 120 TFEU. The main thrust of Article 120 TFEU is The euro area has developed a sound structure of economic governance, but structural reforms have been less ambitious than in the run-up to the [introduction of] the euro. 6 Commission, ‘Reinforcing economic policy coordination (Communication)’ COM (2010) 250 final; and Commission, ‘Enhancing economic policy coordination for stability, growth and jobs—Tools for stronger EU economic governance (Communication)’ COM (2010) 367/2. 7 For a detailed analysis of the ‘six- pack’, see Carlino Antpöhler, ‘Emergenz der europäischen Wirtschaftsregierung— Das Six Pack als Zeichen supranationaler Leistungsfähigkeit’ (2012) 72 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 353 (hereafter Antpöhler, ‘Emergenz der europäischen Wirtschaftsregierung’).

Structural Reforms 853 to confirm the core role of the Member States in the field of economic policy, while underlining that the aims pursued by national policy must contribute to the Union’s overall objectives.8 Article 120 TFEU envisages two key guiding themes: the ‘principle of the open market economy with free competition’ and ‘favouring an efficient allocation of resources’.9 By acknowledging the role of both, Article 120 TFEU recognizes that structural policies have a place in addressing markets’ imperfections and their resulting inability to avoid failures. The culmination of the annual European Semester is the adoption by the Council of recommendations to each Member State included in the process. Those country-specific recommendations (CSRs) cover five broad policy areas: public finances and taxation; the financial sector; the labour market, social inclusion and education; structural policies; and public administration and the business environment. Earlier chapters have already covered that first area,10 while issues of the labour market, social inclusion and education are outside the scope of this work. This chapter therefore looks at themes in how the CSRs treat aspects of non-fiscal surveillance, in particular as regards structural policies as well as public administration and the business environment.

29.10

A survey of the CSRs adopted in 2016 gives many examples of advice to the Member States promoting structural reforms, such as greater competition, market-opening measures and liberalization.

29.11

As regards the dynamics of competition within national economies, Italy received, for example, a recommendation to take action in 2016 and 2017 to ‘swiftly adopt and implement the pending law on competition’.11 The 2016 CSR for Denmark recommended it to ‘enhance productivity and private sector involvement by increasing competition in the domestic services sector’,12 while Finland was invited to ‘continue pursuing efforts to increase competition in services, including in retail’.13

29.12

The Council regularly makes calls on Member States to liberalize the business environment. For instance, in 2016 it called on Poland to take action to ‘take measures to remove obstacles to investment in transport, construction and energy infrastructure’. The corresponding recital to that recommendation explains:

29.13

bottlenecks and deficiencies in transport, energy and communication networks persist. Investment activity is hampered by barriers in relation to the functioning of the public administration, taxation, the environment for research, development and innovation activities, and lengthy contract enforcement. Weaknesses in managerial and administrative capacity have a negative effect on the timely implementation of investment projects 8 See also Christoph Herrmann and Herbert Rosenfeldt in Matthias Pechstein, Carsten Nowak, und Ulrich Häde (eds), Frankfurter Kommentar EUV, GRC und AEUV (Band III, Mohr Siebeck 2017) Article 120 TFEU, 592. 9 See also Rüdiger Bandilla in Eberhard Grabitz, Meinhard Hilf, and Martin Nettesheim (eds), Das Recht der Europäischen Union: Kommentar (CH Beck 2011); Article 120 TFEU, para 3. 10 See Chapter 27 and Chapter 28. 11 Council Recommendation of 12 July 2016 on the 2016 National Reform Programme of Italy and delivering a Council opinion on the 2016 Stability Programme of Italy [2016] OJ C299/1. 12 Council Recommendation of 12 July 2016 on the 2016 National Reform Programme of Denmark and delivering a Council opinion on the 2016 Convergence Programme of Denmark [2016] OJ C299/87. 13 Council Recommendation of 12 July 2016 on the 2016 National Reform Programme of Finland and delivering a Council opinion on the 2016 Stability Programme of Finland [2016] OJ C299/79.

854 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES in the railway sector and other transport, energy and telecommunication infrastructure projects.14

Such CSRs are far-reaching as to the aspects of Member States’ conduct they scrutinize. 29.14

There is no ‘one size fits all’ approach to the messages delivered to the Member States in the context of non-fiscal surveillance. CSRs can adapt to differing national policy preferences, as can be seen from how the 2016 CSRs treat state ownership.

29.15

For Croatia, the Council recommended it to ‘advance the divestment process of [S]‌tate assets and reinforce the monitoring of [S]tate-owned enterprises’ performance and boards’ accountability, including by advancing the listing of share of [S]tate-owned enterprises’.15 By contrast, the 2016 CSR for Slovenia recommended it to ‘improve the governance and performance of [S]tate-owned enterprises’.16 Making no mention to disposal of state assets, that CSR has a very different flavour to that of its Croatian counterpart.

29.16

The corresponding recital in the Slovenian CSR explains the variation in approaches between the two neighbouring Member States. It outlines that in 2016 Slovenia had adopted a national strategy on the management of state ownership in which the Member State ‘confirms the extent of the State’s current involvement in the economy and shifts the focus towards the improved performance of the [S]‌tate-owned enterprises’. The 2016 CSR for Croatia reflects the fact that that Member State had chosen to lower the level of the state’s direct presence in the economy, and the Council called on it to pursue its contrasting national policy in an effective manner that would boost economic performance and safeguard public finances.

29.17

In recent years, the CSRs adopted in the European Semester have pointed to the link between economic policy and the precepts that underpin an open market, including maintaining the rule of law. In the 2017 CSR to Poland, the Council noted in a recital that investment activity in that Member State had declined significantly in 2016 and that legal changes for which there had been limited public consultation had affected business confidence. The recital went on: Legal certainty and trust in the quality and predictability of regulatory, tax and other policies and institutions are important factors that could allow an increase in the investment rate. The rule of law and an independent judiciary are also essential in this context. Addressing serious concerns related to the rule of law will help improve legal certainty.17

29.18

In the 2018 CSR addressed to Hungary, the Council voiced comparable views about the importance of legal certainty as a fundamental issue for long-term economic health. Speaking

14 Council Recommendation of 12 July 2016 on the 2016 National Reform Programme of Poland and delivering a Council opinion on the 2016 Convergence Programme of Poland [2016] OJ C299/15. 15 Council Recommendation of 12 July 2016 on the 2016 National Reform Programme of Croatia and delivering a Council opinion on the 2016 Convergence Programme of Croatia [2016] OJ C299/96. 16 Council Recommendation of 12 July 2016 on the 2016 National Reform Programme of Slovenia and delivering a Council opinion on the 2016 Stability Programme of Slovenia [2016] OJ C299/90. 17 Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Poland and delivering a Council opinion on the 2017 Convergence Programme of Poland [2017] OJ C261/88. The recital in question did not, however, correspond to a specific recommendation to Poland.

Structural Reforms 855 about issues in the services sector affecting an efficient allocation of resources, productivity and innovation, the Council stated: There is a continuous trend to entrust certain services to [S]‌tate-owned firms specifically created for these purpose, to the detriment of open competition. Unpredictability of the legal framework is a further problem, especially in the retail sector, which in recent years has been faced with frequent changes to regulations . . . A stable regulatory environment favourable to competition is needed.18

The resulting recommendation made to Hungary was to ‘strengthen competition, regulatory stability and transparency in the services sector, in particular in retail’. The CSRs are the main ‘output’ of the Semester process, and they focus to a large extent on non-fiscal surveillance. They rest on a system of peer review, public identification of issues and exhortations to the Member States concerned address them. However, while the Member States clearly care about identified as having (actual or potential) problems, it is less evident that they are willing to adopt meaningful responses. There is also the dilemma arising from a mismatch between an annual process of surveillance that looks at structural challenges requiring long-term solutions, for which a single year is rarely sufficient time to act.19 Those issues, of the extent of incentives Member States have to react to the Council’s recommendations and their ability to do so in the timeframes within which the Semester operates, have given rise to additional tools at Union level to tackle the Semester’s limitations. At the same time, the Semester remains a privileged site for coordination and is increasingly a point from which other Union-level tools start, as the discussion of the draft Reform Support Programme will show.

29.19

B. Euro area recommendations The European Semester concentrates on the economic and fiscal position of the individual Member States. However, the euro area as the totality of Member States using the single currency constitutes a zone with even more intertwined structural and budgetary linkages between its participants than is the case in the Union as a whole. That singularity is recognized in practice by the Euro Area Recommendation (EAR).

29.20

The EAR is adopted every year by the Council as a functional equivalent to CSRs provided to individual Member States, albeit without the elements that flow exclusively from Article 148 TFEU in CSRs. The current practice is for the timetable for the adoption of the EAR to be distinct from that of the CSRs, with the Council making its recommendation in the spring every year.

29.21

The Council adopted its first EAR in 2011.20 The 2011 EAR used Article 136 in conjunction with Article 121(2) TFEU as its legal basis. From 2013 onwards, the Council has based the

29.22

18 Recital (13) of Council Recommendation of 13 July 2018 on the 2018 National Reform Programme of Hungary and delivering a Council opinion on the 2018 Convergence Programme of Hungary [2018] OJ C261/72. 19 See also Damian Chalmers, ‘The European Redistributive State and a European Law of Struggle’ (2012) 18 European Law Journal 667, 686–87 (hereafter Chalmers, ‘The European Redistributive State’). 20 Council Recommendation of 12 July 2011 on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro [2011] OJ C217/15.

856 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES EARs on, in addition to those Treaty provisions, Article 6(1) Regulation (EU) 1176/2011 as well as on Article 5(2) Regulation (EC) 1466/97.21 29.23

The same principles expressed in the CSRs shape the guidance given by the Council on the economic policy of the euro area.

29.24

For instance, in the 2018 EAR the Council noted that, [p]‌roduct market reforms that increase competition and reforms that improve the business environment and the quality of institutions (including an effective justice system that facilitates contract enforcements) foster economic resilience in Member States and the euro area as a whole.

Accordingly, it recommended that in 2018 and 2019 euro area Member States should take action within the Eurogroup, individually and collectively, to: make significant progress towards completing the Single Market, particularly in services, including financial, digital, energy and transport, by, inter alia, implementing relevant product market reforms at national level.22

The previous year, the Council’s observations had again reflected that principle, explaining in the 2017 EAR that: [s]‌tructural reform implementation, by creating efficient markets with responsive price mechanisms, would support monetary policy through facilitating its transmission to the real economy.23 29.25

Where the Union legislator is already considering draft legislative acts, the EAR may not amount to a proposed act in the area in question.24 While that constraint also applies to CSRs, it is not of practical importance for them because the Commission and the Council do not direct guidance in them to the individual Member States as regards on-going legislative files. By contrast, when an EAR deals with a pending legislative proposal, the manner in which such recommendations are phrased is sensitive and must not overlap directly with the on-going legislative procedure. In consequence, although an EAR may call on the euro area Member States to continue working on a given issue the EAR may not call on them to agree on a specific, previously tabled, legislative proposal.

29.26

In a similar vein, there can be questions about the legal basis of the EAR where its recommendations relate to specific policy fields at Union level. Recommendations adopted by the Council in the field of economic policy touch on many issues that have a specific legal base within the TFEU. However, such linkages do not require the addition of legal bases relating to those policy fields, as the decisional practice of the Council shows. In the highly sensitive field of taxation, for instance, recommendation 2 in the 2018 EAR calls on the euro area Member States to continue work on the Common Consolidated Corporate Tax Base. In

21 With the exception of the 2017 EAR (Council Recommendation of 21 March 2017 on the economic policy of the euro area [2017] OJ C92/1), for which the Council used only Article 136 in conjunction with Article 121(2) TFEU. 22 Council Recommendation of 14 May 2018 on the economic policy of the euro area [2018] OJ C179/1. 23 Council Recommendation of 21 March 2017 on the economic policy of the euro area [2017] OJ C92/1. 24 Article 296(3) TFEU.

Structural Reforms 857 previous years, the Council has adopted EARs that also called for continued work on areas whose legal basis is not that of the recommendation. For example, in recommendation 4 of the 2017 EAR the Council called for continued work to complete the Banking Union in respect of specific elements for which the Commission had adopted legislative proposals (in particular the European Deposit Insurance Scheme, whose legal basis is Article 114 TFEU).

C. Economic dialogue By virtue of the addition in 2011 of Article 2-ab Regulation (EC) 1466/9725 and the adoption of Article 14 Regulation (EU) 1176/2011,26 there is provision for an ‘economic dialogue’ within the European Semester.27 That dialogue occurs on two levels. Between the institutions, Article 2-ab(1) provides that the competent committee of the European Parliament (the ECON committee) may invite the President of the Council, the Commission and the President of the Eurogroup before it to discuss various aspects of the Semester process.28 Between the Union-level and that of the Member States, Article 2-ab(3) allows the ECON committee to invite for a voluntary exchange of views a Member State that is the subject of a significant deviation procedure recommendation.

29.27

The ECON committee holds dialogues with the President of the Eurogroup twice a year, at the beginning of the year and in the autumn, as well as with the relevant Members of the Commission. There is less regularity to its practice with regard to exchanges of views with Member States.

29.28

The economic dialogue seeks to balance the strengthened economic governance introduced by the ‘six-pack’, with the European Parliament being involved in a closer, more timely, manner in the various steps of multilateral surveillance, increasing transparency and legitimacy.29

29.29

25 Introduced by European Parliament and Council Regulation (EU) 1175/2011 of 16 November 2011 amending Council Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2011] OJ L306/12. 26 There is a similar provision in Article 6 Regulation (EU) 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8, governing the sanctions on euro area Member States under the MIP. 27 Article 2a Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6 creates a comparable economic dialogue mechanism for the corrective arm of the SGP, while Article 3 Regulation (EU) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1 does the same as regards the sanctions regime created for euro area Member States in relation to both arms of the SGP. In addition, under Article 15 Regulation (EU) 473/ 2013 of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area [2013] OJ L140/11, on draft budgetary plans for euro area Member States, an economic dialogue is also established. As those three provisions relate more to fiscal surveillance than non-fiscal surveillance, this section does not cover them. On the role of the European Parliament in adopting the ‘six-pack’, see Cristina Fasone, ‘European Economic Governance and Parliamentary Representation. What Place for the European Parliament?’ (2014) 20 European Law Journal 164, 170–72 (hereafter Fasone, ‘European Economic Governance and Parliamentary Representation’). 28 Specifically, the broad guidelines of economic policy, the Commission’s general guidance to Member States at the start of each Semester cycle, the conclusions of the European Council on orientations for economic policy, the results of multilateral surveillance under the preventive arm of the SGP, and measures adopted in any significant deviation procedure. 29 See Diane Fromage, ‘The European Parliament in the Post-Crisis Era: An Institution Empowered on Paper only?’ (2018) 40 Journal of European Integration 281, 285–88. More critically see, Fasone, ‘European Economic Governance and Parliamentary Representation’ (n 27); Chalmers, ‘The European Redistributive State’ (n 19) 691– 92; Mark Dawson and Floris de Witte, ‘Constitutional Balance in the EU after the Euro-Crisis’ (2013) 76 Modern

858 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES

III. The Macroeconomic Imbalances Procedure (MIP) 29.30

A core component of the European Semester is surveillance to prevent and correct macroeconomic imbalances under Regulation (EU) 1176/2011, the so-called ‘macroeconomic imbalance procedure’ (MIP).30 In the CSRs addressed by the Council to the Member States each year, which is the ‘end point’ of the annual Semester process, any Member State experiencing imbalances or excessive imbalances will receive MIP-related recommendations intended to address them. Indeed, since 2015 the MIP has underpinned most CSRs addressed to Member States experiencing excessive imbalances.

A. Genesis and scope of the MIP 29.31

The Commission proposed what would become the MIP in 2010, shortly after the outbreak of the sovereign debt crisis, in order to strengthen macroeconomic surveillance of all Member States in the areas outside by the Stability and Growth Pact. The character of the MIP is different to that of the SGP, since in comparison with the latter the MIP has a wider scope than budgetary policy, incorporates elements that are more discretionary in nature, and overall is less rule-based. In addition to Regulation (EU) 1176/2011, setting out the definitions and the procedures of the MIP, Regulation (EU) 1174/2011 introduces an enforcement mechanism for the MIP, establishing a sanctions regime for euro area Member States only.

29.32

In 2010 the need to enhance macroeconomic surveillance and to extend its scope beyond fiscal matters became strikingly evident.31 Several Member States that had had performed well in terms of compliance with their obligations under the SGP, such as Ireland, Latvia, and Spain, required financial assistance to cope with external imbalances (current accounts, external debt) and internal imbalances (household and corporate debt, housing market dynamics, non-performing loans (NPLs) and other banking-sector problems, excessive growth in unit labour costs). Those imbalances did not show up in the Member States’ fiscal performance until they reached a ‘tipping-point’, which in some cases resulted in the government concerned completely losing access to the capital markets at the same time as their domestic tax revenues fell sharply. Regulation (EU) 1176/2011 supplements the multilateral surveillance procedure referred to in paragraphs 3 and 4 of Article 121 TFEU with specific rules for the detection of macroeconomic imbalances. It also seeks to prevent and correct excessive imbalances within the Union.

Law Review 817, 832–33; Mark Dawson, ‘The Legal and Political Accountability Structure of ‘Post-Crisis’ EU Economic Governance’ (2015) 53 Journal of Common Market Studies 976, 989. 30 On the MIP generally, see Christoph Ohler in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 121 TFEU, 118–21 and Charlotte Gaitanides in Helmut Siekmann (ed), EWU—Kommentar zur Europäischen Währungsunion (Mohr Siebeck 2013) Article 126 TFEU, para  61–67. 31 Dariusz Adamski, ‘National Power Games and Structural Failures in the European Macroeconomic Governance’ (2012) 49 Common Market Law Review 1319, 1351 (hereafter Adamski, ‘National Power Games’).

The Macroeconomic Imbalances Procedure (MIP) 859 The definition of ‘imbalances’ in Article 2(1) Regulation (EU) 1176/2011 is relatively wide.32 29.33 The term can therefore capture macroeconomic risks originating from different kinds of economic trends, such as current account imbalances, indebtedness (foreign or domestic, public or private), diverging competitiveness trends or housing bubbles. The definition of ‘excessive imbalances’ in Article 2(2) Regulation (EU) 1176/2011 is similarly open- textured,33 placing emphasis on spillovers at the level of the EMU.

B. Screening under the MIP The MIP takes the form of a series of stages, the first of which is a screening by the Commission of all Member States. During that screening stage, the Commission selects Member States for further investigation if they potentially face the risk of macroeconomic imbalances.34 That screening takes the form of an alert mechanism report (AMR) that the Commission prepares each November, at the start of the European Semester. The AMR contains a broad-based quantitative and qualitative assessment of evidence that points to the possible presence of macroeconomic imbalances.

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The Commission’s assessment takes account of a scoreboard of indicators drawn up under 29.35 Article 4(1) Regulation (EU) 1176/2011.35 Those indicators are to be ‘relevant, practical, simple, measurable and available’,36 with indicative thresholds for the indicators that serve as alert levels. The scoreboard consists of 14 headline indicators with thresholds, grouped under three headings.37 In addition to those fourteen headline indicators, there are twenty- eight auxiliary indicators with no thresholds.38 While Regulation (EU) 1176/2011 refers only to the headline indicators of the scoreboard, the Commission added those auxiliary indicators after having consulted the Council (in the form of the EPC) and the European Parliament (in the form of the ECON committee).39 The economic reading of the scoreboard in the AMR uses the headline indicators, but the Commission is required under Recital (10) Regulation (EU) 1176/2011 to use ‘economic judgment’ and so also to rely on additional relevant data and information. The role of the

32 ‘Any trend giving rise to macroeconomic developments which are adversely affecting, or have the potential adversely to affect, the proper functioning of the economy of a Member State or of the economic and monetary union, or of the Union as a whole’. 33 ‘Severe imbalances, including imbalances that jeopardise or risks jeopardising the proper functioning of the economic and monetary union’. 34 Articles 3 and 4 Regulation (EU) 1176/2011 of 16 November 2011 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/25. 35 For a more critical assessment of the ‘scoreboard’-approach, see Stefan Pilz and Heidi Dittmann, ‘Perspektiven des Stabilitäts-und Wachstumspakt—Rechtliche und ökonomische Implikationen des Reformpakts “Economic Governance” ’ (2012) 15 Zeitschrift für europarechtliche Studien 53, 76–77. 36 Article 4(2) Regulation (EU) 1176/2011. 37 As an example from the first group (external imbalances and competitiveness), the lower and upper thresholds for the current account balance as a percentage of GDP are -4 per cent and 6 per cent respectively. From the second group (internal imbalances), the threshold for the house price index is 6 per cent per annum. From the third group (employment indicators), the threshold for the changes over a three-year period in the long-term unemployment rate as a percentage of the active population is 2 per cent. 38 An example of an ancillary threshold is non-performing loans in gross terms as a percentage of total loans. 39 Regulation (EU) 1176/2011 only envisages that the Commission is to make changes to the composition of the scoreboard where it is necessary to do so (Article 4(7)) without establishing a specific procedure, but it carries out such modifications in line with what Recital (12) envisaged for the creation of the scoreboard.

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860 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES scoreboard is therefore that of a ‘tool to facilitate early identification and monitoring of imbalances’,40 and Regulation (EU) 1176/2011 expressly bars the Commission from drawing conclusions from ‘a mechanical reading of the scoreboard indicators’.41 As a result, the Commission does not move a Member State to the second stage of the MIP simply because a particular indicator for that Member State is ‘flashing’ or because a certain number of indicators have shown signs of imbalances. Instead, the Commission relies on the indicators themselves, on the auxiliary indicators as a relevant source of complementary information, on analytical tools to qualify the signals provided by those two sets of indicators and on additional information. Finally, the Commission also builds its analysis in the AMR for any given year on the findings and outcomes from previous cycles of the MIP.

C. In-depth reviews under the MIP 29.37

The second stage of the MIP is an identification and analysis of imbalances, pursuant to Articles 5 and 6(1) Regulation (EU) 1176/2011. The Commission carries out in-depth reviews of the Member States selected in the AMR, taking account of the discussions on the AMR in the Council and the Eurogroup required under Article 3(5) Regulation (EU) 1176/ 2011. Article 5(1) also allows for the initiation of an in-depth review on an ad hoc basis, outside the annual screening process of the AMR. However, the Commission can only initiate any such ad hoc in-depth review in the event of unexpected, significant economic developments that require urgent analysis, and it has not used that possibility used to date.

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Each in-depth review is country-specific, a feature that Article 5(1) repeatedly underlines. The Commission must analyse ‘country-specific characteristics’, look at the ‘different starting positions across Member States’ and use ‘qualitative information of country- specific nature’. It must also consider any other information that the Member State concerned provides to it. It must carry out its evaluation in conjunction with any surveillance mission it carries out in that Member State, under Article 13 Regulation (EU) 1176/2011.

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The feature of ‘country-specificity’ is, in fact, a hallmark of the MIP regime. Regulation (EU) 1176/2011 requires that when the Commission and the Council implement its provisions they must respect several national prerogatives, of which the most important are those regarding the role of national parliaments and the social partners.42 The application of the MIP rules must fully observe Article 152 TFEU, and the Regulation has regard to Article 28 of the Charter and so has no effect on rights of collective bargaining or industrial action.43

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The aim of the in-depth reviews is to identify imbalances and to assess their severity. The Commission’s in-depth reviews must take particular account of recommendations

40 Article 4(1) Regulation (EU) 1176/2011. 41 Article 3(2) Regulation (EU) 1176/2011. 42 On the role of national parliaments in the European Semester, see Valentin Kreilinger, ‘Scrutinising the European Semester in National Parliaments: What are the Drivers of Parliamentary Involvement’ (2018) 40 Journal of European Integration 325; Mette Buskjær Rasmussen, ‘Accountability Challenges in EU Economic Governance? Parliamentary scrutiny of the European Semester’ (2018) 40 Journal of European Integration 341. See also Stefan Kadelbach, ‘Lehren aus der Finanzkrise—Ein Vorschlag zur Reform der politischen Insitutionen der Europäischen Institutionen’ (2013) 48 Europarecht 489. 43 Article 1(3) Regulation (EU) 1176/201. See also Recital (25) and Article 6(3) thereof.

The Macroeconomic Imbalances Procedure (MIP) 861 and invitations received by the Member State under review within the framework of the European Semester (that is, under Articles 121, 126, and 148 TFEU or in earlier iterations of the MIP). The Commission must similarly factor in the policy intentions of the Member State under review, as reflected in its national reform programmes and its stability or convergence programme. Finally, the Commission must have due regard to warnings or recommendations from the European Systemic Risk Board (ESRB) on systemic risks addressed to, or are relevant for, the Member State under review. The results of the in-depth reviews take the form of a Communication from the Commission, which it publishes in practice in February or March and sends to the European Parliament, the Council, the European Central Bank (ECB) and the Eurogroup. The in-depth reviews themselves are contained within the so-called ‘Country Reports’, staff working documents produced by the services of the Commission (in practice, DG ECFIN). The Commission has followed that approach since 2015 and it is worth dwelling on because Country Reports do not have a specific legal status. They are foreseen nowhere in the legislation governing economic policy coordination, and because Country Reports are not adopted by the Commission itself they do not represent an official position of the latter. As a result, they sit in an institutional ‘twilight zone’; they are analytical documents whose descriptions of macroeconomic and other policy challenges are very influential in the exchanges between the Member States, the Council and the Commission, but which lack a normative weight in formal terms.

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Taking the first two stages of the MIP together, three possible outcomes appear possible based on the text of Regulation (EU) 1176/2011: no imbalances; imbalances; or excessive imbalances. However, in the application of the MIP a more nuanced set of categorizations has emerged. The Commission’s approach has evolved over time in that regard. For example, in 2012 while the Commission found no excessive imbalances it categorized the imbalances it identified as either ‘serious’ (France, Italy, Hungary, and Slovenia) or ‘very serious’ (Cyprus and Spain). By 2015, the Commission had graduated to using six categories: ‘no imbalances’; ‘imbalances, which require monitoring and policy action’; ‘imbalances, which require monitoring and decisive policy action’; ‘imbalances, which require specific monitoring and decisive policy action’; ‘excessive imbalances, which require specific monitoring and decisive policy action’; and ‘excessive imbalance with corrective action plan’. The Commission streamlined those categories in 2016, reducing them to four—no imbalances; imbalances; excessive imbalances; and excessive imbalances with corrective action plan.44

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That approach of using four to six categories provides a finely tuned assessment of the situations of the Member States. It is consistent with the requirement in Recital (17) Regulation (EU) 1176/2011 that in the assessment ‘account should be taken of the severity’ of any macroeconomic imbalances. However, in its 2018 Special Report on the MIP the Court of Auditors considered that the Commission’s classification of imbalances suffered from a lack of clear criteria and processes.45

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44 Commission, ‘2016 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances and results of in-depth reviews under Regulation (EU) 1176/2011 (Communication)’ COM (2016) 95 final, 2. 45 European Court of Auditors, ‘Audit of the Macroeconomic Imbalance Procedure (MIP)’ (2018) Special Report No 3/2018 (hereafter Special Report No 3/2018). See also Dariusz Adamski, ‘Europe’s (Misguided) Constitution of Economic Prosperity’ (2013) 50 Common Market Law Review 47, 54–56.

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D. Preventive action under the MIP 29.44

After the in-depth reviews, the next stages in the MIP regime are those of preventive action and of corrective action. Either can follow on from the results of the in-depth reviews.

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Up to the present, the preventive action mechanism in Article 6 has been the MIP stage that de facto follows the identification and analysis of imbalances and of excessive imbalances. Member States identified as having excessive imbalances have never been placed under the corrective action mechanism of Regulation (EU) 1176/2011.

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Article 6 Regulation (EU) 1176/2011 governs the preventive action mechanism. The terms of Article 6(1) refer to the mechanism being applicable where the Commission considers that the Member State is experiencing imbalances, which could give the impression that the mechanism is not available for Member States experiencing excessive imbalances.46 However, the decisional practice of the Commission and the Council has been to use the preventive arm for both groups of Member States. In particular, the Commission has explained that Regulation (EU) 1176/2011 does not seek to (and indeed could not) remove from the Commission the discretion it has under Article 121(4) TFEU by compelling the activation of the corrective action mechanism.47

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Under Article 6(1), the Commission is to inform the European Parliament, the Council and the Eurogroup where, based on the in-depth review, it considers a Member State to be experiencing imbalances. The Council may then address necessary recommendations to the Member State concerned using the procedure set out in Article 121(2) TFEU. Article 6(4) Regulation (EU) 1176/2011 ties the prevention action mechanism into the European Semester, with the Council being required to review its earlier recommendations annually and, if necessary, to adjust them under Article 6(1). Since Article 6(1) foresees that the Council adopts its recommendations under the procedure in Article 121(2) TFEU, it is for the Commission in the first place to make a recommendation to the Council. Thereafter, the Council adopts its recommendations using a qualified majority vote (if a vote is taken), basing itself on conclusions of the European Council that are themselves prepared on a report from the Council regarding the Commission’s recommendation. Because the Council’s recommendations are based on recommendations from the Commission (rather than proposals), the Council would be free to deviate from the text recommended to it by the Commission.48 However, any such departure by the Council would have to be explained by it, pursuant to Article 2-ab(2) Regulation (EC) 1466/97 (the so-called ‘comply-or-explain’ rule), in the form of a written note setting out reasons that would also be adopted by qualified majority vote and made public.

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In practice, the Council identifies in the final recital to the country-specific recommendations it addresses to the Member States which of the individual recommendations the latter receive are fully or partly relevant to the MIP. For example, of the three recommendations addressed to Bulgaria in the 2018 CSRs, only the second and third reflected Article 6(1)

46 Commission, ‘On steps towards Completing Economic and Monetary Union (Communication)’ COM (2015) 600 final. 47 See European Commission replies on Special Report No 3/2018 (n 45) para 104. 48 Based on e contrario reading of Article 293(1) TFEU.

The Macroeconomic Imbalances Procedure (MIP) 863 recommendations.49 It is necessary to have such a ‘tagging’ of recommendations, so that the surveillance of follow-up under Article 6(4) Regulation (EU) 1176/2011 can be effective. It also makes it possible to identify MIP-related recommendations that have an SGP-relevant dimension (for example, imbalances affecting competitiveness could affect the trajectory of already high government debt) or are pertinent in the context of the Employment Guidelines under Article 148(2) TFEU (for example, in the case of labour market reforms). Those MIP-related recommendations in the CSRs build on recitals that first synopsise the findings of the in-depth review of the Member State concerned. The recital then examine the imbalances or excessive imbalances identified, by describing the source of the current or potential problems. As a result, it is possible to understand the call to action in the CSRs themselves. The Commission considers that the MIP has had a positive influence on national reform agendas and has a useful effect by inciting Member States under the MIP to comply with the Council Recommendations that they receive in the European Semester.50 Its provisional assessment after the first five years of the procedure’s operation was that: the Institutions used the MIP actively as a surveillance tool; there was an enhanced quality in the policy dialogue between the Member States collectively and bilaterally with the Institutions; and there was greater peer pressure that increased policy compliance.

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The Court of Auditors, by contrast, was less upbeat in assessing the MIP in its 2018 Special Report, arguing there was low implementation by Member States of MIP-relevant CSRs.51

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E. Corrective action under the MIP We now turn from the preventive action mechanism under Article 6 Regulation (EU) 1176/ 29.51 2011, to the corrective action mechanism. The latter is set out in Articles 7–12 Regulation (EU) 1176/2011, governing the excessive imbalance procedure. When an in-depth review shows that a Member State is experiencing excessive imbalances, the Commission must, if it decides to launch the excessive imbalance procedure, issue a recommendation for a Council recommendation to activate the correction action mechanism under Article 7(2) Regulation (EU) 1176/2011. That mechanism establishes detailed rules for the powers granted to the Commission and the Council under Article 121(4) TFEU. Because Article 7(2) does not create a new power or procedure, but only defines conditions for exercising an existing, Treaty-based power under Article 121(4) TFEU, the Commission is not obliged to initiate the excessive imbalance procedure automatically. The Commission has its general monopoly of initiative under the Treaties, including under Article 121(4) TFEU, and an act of secondary law could not deprive it of that discretion. One must read Recital (22) Regulation (EU) 1176/2011, stating that ‘if severe macroeconomic imbalances are identified . . . an excessive imbalances procedure should be initiated . . .’, against that 49 Council Recommendation of 13 July 2018 on the 2018 National Reform Programme of Bulgaria and delivering a Council opinion on the 2018 Convergence Programme of Bulgaria [2018] OJ C320/7. 50 Commission, ‘The Macroeconomic Imbalance Procedure—Rationale, Process, Application: A Compendium’ (2016) DG ECFIN Institutional Paper 039, 65–67. 51 Special Report No 3/2018 (n 45).

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864 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES background. It does not require the Commission to make a recommendation, but expresses a political desire of the co-legislators without creating an obligation. 29.53

The Commission may issue its Article 7(2) recommendation at any moment after adoption of the in-depth review. That position means that the Commission is not subject to a fixed period within which it must act. The latitude enjoyed by the Commission does not extend so far that it could decide to adopt as regards a given Member State a recommendation to the Council under Article 6, only then to make a recommendation under Article 7(2) for the same Member State based on the existing in-depth review. However, up to the point in time when the Commission has decided on which legal basis it will make a recommendation, whether under Article 6 or Article 7, the Commission retains a power of appreciation.

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In that context, it is notable that the Commission has in the past flagged to the Council and the Member States that, if there is not effective follow-up on the CSRs addressed in a given year to certain Member States, it will consider moving them into the excessive imbalances procedure. For instance, in its 2017 Communication on the CSRs it proposed to the Council, the Commission stated as regards Italy, Cyprus and Portugal (for which the in- depth reviews completed earlier that year had shown excessive imbalances with persistent structural weaknesses): [T]‌he Commission has concluded that there are currently no analytical grounds for stepping up the macroeconomic imbalance procedure, provided that these Member States swiftly and fully implement the reforms set out in their country-specific recommendations. The Commission will continue to monitor these three countries, as it does all countries with excessive imbalances, notably through ‘specific monitoring’.52

By linking such specific monitoring with a possible opening of the excessive imbalances procedure, the Commission strengthens the incentives for Member States to address the structural weaknesses giving rise to their excessive imbalances.53 29.55

In addition to the specific monitoring device, for which there is no specific legislative underpinning but which is consistent with the procedural logic of Regulation (EU) 1176/ 2011, there has been at least one instance of the Commission flagging the possibility of further steps as regards Member States experiencing excessive imbalances, in the form of a ‘rendez-vous’ clause. In its 2016 Communication on the results of the in-depth reviews,54 the Commission stated that of the six Member State experiencing excessive imbalances it would, for Croatia and Portugal, ‘review its assessment in May, taking into account the level of ambitions in their National Reform Programmes’. It is not evident whether such a review would entail a later decision to place such Member States under the correction action mechanism or whether (which appears more orthodox as an approach) it would mean that 52 Commission, ‘2017 European Semester: Country- specific recommendations (Communication)’ COM (2017) 500 final, 9. See also Commission, ‘2016 European Semester: Country- specific recommendations (Communication)’ COM (2016) 321 final, 8 (similar approach for Croatia and Portugal); and in Commission, ‘2015 European Semester: Assessment of growth challenges, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) 1176/2011 (Communication)’ COM (2015) 85 final, 4 (similar approach for France and Croatia). 53 Armin Steinbach, ‘Structural Reforms in EU Member States: Exploring Sanction-based and Reward-based Mechanisms’ (2016) 9(1) European Journal of Legal Studies 173, 178. 54 COM (2016) 95 final, 2. That Communication was a revised version of the document adopted on 8 March 2016, in light of additional information on Cyprus.

The Macroeconomic Imbalances Procedure (MIP) 865 the CSRs proposed to the Council for them would be particularly stringent if their NRPs were not sufficiently ambitious. At the same time or before the Commission adopts its recommendation under Article 7(2), it must inform the relevant European Supervisory Authorities and the ESRB of the excessive imbalances.

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The Commission recommendation to the Council must establish the existence of excessive imbalances, describe their nature and request the submission of a corrective action plan by the Member State concerned. The content of the Council’s Article 7(2) recommendation provides the basis for the Member State concerned to formulate a corrective action plan in line with Article 8 Regulation (EU) 1176/2011. Regulation (EU) 1176/2011 provides that the Council should set a deadline for the delivery of the corrective action plan but is silent on what that deadline should be.55

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The Council adopts the Commission’s recommendation to it by a qualified majority, without the Member State concerned being able to vote.

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In the wake of the Article 7(2) recommendation addressed to it by the Council, the Member State concerned must submit a corrective action plan to the Council and Commission, setting out specific policy actions that it has taken or intends to take and a timetable for those actions. The Council, based on a Commission report, assesses the corrective action plan within two months of its submission. Regulation (EU) 1176/2011) foresees two possible outcomes to that assessment.

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If the corrective action plan is considered sufficient, the Council issues a recommendation under Article 8(2) Regulation (EU) 1176/2011 endorsing the corrective action plan, listing specific actions required and deadlines for taking them, and laying down a timetable for surveillance. If, by contrast, the Council on a Commission recommendation considers the corrective action plan insufficient, the Council adopts a recommendation asking the Member State concerned to submit a new corrective action plan, under Article 8(3) Regulation (EU) 1176/2011. The deadline for the submission of a new corrective action plan is two months, as a rule, and the Commission and Council must assess the new plan following the same procedure as they used in relation to the first one.

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If the two successive corrective action plans are deemed insufficient, then a fine may must be imposed for euro area Member States, under Article 3(2)(a) Regulation (EU) 1174/2011.

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Once the Council has endorsed the corrective action plan, the excessive imbalance procedure continues with the Commission’s assessment of implementation of the corrective action plan, a process that continues until the correction of the excessive imbalances. After the acceptance of the corrective action plan, the Commission and the Council monitor if the Member State executes the corrective action plan with the indicated period, based on progress reports submitted by that Member State to the Commission and the Council. The Commission may carry out enhanced surveillance missions to the Member

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55 By analogy with the two-month deadline for the submission of a second correction action plan in the event the first one is rejected (Article 8(3)), a similar period would seem suitable for that first deadline.

866 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES State for monitoring purposes, and for euro area Member States and those in ERM II the Commission liaises with the ECB in those missions. 29.63

Article 9(4) Regulation (EU) 1176/2011 allows the Council to amend its Article 8(2) recommendations, on a recommendation from the Commission to do so, in the event of ‘relevant major changes in economic circumstances’. Because Article 9(4) establishes explicitly a power to modify an existing measure, one can reasonably ask whether e contrario no amendment is possible in the absence of that triggering condition. The question arises because of the general rubric under Union administrative law that the author of any act may modify it through the same procedure by which it adopted the act,56 which should render redundant the need to provide for a power to amend.

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Looking at the characteristics of a corrective action plan overall, one can say that it can be very broad in scope (potentially far wider than the Article 7(2) recommendation from the Council); lengthy (since there is no pre-defined duration); difficult to modify; and highly specific in content (since it must address the excessive imbalances in question).57 The effective use of that instrument is, therefore, far from straightforward.

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Article 9 Regulation (EU) 1176/2011 governs the monitoring of the corrective action, which involves a ‘bottom-up’ and a ‘top-down’ approach. The former consists of progress reports drawn up by the Member State concerned at regular intervals (themselves set in the Council’s Article 8(2) recommendations) and presented by it to the Commission and the Council. The Council must make those reports public. The latter consists of enhanced surveillance missions carried out by the Commission in that Member State.58

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Based on its monitoring activities, the Commission draws up a report on the implementation of the corrective action. That report serves in turn as the basis on which the Council assesses under Article 10 Regulation (EU) 1176/2011 whether the Member State has taken the action recommended to it by the Council under Article 8(2). If the Council considers that the Member State has indeed taken the necessary action, it holds the excessive imbalance procedure in abeyance, under Article 10(5), with the Council to make public the reasons for its evaluation. If, by contrast, the Council considers that the Member State has not taken the necessary action, it must, based on recommendations from the Commission, adopt under Article 10(4) a decision establishing non-compliance and a recommendation setting new deadlines for taking corrective action. The Council’s Article 10(4) decision is adopted by reverse qualified majority,59 meaning that the Commission’s recommendation is deemed to be adopted until the Council decides by qualified majority to reject that recommendation within ten days of its adoption by the Commission. 56 See, to that effect, Case T-225/04 Italy v Commission [2006] II-56, para 71. 57 See also Adamski, ‘National Power Games’ (n 31) 1353–56. 58 Article 8(3) Regulation (EU) 1176/2011. In contrast with enhanced surveillance missions under Article 4(5) European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1 (‘The Commission . . . shall conduct regular review missions in the Member State subject to enhanced surveillance to verify the progress made by that Member State . . .’), under Article 8(3) monitoring missions are not obligatory (‘The Commission may carry out enhanced surveillance missions to the Member State concerned, in order to monitor the implementation of the corrective action plan . . .’). See also Article 13(2) Regulation (EU) 1176/2011. 59 For a discussion on reverse qualified majority, see Rainer Palmstorfer, ‘The Reverse Majority Voting under the “Six Pack”: A Bad Turn for the Union?’ (2013) 20 European Law Journal 186.

The Macroeconomic Imbalances Procedure (MIP) 867 In case of a lack of corrective action for euro area Member States, leading to the adoption of an Article 10(4) decision by the Council, sanctions follow. For a first Article 10(4) decision, the Council is to impose an interest-bearing deposit on the Member State concerned. For a second successive Council decision under Article 10(4), the Council is to impose annual fines. All such sanctions are proposed and voted under the conditions set out in Regulation (EU) 1174/2011, in Article 3(3) (reverse qualified-majority in the Council), Article 3(4) (Commission to make its recommendation for a Council decision within twenty days of the Article 10(4) decision), and Article 3(5) (the sanction in question to amount to 0.1 per cent of the Gross Domestic Product (GDP) of the Member State concerned in the preceding year).60

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The excessive imbalance procedure is not concluded by the accomplishment of the corrective action plan—satisfactory implementation of that plan can only result in the procedure being held in abeyance. Instead, Article 11 Regulation (EU) 1176/2011 foresees the closing of the excessive imbalance procedure once there is a correction of the excessive imbalance that had been identified in the Article 7(2) recommendation (ie, once the Commission and the Council acknowledge that the macroeconomic imbalances and risks outlined there have receded sufficiently). As a result, just as the accomplishment of the corrective action plan does not lead to the end of the excessive imbalance procedure, the closing of such a procedure can take place even though the Member State concerned did not accomplish all the MIP-related recommendations the Council made.

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Precisely because of that ‘disconnect’ between execution of the MIP-related recommendations and the closure of the excessive imbalances procedure, one can ask what steps would follow if the Member State concerned implemented the recommendations but the excessive imbalance persisted. While Regulation (EU) 1176/2011 is silent on that point, a systemic interpretation pleads in favour of a new correction action plan and the ensuing Article 8(2) recommendations from the Council.

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F. Macroconditionality and the MIP Apart from the possibilities of imposing sanctions on euro area Member States put into an excessive imbalance procedure, macroconditionality is another external constraint arising from such a procedure.61 That latter mechanism is not a sanction, although in functional terms it creates strong incentives for the Member State concerned to avoid the opening of an excessive imbalance procedure. Article 23 Regulation (EU) 1303/2013,62 in which the 60 However, Article 3(6) Regulation (EU) 1174/2011 allows the Commission to propose the reduction or cancellation of the interest-bearing deposit or fine on grounds of exceptional economic circumstances or on a reasoned request from the Member State concerned within ten days of the Article 10(4) decision. See Antpöhler, ‘Emergenz der europäischen Wirtschaftsregierung’ (n 7) 365; and Adamski, ‘National Power Games’ (n 31) 1353. 61 For a critical approach to macroconditionality, see Roland Bieber and Francesco Maiani, ‘Enhancing Centralized Enforcement of EU Law: Pandora’s Toolbox?’ (2014) 51 Common Market Law Review 1057, 1081–82. 62 European Parliament and Council Regulation (EU) 1303/2013 of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) 1083/2006 [2013] OJ L347/320.

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868 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES common provisions are set out for the European Structural and Investment Funds (‘the Funds’), links the effectiveness of those Funds to sound economic governance (including the excessive imbalance procedure). 29.71

Under a so-called ‘first strand’ of that macroconditionality, the Commission may request the Member State concerned to re-programme the Union financing for its programmes so as to support the implementation of relevant Council recommendations made to it under the excessive imbalance procedure.63 Such a request must be reasoned and targeted, and cannot be made at the start or the end of the programming period for the Funds in question. A failure by the Member State to initiate re-programming in response to the Commission’s request can trigger a Council decision to suspend payments under the programmes or the parts of the programme identified in that request, until such time as the Member State takes steps for re-programming.64

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Under a so-called ‘second strand’ of that macroconditionality, the Commission must propose the suspension of commitments or of payments for the programmes of the Member State concerned if the Council takes two successive decisions that that Member State has submitted an insufficient corrective action plan or if the Council takes two successive decisions that that Member State has not taken the recommended corrective action. As a result, there is a tight link between the excessive imbalance procedure and availability of commitments and payments from the Funds. Priority is given to suspension of commitments (which takes far longer to have an effect on the Member State), and indeed payments can only be suspended under the second strand where immediate action is sought and ‘in the case of significant non-compliance’.65

G. The MIP and fiscal surveillance 29.73

There are, in practice, some links between non-fiscal surveillance and the mechanisms under Article 126 TFEU to ensure the budgetary health of Member States. One might expect that under decisions under Article 126 TFEU would deal exclusively with the fiscal situation of Member States, and so be silent on non-fiscal matters. That view is largely correct as regards the decisions to open or to close an excessive deficit procedure in respect of a Member State. By contrast, where a Member State that is under an excessive deficit procedure has not taken effective action to bring order to its government finances, Article 126(9) TFEU allows the Council to give it notice to take measures to remedy the situation of excessive deficit.

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It is instructive to look at the experience as regards the notice to Portugal in 2016. In a recital to the Article 126(9) decision addressed to it the Council stated: Portugal should reinforce structural reforms to enhance competitiveness and long-term sustainable growth in line with the Council Recommendations addressed to Portugal in

63

Article 23(1)(b) Regulation (EU) 1303/2013. Article 23(6)–(8) Regulation (EU) 1303/2013. 65 Article 23(9) Regulation (EU) 1303/2013. 64

The Macroeconomic Imbalances Procedure (MIP) 869 the context of the European Semester and in particular those related to the correction of its excessive macroeconomic imbalances.66

Thus economic policy guidance provided under Article 121 TFEU and under Regulation (EU) 1176/2011 ties back to the fiscal surveillance mechanisms.

H. Concluding remarks on the MIP A final issue worth considering as regards the excessive imbalances procedure is its interaction with the normal procedures of the European Semester. As a starting-point, and by way of comparison, one should note that if a Member State obtains financial assistance from one or more Member States or third countries, the ESM or the IMF, that Member State must prepare a draft macroeconomic adjustment programme (‘programme’) for the Council to approve, and for the duration of the programme Regulation (EU) 1176/2011 will not apply to that Member State (other than that the indicators in the scoreboard must be integrated into the monitoring of the programme).67 The rationale of excluding such Member States from the MIP is that the implementation of the programme, and more particularly the monitoring of the programme, covers all relevant structural issues, which justifies streamlining monitoring instruments and processes. The question then arises as to whether a comprehensive corrective action plan would not also justify a similar exclusion from the standard processes of the European Semester.

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From a functional perspective, many arguments support such an exclusion. It would eliminate risks of overlap and would avoid duplication of surveillance processes. It would sidestep the waste inherent in ‘double monitoring’ of the same policy commitments (since one would expect that the correction action plan would address the challenges the Council would seek to address in its CSRs to that Member State). Exclusion would also mean a de facto unification of the surveillance cycle for that Member State. As a result, the Member State and the institutions would avoid complications that could arise from having two timelines, one to monitor commitments under the correction action plan and another under the Semester.68

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However, while such an exclusion appears rational, it may be legally challenging to achieve without an amendment to Regulation (EU) 1176/2011. Regulation (EU) 472/2013 has explicit exclusions, to ensure constituency with the Stability and Growth Pact and the European Semester. By contrast, Regulation (EU) 1176/2011 is silent on those same points, making it hard to argue that the opening of an excessive imbalance procedure moves the Member State outside the ambit of the usual instruments for multilateral surveillance.

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Regulation (EU) 1176/2011 provides a useful framework for surveillance of the Member States outside the fiscal sphere. It can identify economic imbalances emerging from a

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66 Council Decision (EU) 2017/985 of 8 August 2016 giving notice to Portugal to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit [2017] OJ L148/42. 67 Articles 7 and 11 Regulation (EU) 472/2013. See generally, Michael Ioannidis, ‘EU Financial Assistance Conditionality after “Two Pack” ’ (2014) 74 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 61. 68 The Semester’s calendar operates under a logic that is independent of the specific needs of Member State under a corrective action plan since the Semester has its own annual rhythm common to all of the Member States.

870 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES variety of sources, ranging from policy oversights at the level of the individual Member States, to unanticipated results of market integration and sector specialization in the euro area. The multilateral surveillance conducted under Regulation (EU) 1176/2011 has probably increased the awareness of policy-makers regarding how imbalances manifest themselves. It is less clear that it has been as successful in identifying underlying causes.

I. Complementing the MIP: the role of the ESRB 29.79

In 2010, Regulation (EU) 1092/2010 established the European Systemic Risk Board (ESRB), as part of the responses to the financial crisis that began in 2008.69 Pursuant to Article 3 Regulation (EU) 1092/2010, the mission of the ESRB is to exercise macroprudential oversight of the financial system within the Union in order to contribute to the prevention or mitigation of risks to financial stability and to take into account macroeconomic developments, so as to avoid periods of widespread financial distress.

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Macroprudential supervision seeks to limit the distress of the financial system as a whole in order to protect the overall economy from significant losses in real output. In contrast to microprudential supervision, which looks to the situation of individual financial institutions, macroprudential supervision focuses on systemic risks arising from a common exposure of many financial institutions to the same risk factors.70

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The decision-making organ of the ESRB is its General Board, made up of the ECB’s President and Vice-President, the Governors of the national central banks, a Member of the Commission, the Chairpersons of the European Supervisory Authorities (ESAs), the EFC’s President and persons from the ESRB’s advisory committees, as voting members.71 The ESRB can issue warnings and recommendations to address significant risks to financial stability in the Union.72 It can address those warnings and recommendations to the Union as a whole, to one or more Member States, ESAs, or national supervisory authorities. The ESRB does not necessarily make public its warnings or recommendations but can decide to do so.73

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In terms of non-fiscal surveillance of the Member States, there are close ties between macroprudential supervision and macroeconomic policy. The make-up of the General Board reflects those connections. Recital (25) to Regulation (EU) 1092/2010 explains that the participation of the Member of the Commission helps create a link with the macroeconomic and financial surveillance of the Union, while that of the President of the EFC reflects the role of the Member States and the Council in, inter alia, performing economic and financial oversight. 69 European Parliament and Council Regulation (EU) 1092/2010 of 24 November 2010 on European Union macroprudential oversight of the financial system and establishing a European Systemic Risk Board [2010] OJ L331/1. See also Eilís Ferran and Kern Alexander, ‘Can Soft Law Bodies Be Effective? The Special Case of the European Systemic Risk Board’ (2011) 37 European Law Review 751. 70 See Jacques De Larosière and others, ‘Report of the High Level Group on Financial Supervision in the EU’ (Brussels, 25 February 2009) 38 accessed 10 February 2020. 71 Articles 4(2) and 6(1) Regulation (EU) 1092/2010. 72 Article 16 Regulation (EU) 1092/2010. 73 Article 18 Regulation (EU) 1092/2010.

Emerging Approaches 871 In addition to the tasks assigned to the ESRB by Regulation (EU) 1092/2010 and under the 29.83 Union legislation directly governing financial supervision, the ESRB has a role to play in multilateral economic surveillance. In the macroeconomic imbalance procedure, for example, the Commission must take due account of the work of the ESRB when drafting the indicators in the scoreboard relevant to financial market stability and invite the ESRB to give its views on the draft indicators.74 Similarly, when the Commission carries out an in- depth review, it must take account of ESRB warnings or recommendations addressed to, or relevant to, the Member State concerned.75 Equally, if the Commission considers that excessive imbalances exist in a Member State, it must inform the ESRB and invite the latter to take the steps that it deems necessary.76

IV. Emerging Approaches A. General The Semester process relies on peer review, public recommendations and possible sanctions for euro area Member States to be effective. That mixture has not translated into a speedy implementation of recommendations. There are several, probably overlapping reasons for that situation. Member States may be more concerned about avoiding a recommendation being made to them than about following up on those received. Reform needs may require many years of multi-faceted action that fits poorly within an annual cycle. Finally, there is the phenomenon of ‘this will hurt me more than it hurts you’; the ‘sticks’ that could be used against euro area countries may be as hard for the Union institutions to wield as the resulting ‘blows’ would be for those countries to experience. As a result, recent years have been replete with new approach to enhance the effectiveness of multilateral non-fiscal surveillance.

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B. The Structural Reform Support Programme As part of the November 2015 European Semester package, the Commission proposed a regulation to establish a Structural Reform Support Programme (SRSP) for the 2017–20 period. As previously noted, all participants in the multilateral surveillance process have identified structural reforms a priority area, to enhance growth and productivity and to address macroeconomic imbalances.77

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The proposal sought to address such needs, particularly in the areas of the regulatory environment for businesses, stimulating growth and increasing labour participation and productivity.78 The proposal drew on experience with technical assistance for reforms in

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74 Article 4(5) Regulation (EU) 1176/2011. 75 Article 5(2)(c) Regulation (EU) 1176/2011. 76 Article 7(1) Regulation (EU) 1176/2011. 77 See, for example, the 2016 CSRs and EAR described above, seeking reforms aimed at modernising the economy of Member States and the euro area and improving long-term growth prospects. 78 See Editorial Comment, ‘Tinkering with the Economic and Monetary Union’ (2018) 55 Common Market Law Review 709, 712ff.

872 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES Greece (the ‘Task Force for Greece’, established in 2011) and Cyprus (the ‘Support Group for Cyprus’, established in 2013), extending that model to all Member States, on a voluntary basis and at the Member State’s request. The co-legislators adopted the Commission’s proposal in May 2017, as Regulation (EU) 2017/825.79 29.87

The SRSP offers technical assistance to all Member States, aimed at improving their institutional and administrative capacities for implementing structural reforms with a view to building strong economic foundations. It can offer national authorities technical support in a wide variety of policy areas, such as public financial management, administration, business environment, trade, competition, labour markets, education and training, social security systems, migration, and agriculture. Under the SRSP, eligible actions include workshops, expert advice, working visits, training, data collection, research, methodology development, IT capacity building, studies, evaluations and awareness-raising campaigns, systems, and tools. The Commission organizes support under the programme, but implements that support in cooperation with other Member States and international organizations. Multiannual work programmes sets out the SRSP’s policy objectives, expected results and funding priorities, while annual work programmes specify further details regarding implementation. Outside those annual work programmes, Regulation (EU) 2017/825 allows a Member State to benefit from special measures, allowing limited action to support national authorities in addressing urgent needs that require an immediate response.

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Under Regulation (EU) 2017/825, the SRSP received a financial envelope of 142.8 million euro. Since the Commission’s proposal came midway through the 2014–20 Multiannual Financial Framework, it put the financial envelope together from allocations under the European Structural and Investment Funds (ESI Funds). The use of those monies from other instruments required the amendment of legislation governing those Funds. Various Member States and groups particularly concerned about the future dilution of cohesion policy-related spending successfully pushed to modify the proposal, by adding a recital noting that such a means of financing would not constitute a precedent.80 In addition to that financial envelope, Regulation (EU) 2017/825 allows Member States to make further contributions, including transferring of ESI Funds resources for technical assistance.

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That initial financial envelope proved insufficient. Seventeen months after its adoption, the co-legislators amended Regulation (EU) 2017/825,81 increasing the amounts available under the SRSP by 80 million euro. At the same time, they modified the objectives of the SRSP to cover preparations by non-euro area Member States to participate in the single currency.

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Regulation (EU) 2017/825 has a double legal basis, Article 197(2) TFEU and the third paragraph of Article 175 TFEU. 79 European Parliament and Council Regulation (EU) 2017/825 of 17 May 2017 on the establishment of the Structural Reform Support Programme for the period 2017 to 2020 and amending Regulations (EU) 1303/2013 and (EU) 1305/2013 [2017] OJ L129/1. 80 Recital (17) of Regulation (EU) 2017/825: ‘The financing of the Programme through the transfer of allocations from [Commission] technical assistance [under the ESI Funds] should only be considered a one-off solution that should not constitute a precedent as regards the funding of future initiatives’. 81 European Parliament and Council Regulation (EU) 2018/1671 of 23 October 2018 amending Regulation (EU) 2017/825 to increase the financial envelope of the Structural Reform Support Programme and adapt its general objective [2018] OJ L284/3.

Emerging Approaches 873 Article 197 TFEU82 is a legal base for Regulation (EU) 2015/825 due to the means by which the SRSP primarily acts (namely, by assisting national administrations in the implementation of Union law, in particular by means of inter-administration cooperation). However, Article 197 TFEU would not allow for actions unconnected with the implementation of Union law or that did not involve cooperation between national administrations or between those of the Union and of the Member States. Since the objective of the SRSP goes beyond what Article 197 TFEU covers, Regulation (EU) 2015/825 need a second legal basis.

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Article 175 TFEU is part of Title VIII, on cohesion policy. It makes a link between the coordination of Member States’ economic policies and the strengthening of the Union’s economic, social and territorial cohesion. Its third paragraph lays down that the Union can support action within the scope of cohesion policy as described in Article 174 TFEU through a legal instrument based on Article 175 third paragraph TFEU if one of the Structural Funds or the Cohesion Fund cannot provide the support or the action. Those Funds might be unable to support an action due to the fact, although the action is in the scope of cohesion policy, it is outside the subject matter of the Funds. Equally, the action might not fit with the rules laid down in the current secondary legislation governing the Funds (such as rules limiting Union financing from the Funds to payments in respect of projects). Actions undertaken to enhance the resilience of the economies of the Member States or to promote convergence between them can be considered as falling within the scope of cohesion policy where those actions strengthen the economic, social and territorial cohesion of the Union. Due to its potentially wide scope, the third paragraph of Article 175 TFEU can therefore allow the SRSP to act outside the limits attached to Article 197(2) TFEU.

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In 2017, the SRSP received 271 requests from sixteen Member States, of which 159 requests were successful. In 2018, it received 444 requests for twenty-four Member States, of which 146 requests were successful. It should not be lost to sight that the SRSP does not provide funding to Member States, but only technical support. As a result, the amounts budgeted for it and the funding awarded are relatively modest, since it does not substitute funding from national budgets.

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In the handling of requests for support, Article 7 Regulation (EU) 2017/825 establishes two links with the European Semester. First, Article 7(2), dealing with the analysis of requests made by Member States, foresees that the Commission will carry out a dialogue with the Member State concerned in the context of the Semester when it is analysing the requests made under the SRSP. Second, Article 7(3), setting out the three categories of assistance that the SRSP may support, provides that requests for support may be made to implement ‘growth-sustaining reforms in the context of the economic governance processes, in particular of the [CSRs] issued in the context of the European Semester . . .’.

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C. The (proposed) Reform Support Programme On 31 May 2018, as part of the array of financial instruments for the post-2020 Multiannual Financial Framework period, the Commission proposed a Regulation on the establishment

82

Which deals with administrative cooperation, to implement Union law.

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874 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES of the Reform Support Programme (‘the draft RSP Regulation’).83 The draft RSP Regulation envisages a new financial instrument with, essentially, three parts; one is a technical support instrument that will be the successor to the SRSP, a second is a so-called ‘Reform Delivery Tool’, while the third is a ‘Convergence Facility’. 29.96

The technical support instrument would have a financial envelope of 860 million euro for the period from 2021–27. That instrument would be broadly the same as the current SRSP in terms of objectives and eligible activities.

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The Reform Delivery Tool (RDT) was to be the major innovation in the draft RSP Regulation. It would provide financial incentives for the implementation of reforms in Member States. The draft RSP Regulation foresaw a financial envelope of 22 billion euro for the RDT.

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At present, Member States can access funds from the Union budget through the European Structural and Investment Funds (‘ESI Funds’) to support investment-related actions linked to structural reforms that they undertake. However, such support has two limitations. Firstly, it takes the form of payment against eligible costs, meaning that for a given investment one can ultimately charge a certain part of spending on that investment to the Union budget. In concrete terms, those Union funds cannot finance reforms that have no implementation or investment costs (such as regulatory reforms). Second, although individual Member States must frame any reforms that the ESI Funds will support within operational programmes that they agree with the Commission, the Union institutions have a relatively limited ability to promote the design and implementation of such structural reforms. Moreover, the selection of such reforms as the ESI Funds can support is a matter of bilateral dialogue between the Commission and the Member State concerned, in which there may not be sufficient emphasis on positive spillovers for other Member States, the euro area or the Union as a whole. The RDT sought to overcome those limitations.

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First, financial contributions under the RDT would take the form of financing not linked to cost.84 That approach recognized that many of the Member States’ structural challenges need more than investments or implementation of a programme to address them; they may require a complex mix of policy actions and legislation, investments and improvements in the governance of institutions and systems. It also built on the observed experience in many Member States of the high political costs in the short term associated with structural reforms, which can prevent or slow down their implementation. Financial contributions from the RDT therefore sought to help overcome such obstacles and at the same time enhance political ownership of the reforms, thereby discouraging the phenomenon of reversal of recently instituted reforms (often after a change in government) before they bear fruit.

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Second, while the Commission would have decided on the level financial contributions under the RDT for a given reform proposal, the content of such proposals would be shaped by an in-depth dialogue between the Commission and the Member State, encouraging the latter to design and implement a comprehensive set of reforms.85 Moreover, the Economic

83 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on the establishment of the Reform Support Programme’ COM (2018) 391 final (hereafter ‘Draft RSP Regulation’). 84 Article 15(1) Draft RSP Regulation. 85 Article 11(4) and (5) Draft RSP Regulation.

Emerging Approaches 875 Policy Committee could provide an opinion on the reform proposals submitted by Member States.86 In contrast to the SRSP, for which Member States can seek technical assistance for their own reform priorities as well as for those that the Council recommends to them in the context of the multilateral surveillance of economic policy, the RDT was to rests on a tight link between reform proposals and the Semester. To be eligible for a financial contribution, reform proposals must effectively address challenges identified in the context of the European Semester, specifically in the CSRs or other European Semester documents officially adopted by the Commission87 or under Regulation (EU) 1176/2011.88 The greater the degree to which the reform proposal contributes to addressing those challenges, the higher the level of financial contribution the Commission may award to it.89

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The link to the Semester is also evident in other aspects of the draft RSP Regulation. Member States are to submit their reform proposals to the Commission alongside their national reform programmes.90 They are to report on programme in achieving the reforms selected for support within the Semester process, and preferably in their national reform programmes.91 The role of the Economic Policy Committee also serves to ensure coherence with the Semester.

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To encourage delivery of reforms, the draft RSP Regulation foresees payment to the Member State concerned only on completion of the reforms to which it has committed.92 Moreover, the reforms must be durable; Member States must repay any financial contribution paid to them if, within five years of the payment, those reforms are reversed or are significantly modified by other measures.93

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The legal basis for the RDT is the third paragraph of Article 175 TFEU, meaning that it is a specific action to strengthen the cohesion of the Union outside the ESI Funds. The justification for the RDT as an instrument of cohesion policy is that the completion of reforms of a structural nature improves the performance of the national economies, thereby promoting resilient economic and social structures in the Member States. There are links between such actions and economic policy, but the RDT does not make use of the Title VIII (‘Economic and Monetary Policy’) as a legal basis. Instead, it develops a concept of cohesion as embracing real convergence between the Member States and of augmenting the resilience of their economies.

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The Commission had intended to carry out a ‘test run’ for the RDT, by putting in place a pilot phase for that programme. In its December 2017 package for deepening EMU, it proposed a Regulation that would allow Member States to use all or part of the performance reserve in the ESI Funds to support reforms instead of specific projects (‘the draft pilot phase

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86 Article 11(9) Draft RSP Regulation. 87 That formulation appears to exclude Country Reports, but encompass the Commission Communication accompanying such reports. 88 Articles 11(1) and (7) and 12(2) Draft RSP Regulation. 89 See Annex II Draft RSP Regulation. 90 Article 11(2) Draft RSP Regulation. 91 Article 14 Draft RSP Regulation. 92 Article 15(4) Draft RSP Regulation. 93 Article 16 Draft RSP Regulation.

876 NON-FISCAL SURVEILLANCE OF THE MEMBER STATES RDT Regulation’).94 The draft pilot phase RDT Regulation would have amended Regulation (EU) 1303/2013, which lays down common provisions for the ESI Funds, creating a tool for Member States to use the funds transferred from the performance reserve to implement structural reforms identified in the European Semester process. However, on 24 October 2018 the European Parliament rejected the Commission’s proposal. 29.106

The third part of the draft RSP Regulation is the Convergence Facility, itself comprising two components. The first is a technical assistance component, and the second is a financial support for reforms component (‘the financial assistance component’). The difference between those two components and the other parts of the draft RSP Regulation is that they are dedicated to preparation for euro area membership. They cater for the specific needs of non- euro area Member States that embark on structural reforms, by offering additional tools for making their economies and social structures more resilient to shocks, better preparing them for euro area membership. Support under the Convergence Facility would be open to non-euro area Member States that have taken demonstrable steps to adopt the single currency within a given timeframe, thereby contributing to the fulfilment of the convergence criteria and to the resilience of the euro area as a whole. There would be a financial envelope of 160 million euro for the technical assistance component and one of 2 billion euro for its financial assistance component.

D. National Productivity Boards 29.107

The Five Presidents’ Report of June 2015 (‘the Report’) identified the creation of a system of Competitiveness Authorities in the euro area as an immediate step for a complete EMU. The Report recommended that the euro area Member States each create a national body in charge of tracking performance and policies in the field of competitiveness, to prevent economic divergence and increase ownership of the necessary reforms at the national level. It envisaged those authorities as independent entities with 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’, and to assess progress made with economic reforms so as to enhance competitiveness more generally. It also envisaged a form of network of such authorities, bringing the national bodies together with the Commission, which would coordinate their actions on an annual basis. Finally, the Report recommended that the Commission would take into account the outcome of that coordination when deciding on steps under the European Semester, including the activation of the excessive imbalances procedure under Regulation (EU) 1176/2011.

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In October 2015, the Commission made a recommendation for a Council recommendation giving effect to the Report’s invitation, which the Council adopted in September 2016.95 The 2016 Recommendation differs markedly from the vision of the Report.

94 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 1303/2013 . . . as regards support to structural reforms in Member States’ COM (2017) 826 final. 95 Council Recommendation of 20 September 2016 on the establishment of National Productivity Boards [2016] OJ C349/1. The legal basis for the 2016 Recommendation is Article 292 TFEU, in conjunction with Articles 121(2) and 136 TFEU.

Emerging Approaches 877 Rather than calling for the creation of ‘Authorities’, the 2016 Recommendation looks for 29.109 the identification or setting up of ‘Boards’. Instead of those bodies being ‘Competitiveness Authorities’, they are to be ‘National Productivity Boards’. While the Council addressed its recommendation to euro area Member States, it encouraged non-euro area Member States to create similar bodies. In addition, although it recognizes the link between the activities of those bodies with the European Semester and the application of Regulation (EU) 1176/ 2011, Recital (12) of the 2016 Recommendation makes clear that it does not alter the assigned responsibilities of the Union Institutions for those processes. While other tasks of the boards envisaged in the Report have fallen away, their purpose remains that of promoting and supporting implementation of structural reforms, by providing a solid analytical foundation and informing public debates. They are to be objective, neutral and independent institutions. As of the end of 2018, ten euro area Member States had set up such boards, while three non-euro area Member States (Denmark, Hungary, and Romania) had also done so. For the most part, the Member States have created boards based on or relying on existing national institutions. The boards take part in a network led by the Commission, to facilitate the sharing of views, practices and experiences. In addition, Recital (9) of the 2016 Recommendation envisages that regular discussions between the productivity boards and the Economic Policy Committee, an advisory body to the Council and the Commission.96

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E. Euro Plus Pact The Union rules in the field of non-fiscal surveillance co-exist alongside inter-governmental arrangements, in the form of the Euro Plus Pact,97 which was signed by twenty-three Member States in March 2011.98 It was conceived as an intergovernmental solution to foster reforms and coordination. The Pact sets four goals intended to improve the fiscal strength and competitiveness in the euro area—fostering competitiveness; fostering employment; contributing to the stability of public finances; and reinforcing financial stability. The Euro Plus Pact is supposed to be updated annually, fixing specific strategies by which those goals are to be achieved.99 However, its implementation has suffered from a number of shortcomings,100 including the absence of a monitoring institution. While the Five Presidents’ Report called for its relevant parts to be integrated into the framework of Union law, to date there have been no steps taken in that direction.

96 Established by Council Decision 74/122/EEC of 18 February 1974 setting up an Economic Policy Committee [1974] OJ L63/21. 97 On the Euro Plus Pact generally, see Daniel Gros and Cinzia Alcidi, ‘Was bring der “Euro-plus-Pakt”?’ (2011) 34 Integration 164; Andreas Fischer‐Lescano and Steffen Kommer, ‘EU in der Finanzkrise: Zur Leistungsfähigkeit des Verfahrens der verstärkten Zusammenarbeit für eine Intensivierung der Wirtschafts‐ und Sozialpolitik’ (2011) 44 Kritische Justiz 412, 423–24. 98 The ‘Euro Plus Pact on Stronger Economic Policy Coordination for Competitiveness and Convergence’ was agreed in 2011 by the Heads of State and Government of the euro area and Bulgaria, Denmark, Latvia, Lithuania, Poland, and Romania. It is open to other EU Member States on a voluntary basis. 99 Hermann-Josef Blanke, ‘The European Economic and Monetary Union—Between Vulnerability and Reform’ (2011) 1 International Journal of Public Law and Policy 402, 408. 100 Jens Hamer in Hans von der Groeben and others (eds), Europäisches Unionsrecht (7th edn, Nomos 2015) Article 126 TFEU, 1006.

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30

POLICY CONDITIONALITY ATTACHED TO ESM FINANCIAL ASSISTANCE Ulrich Forsthoff and Nathalie Lauer*

I. Introduction II. The Functioning of the ESM: Overview A. B. C. D. E.

30.1 30.8 The ESM in the EU legal framework 30.9 ESM mandate and modus operandi 30.25 Financial Assistance Instruments 30.27 Capital, funding, and pricing 30.28 Procedure for granting Stability Support 30.33

III. The Memorandum of Understanding (MoU)

A. General, role model IMF B. Legal framework for the MoU—overview C. In particular: Respect of fundamental rights laid down in the Charter D. Procedure

30.41 30.42

E. F. G. H. I.

Parties, review and update, duration Legal nature Content Monitoring, enforcement Post programme period

IV. Accountability

A. ESM Governance, Oversight, Transparency B. Deficits in (democratic) accountability? C. Interplay between various actors

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V. Judicial Control

30.54 30.68

VI. Outlook

A. The ‘right’ forum B. Case law

30.79 30.83 30.86 30.112 30.116 30.121 30.122 30.133 30.149 30.153 30.153 30.175 30.184

I. Introduction 30.1

‘If the euro fails, Europe fails.’ This dictum of the German Chancellor, Ms Angela Merkel, from 2012 marks the importance that the sovereign debt crisis and its solution were accorded in political discourse and action. The European Stability Mechanism (ESM) and its predecessor, the European Financial Stability Facility (EFSF), are a central component of the strategy put in place by the euro states to overcome the crisis. The creation of these institutions and the policies pursued by them have been the subject of intense debate. This cannot come as a surprise given the seriousness of the crisis, the new paths taken, the mobilization of enormous financial resources, the high economic and political costs and the hitherto unknown intensity in which redistributive conflicts, which until then had been discussed in national discourse, where fought on the European Union (EU) level.1 The more or less public debates at highest * The views expressed in this chapter are those of the authors and do not necessarily represent the views of the institutions to which the authors are affiliated. 1 Michael Ioannidis, ‘Europe’s new transformations: How the EU economic constitution changed during the Eurozone crisis’ (2016) 53 Common Market Law Review 1237, 1275ff (hereafter Ioannidis, ‘Europe’s new transformations’); Michael Schwarz, ‘A Memorandum of Misunderstanding—The doomed road of European Stability Mechanism and a possible way out: Enhanced Cooperation’ (2014) 51 Common Market Law Review 389, 400 (hereafter Schwarz, ‘A Memorandum of Misunderstanding’). Ulrich Forsthoff and Nathalie Lauer, 30 Policy Conditionality Attached to ESM Financial Assistance In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0036

Introduction 879 political level of central political conflicts with massive effects on the living conditions of many millions of EU citizens have, fortunately, not broken up the EU and eventually strengthened the institutional framework of the economic and monetary union but have certainly left traces in the cultural memory of the Member States concerned.2 The ESM and its predecessor, the EFSF, were at the centre stage of the politics to save the euro and the financial stability of euro area Member States. This entailed front page press coverage for many days. The ESM and its policies were subject of heated debates which even led to legal challenges,3 namely in Germany.4

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The EFSF/ESM activities were heavily criticized by many citizens for intervening massively into the economic policy of the beneficiary countries by imposing austerity, by others for being still too lenient. And the European Court of Auditors came to the conclusion in its Special Report that ‘financial support for Greece was conditional upon the implementation of a broad range of reforms addressing fiscal, financial and structural imbalances. The scope of the reforms evolved, but from the outset covered almost all functions of the Greek State,5 meaning in some cases that very deep structural imbalances had to be corrected’.6

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It is therefore obvious that the ESM crisis intervention was and is intensively concerned with economic policy setting.

30.4

And yet, from an EU law perspective the ESM instruments are not and must not be instruments of economic policy coordination.

30.5

This potential for conflict is inherent in the role of the ESM, given its nature as a body of international law and at the same time deeply interwoven with the EU. It will be a recurrent theme of this chapter.

30.6

2 See the series of articles by Peter Spiegel, ‘How the euro was saved—FT series’ Financial Times (11 May 2014) describing the fierce negotiations full of drama amongst the highest political leaders at the time; see also Matthias Ruffert, ‘The European debt crisis and European Union law’ (2011) 48 Common Market Law Review 1777–82 (hereafter Ruffert, ‘The European debt crisis’); Martin Nettesheim, ‘It’s about legitimacy: Stärkung der EU-Governance in der europäischen Währungsunion’ (2017) 6 Heidelberger Beiträge zum Finanz-und Steuerrecht 37, 70ff (hereafter Nettesheim, ‘It’s about legitimacy’). 3 Pringle v Government of Ireland and Others [2012] IEHC 296; Pringle v Government of Ireland and Others [2012] IESC 47 reference for a preliminary ruling, which led to Case C-370/12 Pringle v Government of Ireland [2012] ECLI:EU:C:2012:756 (hereafter Pringle); Riigikohus (Supreme Court of Estonia) 12 July 2012, 3-4-1-6-12); and Verfassungsgerichtshof (Austrian Constitutional Court) 16 March 2013, SV 2/12-18. 4 German Constitutional Court regarding the rescue mechanisms prior to the ESM: BVerfG, Judgment of the Second Senate of 7 September 2011—2 BvR 987/10; BVerfG, Judgment of the Second Senate of 28 February 2012— 2 BvE 8/11; BVerfG, Judgment of the Second Senate of 19 June 2012—2 BvE 4/11; regarding the ESM: BVerfG Judgments of the Second Senate of 12 September 2012 (on request for temporary injunctions) and 18 March 2014, 2 BvR 1390/12 (final judgment). The legal analysis was centred on the question whether the establishment of the ESM as a rescue mechanism (initially not foreseen in the architecture of the Monetary Union to which Germany had consented) was admissible and whether the commitments undertaken by Germany in the context of the Treaty Establishing the European Stability Mechanism (ESM Treaty) would still leave sufficient fiscal breathing space on national level for the exercise of the German Parliament’s prerogatives. The Bundesverfassungsgericht made in its judgment of 12 September 2012 the ratification of the ESM Treaty contingent on a specific interpretation of some provisions of the ESM Treaty. The Member States made on 27 September 2012 a joint interpretative declaration, deposited with the depositary of the ESM Treaty (the General Secretariat of the Council of the European Union) in which they express a certain understanding of the provisions in question and confirm that this understanding ‘constitute(s) an essential basis for the consent of the contracting States to be bound by the provisions of the Treaty’. Following that declaration, Germany could deposit its instrument of ratification and the ESM Treaty entered into force. 5 Emphasis added. 6 European Court of Auditors, ‘The Commission’s intervention in the Greek financial crisis’ (2017) Special Report No 17/2017, para 139.

880 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE 30.7

In the following, we will focus on the main policy document of the ESM, the Memorandum of Understanding (MoU).7 The ESM’s features, and in particular its financial assistance operations, are described in detail in other chapters of this book (see Chapters 12 and namely 33). Accordingly, the general features of the ESM are only reported in the following inasmuch as this helps to better grasp the MoU and its significance in the ESM’s operations.

II. The Functioning of the ESM: Overview 30.8

In the following, we are giving a short overview of the ESM’s place within the EU legal framework and its basic functioning, setting the scene for a more in depth analysis of the policy setting in its operations.

A. The ESM within the EU legal framework 30.9

The ESM is established as an international organization by an intergovernmental agreement8 and thus outside of the legal order of the European Union. Nonetheless, it is strongly linked to the EU in many aspects:

30.10

(1) Founding Members of the ESM were the EU Member States whose currency was the euro at the time of the establishment of the ESM and all EU Member State whose currency is the euro shall become Members of the ESM.9 (2) The ESM’s mandate is to safeguard the financial stability of the euro area and its Member States and eventually the euro, the single European currency. (3) The ‘strict conditionality’, to be expressed in the MoU is not only a requirement under the ESM Treaty and a formal prerequisite under Article 136(3) TFEU but is also required to make the ESM’s financial assistance compatible with the no bail-out clause of Article 125 TFEU. (4) The ESM activities must be aligned with the EU policies. (5) The European institutions and most prominently the European Commission fulfil important tasks in the context of the ESM. (6) The strong links between the ESM and the EU are legally ensured by virtue of the ESM Treaty,10 EU primary law11 and EU secondary law.12 7 As defined in Article 13(3) and (4) ESM Treaty. This MoU must be distinguished from MoUs between the ESM and other international organisations, which usually lay down in a non-binding manner areas of mutual interest and cooperation (cf Article 38 ESM Treaty). 8 Treaty establishing the European Stability Mechanism (ESM Treaty) signed on 2 February 2012 accessed 5 February  2020. 9 Cf Recital (7) ESM Treaty. 10 The references in the ESM Treaty are numerous eg Membership in the ESM is open to Member States of the European Union whose currency is the euro (Article 2(1) ESM Treaty), the Board of Governors may decide to be chaired by the President of the Euro Group (Article 5(2) ESM Treaty), the contribution key is based on the ECB’s capital key (Article 11(1) ESM Treaty), the MoU shall be fully consistent with the measures provided for in the TFEU (Article 13(3) ESM Treaty). Moreover, the ESM Treaty allocates certain specific tasks to the European Commission, the ECB and the Court of Justice of the European Union (cf eg Articles 4(4), 13, and 37 ESM Treaty). 11 Article 136(3) TFEU. 12 Eg Article 7 European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1, but also Article 10 European Parliament and Council Regulation (EU) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1; Article 16 Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L209/6 as amended; Article 4 European Parliament and Council Regulation (EU) 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8.

The Functioning of the ESM: Overview 881 This ambiguous nature of the ESM and its activities is part of its DNA, as a rescue mechanism to safeguard the euro, the financial stability of the euro area and of its Member States and being all the same a separate international organization, legally not part of the EU and capitalized with resources from Member States’ budgets. It mirrors also the difficult structure of the Economic and Monetary Union (EMU) in which the ‘Economic’ part of the Union has seen some development but is still in a nascent stage.

30.11

The EMU was introduced in 1993 with the entry into force of the Maastricht Treaty. Whilst the EU has the exclusive competence regarding monetary policy for the Member States whose currency is the euro, the Member States remain in charge of their economic policies and the Union’s competence is limited to coordinate Member State’s policies.

30.12

In respect of the coordination of economic policies, the Union was from the start focusing on fiscal rules, particularly in the form of the Stability and Growth Pact (SGP). In the aftermath of the euro crisis, the Union intensified its efforts to coordinate economic policies, which resulted in the so-called ‘six-pack’ in 201113 and in the so-called ‘two-pack’14 in 2013. However, still today the ‘Economic’ limb of the EMU has not seen much development towards a genuine ‘Economic Union’. The persistence of huge discrepancies in the pursuit of sound economic policies within EU Member States is perceived by many observers as a factor destabilizing the Monetary Union and as a major road block to the benefits that a truly integrated EMU would bring about.

30.13

As the financial crisis turned into a sovereign debt crisis, it soon became clear that the EU had not the necessary financial capacity to support the Member States in acute financing difficulties and even less so to create the necessary financial firepower to restore market confidence. The financial strength of all Member States of the euro area was needed and, all the same, the no bail-out clause (Article 125 TFEU) to be respected. At the same time, the job couldn’t be done by only pouring money into the Member States concerned to keep them afloat. Serious structural problems were at the root of the crisis, and it was clear that decisive action had to be taken in order to address the weaknesses identified.

30.14

In this context, the architecture of the ESM can be seen as an ingenious way of squaring the circle. The ESM combines as one actor financial resources provided by its Member States (in a manner compatible with the no bail-out clause) with meaningful instruments to steer the

30.15

13 European Parliament and Council Regulation (EU) 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1; European Parliament and Council Regulation (EU) 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area [2011] OJ L306/8; European Parliament and Council Regulation (EU) 1175/2011 of 16 November 2011 amending Council Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2011] OJ L306/12; European Parliament and Council Regulation (EU) 1176/2011 of 16 November 2011 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/25; Council Regulation (EU) 1177/2011 of 8 November 2011 amending Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2011] OJ L306/33; Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41. 14 European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1 and European Parliament and Council Regulation (EU) 473/2013 of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area [2013] OJ L140/11.

882 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE economic policies of the Member States concerned, operated namely by the Commission, and, by doing so, filling a lacuna in the powers of the Union.15 30.16

As ingeniously as the ESM was designed, its establishment raised a number of questions regarding its compatibility with national constitutional and EU law. Furthermore, there was unease with the speed in which important developments took shape which deviated significantly from what was previously considered to be the common understanding of central aspects of the functioning of the EU in general and the Economic Union16 in particular.17

30.17

Therefore, it could not come as a surprise that the ESM was legally challenged, both on grounds of national constitutional law and of EU law.

30.18

As regards the compatibility with EU law, the Irish Supreme Court took the initiative and made an order for reference to the European Court of Justice (ECJ). Inasmuch as this is here of interest, the Irish Supreme Court was in particular concerned with questions regarding the compatibility with the no bail-out clause (Article 125 TFEU), with the respect of the EU competences for the coordination of economic policies and the allocation of tasks to EU institutions by the ESM Treaty.

30.19

In its landmark judgment, the ECJ found that the relevant provisions of the EU Treaties do not preclude the conclusion of the ESM Treaty.18

30.20

As interpreted by the ECJ, the aim of Article 125 TFEU is to ensure that the Member States follow a sound budgetary policy and ‘remain subject to the logic of the market when they enter into debt, since that ought to prompt them to maintain budgetary discipline’.19 Accordingly, no financial assistance may be given which would reduce the incentive of the beneficiary Member State to conduct sound budgetary policies.20 The strict conditions detailed in the MoU ensure thereby that the beneficiary of the assistance remains committed to sound budgetary policies. In this respect, conditionality takes the place of market forces, which are at times completely or very largely suspended for the beneficiary country.

30.21

The ECJ did not regard the ESM and the conditionality attached to the financial assistance as a means by which the euro area Member States tried to achieve a meaningful coordination 15 Jean-Paul Kepenne, ‘Institutional Report’ in Ulla Neergaard, Catherine Jacqueson, and Jens Hartig Danielsen (eds), The Economic and Monetary Union: Constitutional and Institutional Aspects of the Economic Governance within the EU (Djøf Publishing 2014) 179, 193 (hereafter Keppenne, ‘Institutional Report’), recalls that the Council in the case of Greece, Spain, and Cyprus adopted ‘far-reaching’ decisions, ‘directly intrud[ing] into the budgetary and economic sovereignty of the concerned Member State’ before the entry into force of Regulation 472/2013 on the basis of Article 136(1) TFEU. Sceptical about the effectiveness of economic governance rules: Nettesheim, ‘It’s about legitimacy’ (n 2) 63ff. 16 For instance, the BVerfG, Judgment of the Second Senate of 18 March 2014, 2 BvR 1390/12 observed in para 180 (English translation): Though, compared to the understanding of the Treaties with which Germany had participated in the foundation of the Economic and Monetary Union, the introduction of Article 136 sec 3 TFEU and the establishment of the European Stability Mechanism constitute indeed a fundamental reshaping of the existing Economic and Monetary Union, because it detaches its concept, albeit to a limited extent, from the principle of independence of the national budgets which had characterised it before . . ., this does not mean that the stability-directed orientation of the Economic and Monetary Union is abandoned. See also Ioannidis, ‘Europe’s new transformations’ (n 1) 1249–63. 17 Critical, Ruffert, ‘The European debt crisis’ (n 2) 1782–93. 18 Pringle (n 3). 19 Pringle (n 3) para 135. 20 Pringle (n 3) paras 136, 137, and 143.

The Functioning of the ESM: Overview 883 of their economic policies and thereby encroaching on the EU’s powers to ‘co-ordinate’ Member States’ economic policies. Its oscillating nature allowed the ECJ to focus on one side of the ESM’s activities. Accordingly, the ECJ took the view that the ESM is not concerned with the coordination of economic policies, but rather constitutes a financing mechanism.21 The purpose of the ‘strict conditionality’ is according to the ECJ not the coordination of the economic policies of the Member State concerned but intended to ensure that the activities of the ESM are compatible with, inter alia, the no bail-out clause of Article 125 TFEU.22 Finally, inasmuch as the ECJ acknowledges (implicitly) that the conditionality attached to the financial assistance may direct the economic policy of the Member State concerned, the ECJ stresses that the Commission must ensure pursuant to Article 13(3) and (4) ESM Treaty, before signing the MoU, its consistency with the EU measures of economic policy coordination.23

30.22

Finally, the ECJ held that the allocation of tasks to the Commission and to the European Central Bank (ECB)24 do not alter the essential character of the powers conferred to them by the EU Treaties25 and that the competences of the ECJ find their basis in Article 273 TFEU.26

30.23

Regardless of the clarifications brought by the Pringle judgment, it still can be sensed that the ESM creates some uneasiness for some scholars and practitioners. Some perceive the ESM as a threat to the EU constitutional balance and to the unity and homogeneity of the Union. Some fear that institutional rivalry will develop and that the ‘intergovernmental’ or ‘semi-intergovernmental’ method is further spreading, to the detriment of the ‘community method’.27

30.24

B. ESM mandate and modus operandi The ESM’s mandate and its modus operandi are described, in a nutshell, in Article 3 ESM Treaty, which is entitled ‘purpose’ It reads: The purpose of the ESM shall be to mobilize funding and provide stability support under strict conditionality, appropriate to the financial instrument chosen, to the benefit of ESM Members which 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 Members. For this purpose the ESM shall be entitled to raise funds by issuing financial instruments or by entering into financial or other agreements or arrangements with ESM Members, financial institutions or other third parties.

21 Pringle (n 3) para 110. 22 Pringle (n 3) para 111. 23 Pringle (n 3) para 112. 24 Very critical as to the use of the EU institutions in the context of the ESM: Paul Craig, ‘Pringle and the Use of EU Institutions outside the EU Legal Framework: Foundations, Procedure and Substance’ (2013) 9 European Constitutional Law Review 263ff. 25 Pringle (n 3) paras 155–69. 26 Pringle (n 3) paras 170–76. 27 Cf Keppenne, ‘Institutional Report’ (n 15) 205–07.

30.25

884 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE 30.26

Article 3 expresses the finality and raison d’être of the ESM’s activity (provision of stability support ‘if this is indispensable to safeguard the financial stability of the euro area as a whole and of its Member States’) and its functioning. The functioning is simple and essentially formulated in a ‘three-element doctrine’: (1) Mobilizing financial resources (in particular on the capital markets); (2) granting of funds as stability support against; (3) strict conditionality to be implemented by the recipient country.

C. Financial Assistance Instruments 30.27

The ESM grants stability support through its financial assistance instruments. The ESM Treaty endows the ESM with five financial assistance instruments, detailed in Articles 14– 18 ESM Treaty28 and with the possibility to establish new financial assistance instruments (Article 19 ESM Treaty). The ESM made use of Article 19 ESM Treaty and established the instrument for the direct recapitalization of institutions by a Resolution of the Board of Governors of 8 December 2014. See for more details on the ESM financial assistance instruments, Chapter 33 Section II.

D. Capital, funding, and pricing 30.28

The Member States endowed the ESM with a particularly robust capital structure of almost 705 billion euro of subscribed capital (cf Article 8(1) ESM Treaty), out of which Members have paid-in slightly above 80 billion euro (cf Article 8(2) ESM Treaty).

30.29

This capital is not destined to be passed on to the beneficiary Member States receiving financial assistance. Instead, the capital’s purpose is to ensure an excellent rating for the ESM, which shall allow the ESM to raise money on the financial markets at affordable rates which can then be lent on to the beneficiary Member States.

30.30

The capital structure of the ESM is robust and very efficient. The paid-in capital of just over 80 billion euro combined with the unique system of capital calls, according to which, in an emergency, the Managing Director is authorized, in accordance with Article 9(3) ESM Treaty, to make a legally binding capital call, allow for the full utilization of the maximum lending volume of 500 billion euro with the same,29 excellent rating.30

30.31

It is one of the undeniable successes of the ESM (and previously of the EFSF) that it was able to raise significant amounts of money at very favourable conditions on the international financial markets and that despite stress situations.

30.32

The beneficiary Member States benefit directly from the favourable costs of funding since the ESM’s costs of funding are passed-through to them (cf Article 20(1) ESM Treaty and the Pricing Policy).31 This design has important advantages. The interest to be paid by 28 Loans, precautionary financial assistance, financial assistance for the re-capitalisation of financial institutions, primary market support facility, and the secondary market support facility. 29 The methodology of the Rating Agencies assumes the full use of the lending capacity. 30 Long-term rating: Moody’s Aa1; Fitch AAA; see ESM website accessed 20 February 2019. 31 See for more details regarding Pricing and Funding, Chapter 33 Section IV.

The Functioning of the ESM: Overview 885 the beneficiary Member States is not subject to possibly difficult discussions between the Member States but is set automatically at the level of the financing costs of the ESM and thereby alleviating interest rate risk from the ESM. Furthermore, the recipient Member States are treated on equal footing. Finally, from a legal point of view, the Member States do not face each other as debtors and creditors. The significance in political terms of this feature should not be underestimated.

E. Procedure for granting Stability Support The procedure for granting stability support is, in principle, the same for the various financial instruments and laid down in Article 13 ESM Treaty. The procedure is a straightforward steps-based approach and described in more detail in Chapter 33 Section I.A.

30.33

The procedure is initiated by the ESM Member seeking financial assistance. On receipt of the request, the Chairperson of the Board of Governors entrusts32 the European Commission, in liaison with the ECB, to assess: (i) the existence of a risk to the financial stability of the euro area; (ii) whether public debt is sustainable (wherever appropriate and possible, such an assessment is expected to be conducted together with the International Monetary Fund (IMF)); and (iii) the financing needs of the ESM Member concerned.

30.34

Based on the request of the ESM Member and the assessments, the Board of Governors can decide to grant, in principle, stability support to the ESM Member concerned. In that case, the Board of Governors entrusts33 the European Commission (in liaison with the ECB and, wherever possible, together with the IMF) with the task of negotiating with the ESM Member concerned a memorandum of understanding (‘MoU’) detailing the conditionality attached to the financial assistance facility. The European Commission34 signs the MoU on behalf of the ESM, subject to approval by the Board of Governors.

30.35

In parallel to the establishment of the MoU, the Board of Governors mandates the Managing Director of the ESM to prepare a proposal for a financial assistance facility agreement, including the relevant financial terms and conditions and the choice of financial instruments. This proposal by the Managing Director needs to be approved by the Board of Governors.

30.36

The MoU and the financial assistance facility agreement are the most important documents which are approved in the context of the granting of financial assistance.

30.37

The financial assistance facility agreement (the ‘FFA’) is the actual contractual agreement with the beneficiary Member State detailing all the financial aspects of the stability support to be granted and is described in more detail in Chapter 33 Section III.

30.38

32 According to draft Article 13(1) revised ESM Treaty, the Managing Director will be entrusted alongside with the European Commission. The text of the revised ESM Treaty including two new Annexes as agreed by the Eurogroup in its meeting of 13 June 2019 is available at accessed 5 February  2020. 33 According to draft Article 13(3) revised ESM Treaty, the Managing Director will be entrusted alongside with the European Commission. 34 Together with the Managing Director, according to draft Article 13(4) revised ESM Treaty.

886 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE 30.39

The ESM financial assistance documentation consists of three separate documents, which together form the integral agreement between the contracting parties. These documents are standardized and consist of: (a) the template FFA; (b) the Standard Facility Specific Terms, covering the specific terms, conditions and modalities which apply to the relevant ESM financial assistance instruments; and (c) the General Terms, being the general terms and conditions applicable to all ESM stability support operations regardless of the relevant financial instrument.

30.40

The MoU (which will be described in detail in the following section) and the FFA are interrelated. The disbursement of tranches of financial assistance, requires a decision by the Board of Directors, based on a proposal by the Managing Director and after having received a report from the Commission on compliance of the beneficiary Member State with the conditionality attached to the financial assistance and detailed in the MoU. The Commission, according to Article 13(7) ESM Treaty,35 is entrusted to monitor, in liaison with the ECB and wherever possible, with the IMF, the compliance with the conditionality expressed in the MoU. Recitals G and I of the template FFA recall that the granting of financial assistance is contingent on MoU compliance. Section 5.3.4 of the General Terms prescribes more specifically that the Board of Directors must be satisfied, after considering the most recent periodic assessment of the beneficiary Member State by the Commission in liaison with the ECB, with the compliance by the beneficiary Member State with the terms of the MoU.

III. The Memorandum of Understanding (MoU) 30.41

The Memorandum of Understanding (MoU) to be concluded between the ESM and the Member State benefitting from financial assistance is the centerpiece of the ESM’s programme documentation. It is the fruit of the discussions and negotiations and sets the reform agenda to be followed throughout the programme. Accordingly, the MoU is the most interesting document if analysing the ESM from the perspective of economic policy setting.

A. General, role model IMF 30.42

The ESM provides stability support to an ESM Member in or threatened by severe financing problems subject to strict conditionality.36 The requirement of strict conditionality is inspired by IMF practice, where a country borrowing money from the IMF, commits to adjust its economic policies to: (1) overcome the problems which have led to the request for financial aid; and (2) to ensure that the country will be able to repay the IMF.37

35 Together with the Managing Director according to draft Article 13(7) revised ESM Treaty. 36 Article 3 ESM Treaty; cf also Article 136(3) TFEU and Pringle (n 3) para 136. 37 February 2020.

accessed

5

The Memorandum of Understanding (MoU) 887 In the context of the ESM, the significance of the requirement of ‘strict conditionality’ is threefold.38

30.43

From the perspective of EU constitutional law, ‘strict conditionality’ is required by Article 136(3) TFEU and is meant to ensure that the granting of financial assistance is compatible with Article 125 TFEU (the ‘no bail-out clause’). In the ECJ’s interpretation, the strict conditions attached to the MoU ensure that the beneficiary of the assistance remains committed to sound budgetary policies.39

30.44

The economic significance of the MoU for the ESM as a lender becomes clear in comparison to a commercial bank. As a rule, the commercial bank will require collateral for the extension of larger amounts of credit, and may even be obliged to do so under supervisory law. The ESM does not require collateral. The implementation of the measures agreed in the MoU serves as an equivalent: it is intended to contribute to the economic recovery of the recipient state, which will thus be enabled to honour its payment obligations towards the ESM.

30.45

The operational significance of the MoU in the context of the provision of stability support lies in the fact that it determines which requirements an ESM Member must meet before a disbursement can be made. The link between conditionality and disbursements is further determined by the respective guidelines applicable to the financial instrument chosen and the relevant provisions of the FFA, including the General Terms and the Standard Facility Specific Terms.40

30.46

B. Legal framework for the MoU—overview Albeit the ESM is a separate international organization, the legal framework for the MoU is not only set by the ESM Treaty and its internal law but also, to a large extent, by EU law. This applies to some procedural steps which are relevant for the MoU and even more so as to the content of the MoU.

30.47

The application of rules of different legal sources (international public law and EU law) to the MoU mirrors the fact that the ESM activities and in particular the MoU are closely interwoven with the EU and its policies:41 (1) The ESM’s mandate is to safeguard the financial stability of the euro area and its Member States and eventually the euro, the single European currency. (2) The ‘strict conditionality’, to be expressed in the MoU, is required to make the ESM’s financial assistance compatible with the no bail-out clause of Article 125 TFEU and Article 136(3) TFEU. (3) The MoU conditionality must be aligned with the EU policies in general and its policies for the Member State concerned in particular. (4) The European Institutions and most prominently the European Commission fulfil important

30.48

38 Slightly different, Anastasia Poulou, ‘Financial assistance conditionality and human rights protection: What is the role of the EU Charter of Fundamental Rights’ (2017) 54 Common Market Law Review 991, 996 (hereafter Poulou, ‘Financial assistance conditionality and human rights protection’). 39 Pringle (n 3) paras 135, 136, 137, and 143. See also Section II.A. 40 Cf for example Articles 3(3) and 4 of the ESM Guideline on loans and sec 5 of the General Terms for ESM Financial Assistance Facility Agreements. 41 See Section II.A.

888 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE tasks in the context of the negotiation and conclusion of the MoU. In fulfilling its tasks, the Commission brings not only its competences to the benefit of the ESM but also brings, as the ECJ made clear in its landmark judgment Ledra,42 the EU law piggy bagged into the sphere of the ESM. 30.49

The coordination between the ESM and the EU-rules relevant for the MoU is addressed in the ESM Treaty as well as in EU law. According to Article 13(3) ESM Treaty, the ‘MoU shall be fully consistent with the measures of economic policy co-ordination provided for in the TFEU, in particular with any act of European Union law, including any opinion, warning, recommendation or decision addressed to the ESM Member concerned’. Likewise, the Commission shall ensure according to Article 7(2) and (12) Regulation 472/201343 that the MoU is ‘fully consistent with the macroeconomic adjustment programme approved by the Council’ in case such programme is prescribed by the applicable ESM rules or, otherwise, that the MoU is fully consistent with the Council decision approving the main policy requirements, which the ESM plans to include in conditionality for its financial support, to the extent the content of these measures falls within the competence of the Union.44

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However, as mentioned earlier, the ECJ has gone beyond the literal meaning of Article 13(3) ESM Treaty and broadened very significantly the duty to ensure consistency. In essence, it has developed a duty for the Commission to ensure the compatibility of the MoU with EU law in general.45

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Initially, in its Pringle judgment, the ECJ held, in accordance with the wording of Article 13 ESM Treaty, that the MoU should be compatible with ‘the measures of economic coordination’.46 However, already at that time, the ECJ oscillated between this narrow concept of consistency and a broader concept, encompassing compatibility with EU law in general.47

30.52

In its Ledra judgment, the ECJ has now clearly established the Commission’s duty to ensure that the MoU is compatible with the entirety of EU law.48

30.53

Such a legal obligation puts certainly the Commission and its services under considerable strain: Time pressure, breadth and depth of Union law, but also the difficulty to take due account of the exceptional crisis situation in which the MoU is adopted when interpreting the law. Nonetheless, this praetorian evolution appears to be supported by strong arguments: The concept developed by the ECJ ensures that the institutional and legal framework of the EU is preserved outside of which the ESM was set up. It should also be recalled that the Commission signs the MoU on behalf of the ESM. Reasonably, this can only be understood as meaning that the Commission should be held accountable. Moreover, there is little 42 Case C-8/15 P to C-10/15 P Ledra Advertising and others v Commission and ECB [2016] ECLI:EU:C:2016:701, para 67 (hereafter Ledra Advertising and others). 43 European Parliament and Council Regulation (EU) 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1. 44 Cf as to the importance of ensuring consistency Alberto de Gregorio Merino, ‘Legal developments in the Economic and Monetary Union during the debt: The mechanisms of financial assistance’ (2012) 49 Common Market Law Review 1613, 1635–38 (hereafter de Gregorio Merino, ‘Legal developments in the Economic and Monetary Union’). 45 Ledra Advertising and others (n 42) para 67. 46 See Pringle (n 3) para 112. 47 See Pringle (n 3) paras 151, 164, and 174. 48 Ledra Advertising and others (n 42) para 67.

The Memorandum of Understanding (MoU) 889 point in the MoU setting objectives which the Member State concerned could only fulfil in breach of its obligations under EU law. In any event, the Commission’s obligation to ensure compliance with EU law does not entail that the MoU is to be considered as EU law or that the presumption of legality applicable to EU acts would apply to the MoU.49 The MoU is not a legal act of the EU50 and solely commits the ESM.51

C. In particular: Respect of fundamental rights laid down in the Charter The question whether, when and how the fundamental rights of the Charter can apply to rescue measures adopted in the context of the ESM has from the start52 fueled an interesting academic debate53 and has found some answer in recent case law.

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In the following, we will first examine whether the MoU must be compatible with the fundamental rights of the Charter. In the second place, it will be seen whether the fundamental rights also apply to the Member State when implementing the MoU measures.

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1. Respect by the MoU In its Ledra judgment, the ECJ held that the Commission is obliged ‘to ensure that [the MoU] is consistent with the fundamental rights guaranteed by the Charter’.54 The Court derives this conclusion from the starting point that the Commission is bound by the fundamental rights even if it acts outside the EU legal framework. This starting point is undoubtedly true. But it is by no means compelling to draw from that starting point the conclusion that the Commission is obliged to ensure the consistency of the MoU with the Charter. In fact, the Commission’s commitment to fundamental rights can be conceptualized in two different ways: According to Advocate General Wahl, one could assume instead a mere procedural obligation to ‘deploy its best endeavors’55 to avert a violation of the Charter. This view is supported by the fact that some of the measures foreseen in the MoU, in particular with Greece, appear to be beyond the powers of the EU and, in any event and to a large extent, beyond its legislative competences. To assume an obligation to respect the rights of the Charter therefore conceptually implies the shortening of the scope for decision-making that potentially exists under the constitutional law of the Member State concerned. This could be seen as an inadmissible extension of the scope of EU law within the meaning of Article 51(2) of the Charter.56

49 See, with respect to the presumption of lawfulness, Case C-362/14 Maximillian Schrems v Data Protection Commissioner [2015] ECLI:EU:C:2015:650, para 52. 50 Ledra Advertising and others (n 42) para 54. 51 See Pringle (n 3) para 161; cf also more general Ledra Advertising and others (n 42) para 53: ‘the activities pursued by [the Commission and the ECB] within the ESM Treaty commit the ESM alone’. 52 See Case C-370/12 Pringle [2012] ECLI:EU:C:2012:675, View of AG Kokott, paras 192–94. 53 See in particular Poulou, ‘Financial assistance conditionality and human rights protection’ (n 38) 991ff. 54 Ledra Advertising and others (n 42) para 67. 55 Joined Cases C- 8/ 15 P to C- 10/ 15 P Ledra Advertising and others v Commission and ECB [2016] ECLI:EU:C:2016:290, Opinion of AG Wahl, para 70 (hereafter Ledra Advertising, Opinion of AG Wahl). 56 Ledra Advertising, Opinion of AG Wahl (n 55) para 90.

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890 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE 30.58

If, however, one ascribes to the Commission, at least to some extent, the authorship of the MoU, it is consistent, and the Court has a point, to also bind the Commission to the Charter as regards the result of its actions. In this respect, the fundamental rights embodied in the Charter function as a limitation of the Commission’s negotiating power and thus in accordance with their purpose, ie to harness the power of the Union.

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In any event, for the time being the legal practice must respect the case-law of the ECJ according to which the Commission must ensure the consistency of the MoU with the fundamental rights guaranteed by the Charter. However, it still needs to be seen how effective the judicial control by the EU judicature will be. So far, it appears that the EU judiciary is rather reluctant to scrutinize in detail the respect of fundamental rights,57 in particular in the context of rescue measures targeted at restoring the banking sector.58

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In our view, it is unfair to criticize the EU Courts for showing too much judicial restraint. In that respect, it should be borne in mind that the adjudication of these cases often concerns central aspects of social burden-sharing in a society. Sensibly, the measures at issue must be assessed in the context of the national system. Furthermore, the measures adopted in that context are the result of negotiations with the Member State concerned, which is, as the Court is right to stress, best suited to determine the measures which are likely to achieve the objectives pursued59 and is first and foremost the trustee of its citizens’ interests. In this context, the case law of the European Court of Human Rights (ECHR) is particularly telling. So far, the European Court of Human Rights has dismissed all but one action as either inadmissible (because manifestly unfounded) or as in any event unfounded.60 Only in proceedings concerning the introduction of a tax of 98 per cent (from a basic amount) on a severance payment in the event of loss of a job in the public sector the European Court of Human Rights found a violation of the right of property.61

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2. Respect by the Member State implementing MoU measures The question if and to what extent Member States are bound by the fundamental rights of the Charter when implementing the measures foreseen in the MoU is not only of academic interest but has important practical and constitutional implications. In fact, the question of the application of the Charter is inextricably intertwined with the question of the remaining relevance of the national fundamental rights.

57 See Case C-64/16 Associação Sindical dos Juízes Portugueses [2018] ECLI:EU:C:2018:117, paras 46–51 relating to the compatibility with Article 19 TEU of a salary reduction of members of the Portuguese Court of Auditors in the context of the Portuguese rescue programme; Case T-531/14 Sotiropoulou and others v Council [2017] ECLI:EU:T:2017:297, paras 80–91 regarding the pension system—however with regards to the Council decision; and Case C-258/14 Florescu and others [2017] ECLI:EU:C:2017:448, paras 43–60 (hereafter Florescu and others) regarding measures adopted in the context of the rescue programme for Romania based on the balance of payments facility, established under Article 143 TFEU. 58 See Ledra Advertising and others (n 42) paras 71–75. At first blush, it appears that General Court has applied in its judgments Case T-680/13 K Chrysostomides & Co and others v Council and others [2018] ECLI:EU:T:2018:486 (hereafter Chrysostomides & Co and others); and Case T-786/14 Bourdouvali and others v Council and others [2018] ECLI:EU:T:2018:487 (hereafter Bourdouvali and others) a stricter level of scrutiny than that of the ECJ. However, this might simply reflect a different style of reasoning rather than a different approach in substance. 59 Florescu and others (n 57) para 57 regarding measures adopted in the context of the rescue programme for Romania based on the balance of payments facility, established under Article 143 TFEU. 60 See ‘Factsheet: Austerity measures’ available on the website of the ECHR. 61 ECHR, Case of N.K.M. v Hungary (Application No 66529/11).

The Memorandum of Understanding (MoU) 891 In our view, the case-law of the ECJ should be understood as to mean that the implementation of the MoU measures does not open the scope of application of the Charter. In its Ledra ruling the Court clearly held that the Member States ‘do not implement EU law in the context of the ESM Treaty’.62

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These findings are not overruled by the judgment in the case Florescu.63 In that case the Court came to another conclusion with regard to the MoU adopted in the context of the assistance programme for Romania based on the balance of payments facility.64 As a starting point, the Court held that the MoU concluded between Romania and the Commission is an ‘act’ of the Commission in the sense of Article 267 TFEU which may be subject to interpretation by the Court in a preliminary ruling.65 After having established that the MoU, albeit ‘mandatory’,66 did not prescribe the national measure at issue, the Court concluded that nonetheless the national measure was adopted in order to implement the undertakings given by Romania in the MoU, which is part of EU law.67 Recalling its case-law according to which the Charter applies where a Member State adopts measures in the exercise of the discretion conferred upon it by an act of EU law,68 the Court concludes that the Charter is applicable in the present context.69 However, according to our analysis, the reasoning in the case Florescu cannot be transposed to the different legal situation prevailing in the case of the ESM. Most significantly: the MoU concluded by the ESM cannot be assimilated to the MoU adopted in the context of assistance through the balance of payments facility since it is not an EU act.

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In our view, the Court’s refusal to apply the Charter to the national measures implementing the MoU is furthermore justified by valid considerations. Given the limited competences of the EU compared to the wide scope for conditionality in the MoU, an obligation to respect the fundamental rights of the Charter when implementing the measures foreseen by the MoU would amount to an unlawful extension of the scope of EU law in the sense of Article 51(2) of the Charter. In the same instance, the MoU would need to be reinterpreted as some sorts of a source of EU law. More fundamentally, the application of the Charter to national measures of implementation does not appear to be appropriate, given its consequences.

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62 Ledra Advertising and others (n 42) para 67; see also Joined Cases C-105/15 P to C-109/15 P Mallis and others v Commission and ECB [2016] ECLI:EU:C:2016:294, Opinion of AG Wathelet, para 84 (hereafter Mallis and others, Opinion of AG Wathelet). Koen Lenaerts, ‘EMU and the EU’s constitutional framework’ (2014) 39 European Law Review 753, 759 (hereafter Lenaerts, ‘EMU and the EU’s constitutional framework’) asks in this context, whether a beneficiary Member State implementing national measures in the context of a financial assistance programme also fulfils an obligation imposed by EU law, notably the Council decision approving the macroeconomic adjustment programme or, more broadly, Regulation (EU) 472/2013 itself. 63 Florescu and others (n 57). 64 The balance of payments facility is governed by Council Regulation (EC) 332/2002 of 18 February 2002 establishing a facility providing medium-term financial assistance for Member States’ balance of payments [2002] OJ L53/1. The Regulation 332/2002 establishes the procedures applicable to the mutual assistance facility provided for in Article 143 TFEU. Purpose of the balance of payments facility is to grant medium term financial assistance to Member States not being part of the Euro area and threatened, in particular, with difficulties in their balance of payments. 65 Florescu and others (n 57) para 36. 66 Florescu and others (n 57) para 41. 67 Florescu and others (n 57) para 47. 68 See Case C-493/10 N.S. and others [2011] ECLI:EU:C:2011:865, paras 65–86. 69 Florescu and others (n 57) para 48.

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In fact, application of the Charter seems to imply that by the same token the national fundamental rights would be superseded by the Charter. According to case-law national authorities and courts remain free to apply national standards of protection of fundamental rights ‘provided that the level of protection provided for by the Charter, as interpreted by the Court, and the primacy, unity and effectiveness of European Union law are not thereby compromised’.70 Applied to the MoU, the national fundamental rights, as limiting possibly the ‘effectiveness’ of the MoU, could possibly no longer be invoked to shield against the national measures implementing the MoU. Recourse would be limited to fundamental rights accorded by the Charter.

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From a public policy perspective, it could be ill perceived if a Member State whose financial autonomy is seriously impaired and asks therefore for financial assistance would, by doing so, forfeit at the same time the relevance of parts of its constitutional order. Moreover, the national judiciary would no longer have the last word, a reason which might explain the reluctance of national courts to refer questions to the Court in this context.71 Finally, it must be recalled that the protection of fundamental rights guaranteed by the national constitution and ensured by national courts is far from trivial, as practice shows. Conversely and as will be explained below (Section V), there are structural impediments which hinder the EU Courts to intervene intensely in the balancing of the various interests at stake. As a matter of consequence, the protection of fundamental rights might even be better served by the national judiciary than by the EU Courts.

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In summary: Contrary to criticism,72 it must be maintained that the national measures implementing the MoU do not open the scope of application of the fundamental rights of the Charter.73

D. Procedure 30.68

The procedure for the negotiation and conclusion of the MoU is laid down in the ESM Treaty and is supplemented, inasmuch as the involvement of EU institutions is concerned, by EU law, in particular by Regulation 472/2013.

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The first step leading to the conclusion of the MoU is a decision by the Board of Governors to entrust the European Commission, in liaison with the ECB and, wherever possible, together with the IMF,74 with the task of negotiating the MoU with the ESM Member concerned. According to Article 13(3) ESM Treaty, the procedure starts ‘if ’ the Board of Governors has adopted its decision, pursuant to Article 13(2) ESM Treaty, to grant, in principle, stability 70 Case C-617/10 Åklagare v Hans Åkerberg Fransson [2013] ECLI:EU:C:2013:105, para 29; and Case C-399/11 Stefano Melloni v Ministerio Fiscal [2013] ECLI:EU:C:2013:107, para 60. 71 The reluctance to make orders for reference is noticed by Poulou, ‘Financial assistance conditionality and human rights protection’ (n 38) 1018ff. 72 See, in particular, Poulou, ‘Financial assistance conditionality and human rights protection’ (n 38) 1019–24. 73 It is acknowledged that this may lead to a certain lack of consistency in the legal situation, inasmuch as the legal situation in the context of an ESM MoU differs from the situation present when concerned with the MoU in the context of the balance of payments facility. Moreover, the application of the fundamental rights of the Charter to national implementing measures could be triggered—instead of by the MoU—by the Council decision adopted in conjunction with the MoU, see Article 7(2) Regulation (EU) 472/2013. 74 And the Managing Director according to draft Article 13(3) revised ESM Treaty.

The Memorandum of Understanding (MoU) 893 support. The prevailing opinion in practice is that the Board of Governors can take the two decisions at the same time.75 In principle, the wording of Article 13(3) ESM Treaty leaves scope for the Board of Governors to provide guidance for negotiating the MoU, also considering that it is the Board of Governors, which will ultimately be asked to approve the MoU (Article 13(4) ESM Treaty). However, it appears that the Board of Governors has so far not made explicit use of that possibility. The Member States seem to prefer other fora, such as the Eurogroup or other politically higher bodies.76 Even there, Member States seem to be very reluctant to give clear guidance on the structure of the MoU.

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The Member States of EU 27 (at that point in time, Croatia was not yet Member State of the EU) agreed to the allocation of tasks to the Commission and to the ECB by the ESM Treaty.77 That allocation of tasks was found compatible with primary EU law by the Court in its Pringle judgment.78 According to the Court, the Commission and the ECB, when participating in the negotiations with the national authorities, providing their technical expertise, giving advice and providing guidance, act within the limits of the powers granted to them by Article 13(3) ESM Treaty.79 Furthermore, the duties conferred on the Commission and the ECB within the ESM Treaty, important as they are, do not entail any power to make decisions of their own. Finally, the activities pursued by those two institutions within the ESM Treaty commit the ESM alone.80 Nonetheless, the Commission and the ECB continue to be bound by EU law and in particular the Commission retains, within the framework of the ESM Treaty, its role of guardian of the Treaties as resulting from Article 17(1) of the Treaty on European Union (TEU).81

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The European Commission and the ECB carry out these tasks not as part of their respective mandates under the EU Treaties, but on the basis of the ESM Treaty and the decision of the representatives of the governments of the Member States of the European Union.82

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As a second step and in parallel to the negotiation and signing of the MoU, decision-making on EU level takes place. The procedure to be followed at EU level differs depending on whether the conditionality takes the form of a macroeconomic adjustment programme or whether this is not required.83 In case a macroeconomic adjustment programme is required, Article 7 Regulation 472/2013 foresees detailed rules for the adoption, by the Council, of a macroeconomic adjustment programme. Conversely, if no macroeconomic adjustment programme is needed, Article 7(12) Regulation 472/2013 stipulates simply that the Council, acting on a recommendation from the Commission, shall approve the main

30.73

75 As it was done by the Board of Governors in the context of the approval of the third Greek programme on 17 July 2015. 76 See, for example, the ‘Euro Summit Statement’ of 12 July 2015, which formulates preconditions for a future ESM programme for Greece and gives some guidance as to its content. 77 Decision of the Representatives of the Governments of the Member States of the European Union, as adopted at the Conference of the Representatives of the Governments of the twenty-seven EU Member States on 20 June 2011. 78 Pringle (n 3) paras 155–69. 79 Ledra Advertising and others (n 42) para 52. 80 Ledra Advertising and others (n 42) para 53; and Pringle (n 3) para 161. 81 Ledra Advertising and others (n 42) paras 56–59. 82 Referred to in Recital (10) of the ESM Treaty. 83 This has also consequences for the content of the MoU; for details, see Section III.G.1.

894 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE policy requirements for the future MoU to the extent its content falls within the Union competence.84 30.74

Currently, a macroeconomic adjustment programme is required solely for one financial assistance instrument: ESM loans, according to Article 16(2) ESM Treaty. No such requirement applies to the other financial assistance instruments of the ESM (precautionary financial assistance, financial assistance for the recapitalization of financial institutions, primary market support facility,85 the secondary market support facility86 and financial assistance for the direct recapitalization of institutions87).88

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In case a macroeconomic adjustment programme is required,89 the first sub-paragraph of Article 7(1) Regulation 472/2013 specifies that the Member State requesting financial assistance ‘shall prepare, in agreement with the Commission, acting in liaison with the ECB and, where appropriate, with the IMF, a draft macroeconomic adjustment programme’. According to Article 7(2) first subparagraph Regulation 472/2013, the Council ‘acting by a qualified majority on a proposal from the Commission, shall approve the macroeconomic adjustment programme prepared by the Member State requesting financial assistance in accordance with paragraph 1’. Finally, the Commission shall ensure, pursuant to Article 7(2) first sub-paragraph Regulation 472/2013 that the MoU to be signed by the Commission on behalf of the ESM is ‘fully consistent with the macroeconomic adjustment programme approved by the Council’.

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In case a macroeconomic adjustment programme is not required, the third and fourth sub- paragraphs of Article 7(12) Regulation 472/2013 prescribe that: the Council, acting on a recommendation from the Commission, shall, by a decision addressed to the Member State concerned, approve the main policy requirements which the ESM . . . plans to include in the conditionality for its financial support, to the extent that the content of those measures falls within the competence of the Union as laid down by the Treaties. The Commission shall ensure that the [MoU] signed by the Commission on behalf of the ESM . . . is fully consistent with such a Council decision.

84 As described in Section III.B. 85 Unless the primary market purchases are sourced from an ESM loan, cf Article 2 ESM Guideline on the Primary Market Support Facility. 86 Unless the secondary market purchases are sourced from an ESM loan, cf Article 2(1) ESM Guideline on the Secondary Market Support Facility. 87 The instrument for the direct capitalisation of institutions was established on the basis of Article 19 ESM Treaty by a resolution of the Board of Governors. Neither this resolution nor other ESM rules do prescribe that the conditionality must take the form of a macroeconomic adjustment programme. According to Article 4(7) ESM Guideline on Financial Assistance for the Direct Recapitalisation of Institutions conditions detailed in the MoU attached to financial assistance for the direct recapitalisation of institutions will relate to the financial sector of the ESM Member, and, where appropriate, its supervision, corporate governance of institutions, domestic legislation as well as the general economic policy of the ESM Member. Furthermore, institution-specific conditions, which are not required under Articles 107 and 108 TFEU, may apply. 88 Cf the list of financial assistance instruments for which ESM rules do not provide for a macroeconomic adjustment programme, published in accordance with Article 7(12) Regulation (EU) 472/2013 in European Commission, ‘Communication from the Commission concerning two lists of financial assistance instruments under Regulation (EU) 472/2013’ [2013] OJ C300/1: PCCL, ECCL, Primary market support facility (if drawn down under a PCCL or ECCL), Secondary market support facility (if activated outside of a macroeconomic adjustment programme) and financial assistance for the recapitalisation of financial institutions. 89 As it was from the start the case for the third Greek programme.

The Memorandum of Understanding (MoU) 895 As a third step, the Board of Governors needs to approve, in accordance with Article 13(4) ESM Treaty, the MoU and simultaneously authorize the Commission90 to sign the MoU on its behalf.

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The fourth and last step is the signature of the MoU. As regards the signature on behalf of the beneficiary Member State, the ESM Treaty does not impose any requirements as to the national decision-making leading to the conclusion of the MoU nor as regards the signatories. In practice, the MoU is signed, on behalf of the beneficiary Member State, by the Minister of Finance and, in particular in case of conditionality related to the banking sector, also the president of the national central bank and possibly of the national resolution fund. As regards the signature on behalf of the ESM, Article 13(4) ESM Treaty91 requires the signature by the ‘European Commission’, which is done in practice by the Commissioner in charge of economic and financial affairs. Despite the fact that the Commission signs the MoU, the Court consistently ruled that the Commission’s tasks within the ESM Treaty, important as they are, do not entail any decision-making power and commit the ESM alone.92 Nonetheless, the Court equally held that ‘the Commission, as it itself acknowledged in reply to a question asked at the hearing, retains, within the framework of the ESM Treaty, its role of guardian of the Treaties as resulting from Article 17(1) TEU, so that it should refrain from signing a memorandum of understanding whose consistency with EU law it doubts’.93

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E. Parties, review and update, duration Parties to the MoU are solely the ESM and the beneficiary Member State and its central bank. Neither the European Commission, nor the ECB, nor the IMF are parties to the MoU. In case the IMF or the European Commission (via the EFSM) grant financial assistance alongside the ESM, a separate MoU or equivalent document is negotiated with the beneficiary Member State.94

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The MoU is not a static document, but updated regularly through so-called Supplemental MoU, although this is not explicitly foreseen neither in the ESM Treaty nor in the instrument specific Guidelines. However, in line with IMF practice, the conditionality attached to financial assistance needs to be updated to react appropriately on progress and failures made and new challenges in the beneficiary Member’s economy.95 In practice, the Supplemental MoU and the conditionality therein are negotiated in the context of monitoring missions of the European Commission, in liaison with the ECB and, wherever possible, the IMF, which are foreseen in Article 13(7) ESM Treaty. The rules applicable to the negotiation (Article 13(3) ESM Treaty), approval and signing of the MoU (Article 13(4) ESM Treaty)

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90 And the Managing Director, according to draft Article 13(4) revised ESM Treaty. 91 According to draft Article 13(4) revised ESM Treaty, the MoU shall be also signed by the Managing Director. 92 Pringle (n 3) para 161; Ledra Advertising and others (n 42) para 53. 93 Ledra Advertising and others (n 42) para 59. 94 As this was the case for example for the EFSF programme for Ireland—the Letters of Intent of the government of Ireland describing the policies that Ireland intended to implement in the context of its request for financial support from the IMF are available on the IMF website . 95 accessed 5 February 2020; Michael Ioannidis, ‘EU Financial Assistance Conditionality after “Two Pack” ’ (2014) 74 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 61, 67ff (hereafter Ioannidis, ‘EU Financial Assistance Conditionality after “Two Pack” ’).

896 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE apply to the negotiation, approval and signing of the Supplemental MoU mutatis mutandis. However, the Commission, the ECB and, if applicable, the IMF are considered to be tasked not only with the initial negotiation of the MoU but also with any further supplement to it; therefore another decision by the Board of Governors is not necessary to entrust these institutions to also negotiate any subsequent Supplemental MoU. 30.81

The duration of the MoU, meaning the time in which the envisaged measures should be implemented, is not defined. It covers the same period, in which ESM financing is available. In practice, the duration was often set at three years,96 probably inspired by the practice of IMF loans,97 Experience shows however that a three year horizon can be too short, in particular in order to conduct properly structural reforms.98

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The duration of the MoU is all but trivial. During the programme period, the recipient state is required to implement the conditions; otherwise no funds from the ESM can flow. Following the end of the programme, the 17th recital of the ESM Treaty stipulates that the ‘post-programme surveillance’ will be carried out by the Commission, which will be complemented by the so-called ‘Early Warning System’ based on Article 13(6) ESM Treaty.99 What these instruments have in common, however, is that they cannot oblige the beneficiary Member State to implement reforms. In principle, the beneficiary Member State is even legally free to undo reforms without the ESM having any effective legal means to intervene. This reflects the compromise reached between the Member States when the EFSF and later the ESM were established. It was assumed that only for a limited period a State should be subject to the ‘strict conditionality’, but that this should not apply for the entire maturity of the loan. However, since then the coordinates have shifted. Over the years since the EFSF was founded, the maturity of the loans have become significantly longer, currently with peaks of over forty years for individual loan tranches. This contrasts with the IMF’s instruments, which have maximum maturities of five up to ten years, depending on the instrument.

F. Legal nature 30.83

The ESM Treaty does not specifically address the question whether the MoU is to be understood as legally binding. On the one hand, the terminology used, ‘memorandum of understanding’ in comparison to the ‘financial assistance facility agreement’, indicates that the MoU should, in contrast to the FFA, not to be construed as a legally binding document. On the other hand, the laborious approval process, the signature by signatories empowered to represent the parties legally, and the language used in the MoU can be seen as elements indicating that the MoU, or at least parts of it, should be considered as legally binding. Furthermore, compliance with the MoU is a requirement for the disbursement and is assessed by the Commission and decided upon by the Board of Directors. The Member State

96

The MoU attached to ESM financial assistance to Spain covered only 1.5 years. accessed 5 February  2020. 98 ESM Independent Evaluator, ‘EFSF/ESM Financial Assistance’ (2017) 77. 99 And as reflected in draft Recital (17) revised ESM Treaty. 97

The Memorandum of Understanding (MoU) 897 must apply any funds disbursed in accordance with the MoU and a breach of this obligation may constitute an ‘event of default’ under the ESM lending documentation.100 The ECJ has not yet taken a clear position as regards the MoU concluded by the ESM; the Advocates General Wathelet and Wahl101 have explicitly not taken a position.102 Interestingly, the ECJ held in its case Florescu that the MoU agreed between the Commission and Romania in the context of financial assistance via the balance of payments facility, ‘constitutes an act of an EU institution within the meaning of Article 267(b) TFEU’103 and that the MoU is ‘mandatory’104 and ‘part of EU law’.105 It needs to be seen, if and to what extent the finding that the MoU concluded in the context of the balance of payments facility is ‘binding’ in nature and is therefore to be considered as ‘law’ can be transposed to the MoU concluded in the framework of the ESM.106

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National Courts have come to divergent findings. Whereas the Simvoulio tis Epikratias (Council of State, Greece) did not consider the MoU as legally binding,107 the Tribunal Constitucional de Portugal (Portuguese Constitutional Court) decided differently.108

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G. Content The European Court of Auditors concludes in its Special Report that ‘financial support for Greece was conditional upon the implementation of a broad range of reforms addressing fiscal, financial and structural imbalances. The scope of the reforms evolved, but from the outset covered almost all functions of the Greek State,109 meaning in some cases that very deep structural imbalances had to be corrected’.110

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The preceding quote is, on the one hand, topical for one feature of many MoUs adopted so far—the far-ranging scope of the measures foreseen. On the other hand, it is in stark contrast, at least at first blush, with the scarcity of guidance, both at EU and at ESM level, as to the content of the MoU.

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100 See Sections 10.1.2 and 3.7 General Terms for ESM Financial Assistance Facility Agreements; other commitments under the MoU are explicitly not taken into consideration for events of default. See, for further explanations of the ESM lending documents Chapter 33 Section III. 101 Ledra Advertising, Opinion of AG Wahl (n 55) left this point deliberately unanswered, cf fn 26. Mallis and others, Opinion of AG Wathelet (n 62) paras 85ff avoided in a less explicit way to take position, but referred to ‘the fear that the MoU is not legally binding’ an assumption which ‘is confirmed by the decisions of certain national courts’. 102 Cf Mallis and others, Opinion of AG Wathelet (n 62) paras 85–88 with reference to the case-law of the Simvoulio tis Epikratias (Council of State, Greece) considering the MoU not as a legally binding. 103 Florescu and others (n 57) para 35. 104 Florescu and others (n 57) para 41. 105 Florescu and others (n 57) para 47. 106 See for an overview of the debate Poulou, ‘Financial assistance conditionality and human rights protection’ (n 38) 1009ff. 107 Cf Mallis and others, Opinion of AG Wathelet (n 62) paras 87f with reference to the case-law of the Simvoulio tis Epikratias (Council of State, Greece); see also Ioannidis, ‘EU Financial Assistance Conditionality after “Two Pack” ’ (n 95) 99. 108 See references to the Decision No 187/2013 relating to the IMF and EFSM of the Portuguese Constitutional Court in Ioannidis, ‘EU Financial Assistance Conditionality after “Two Pack” ’ (n 95) 99. 109 Emphasis added. 110 European Court of Auditors, ‘The Commission’s intervention in the Greek financial crisis’ (2017) Special Report No 17/2017, para 139.

898 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE 30.88

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The MoUs adopted so far, which required in all but one case111 a macroeconomic adjustment programme, had some features in common: an overhaul of the banking sector including its downsizing and deleveraging; fiscal consolidation to correct excessive government deficits including by limiting expenditure and increasing the efficiency of public spending; enhanced revenue collection; improved functioning of the public sector; implementation of structural reforms to support competitiveness and sustainable and balanced growth.

1. Relevant rules Neither the ESM legal framework nor the relevant rules of EU law give much guidance as to the content of the MoU.

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The ESM Treaty is relatively vague in respect of the required conditionality. According to Article 12(1) ESM Treaty, the ‘strict conditionality’ shall be ‘appropriate’ to the financial assistance instrument chosen and ‘may range from a macroeconomic adjustment programme to continuous respect of pre-established eligibility conditions’.

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Currently, the ESM Treaty does not specify whether there is an instrument for which the conditionality consists solely in ‘the continuous respect of pre-established eligibility conditions’; however, according to the guideline on precautionary financial assistance, precautionary financial assistance in the form of the Precautionary Conditioned Credit Line (PCCL) comes very close to it.112 As mentioned before,113 a macroeconomic adjustment programme is required solely for one financial assistance instrument: ESM loans, according to Article 16(2) ESM Treaty. No such requirement applies to the other financial assistance instruments of the ESM (precautionary financial assistance, financial assistance for the recapitalization of financial institutions, primary market support facility114 and the secondary market support facility115 and financial assistance for the direct recapitalization of institutions116).

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According to Article 13(3) ESM Treaty, ‘the content of the MoU shall reflect the severity of the weaknesses to be addressed and the financial assistance instrument chosen’. In addition, the MoU shall be ‘fully consistent with the measures of economic policy co-ordination

111 Spain was accorded financial assistance via the instrument for the recapitalisation of financial institutions, which requires financial sector specific conditionality but no macroeconomic adjustment programme (see Article 4(5) lit a ESM Guideline on Financial Assistance for the Recapitalisation of Financial Institutions). 112 Article 2(3) ESM Guideline on Precautionary Financial Assistance sets out that the ‘beneficiary ESM Member shall ensure continuous respect of the eligibility criteria after the PCCL is granted’. These could be seen as the (exclusive) policy conditions attached to the PCCL and detailed in the MoU pursuant to Article 3(4) lit a ESM Guideline on Precautionary Financial Assistance; see also Commission, ‘The “two-pack” on economic governance: Establishing an EU framework for dealing with threats to financial stability in euro area member states’ (2013) European Economy Occasional Papers 147, 12. In the future, conditionality attached to PCCL will consist of continuous respect of pre-defined eligibility criteria, cf draft Article 14(2) revised ESM Treaty. 113 See Section III.D. 114 Unless the primary market purchases are sourced from an ESM loan, cf Article 2 ESM Guideline on the Primary Market Support Facility. 115 Unless the secondary market purchases are sourced from an ESM loan, cf Article 2(1) ESM Guideline on the Secondary Market Support Facility. 116 The instrument for the direct capitalisation of institutions was established on the basis of Article 19 ESM Treaty by a resolution of the ESM’s Board of Governors. Neither this resolution nor other ESM rules prescribe that the conditionality must take the form of a macroeconomic adjustment programme, see above (n 87).

The Memorandum of Understanding (MoU) 899 provided for in the TFEU, in particular with any act of European Union law, including any opinions, warning, recommendation or decision addressed to the ESM Member concerned’. The instrument-specific guidelines do provide for some additional guidance as to the content of the MoU. For example, the guidelines on financial assistance for the recapitalization of financial institutions and for the direct recapitalization of institutions provide for some further (financial sector related) elements to be addressed in the MoU.117 Similarly, the guideline on precautionary financial assistance indicates the content of policy conditions attached to a PCCL or an Enhanced Conditions Credit Line (ECCL) respectively.118

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Turning to EU law, the requirements differ in respect of whether the conditionality shall take the form of a macroeconomic adjustment programme.

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In case a macroeconomic adjustment programme is required, the first sub-paragraph of Article 7(1) Regulation 472/2013 specifies that the Member State requesting financial assistance shall prepare a ‘draft macroeconomic adjustment programme which shall build on and substitute any economic partnership programme under Regulation (EU) 473/2013 and which shall include annual budgetary plans’.

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As regards the content of the draft macroeconomic adjustment programme, the second to fifth sub-paragraphs of Article 7(1) Regulation 472/2013 prescribe:

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The draft macroeconomic adjustment programme shall address the specific risks emanating from that Member State for the financial stability in the euro area and shall aim at rapidly re-establishing a sound and sustainable economic and financial situation and restoring the Member State’s capacity to finance itself fully on the financial markets. The draft macroeconomic adjustment programme shall be based on the assessment of the sustainability of the government debt referred to in Article 6, which shall be updated to incorporate the impact of the draft corrective measures negotiated with the Member State concerned, and shall take due account of any recommendation addressed to that Member State under Articles 121, 126, 136 or 148 TFEU and of its actions to comply with any such recommendation, while aiming at broadening, strengthening and deepening the required policy measures. The draft macroeconomic adjustment programme shall take into account the practice and institutions for wage formation and the national reform programme of the Member State concerned in the context of the Union’s strategy for growth and jobs. The draft macroeconomic adjustment programme shall fully observe Article 152 TFEU and Article 28 of the Charter of Fundamental Rights of the European Union. 117 According to Article 4(5) lit a ESM Guideline on Financial Assistance for the Recapitalisation of Financial Institutions the policy conditions relate ‘to the specific institution(s) concerned, the beneficiary’s financial sector and its supervision, corporate governance of financial institutions, and domestic legislation related to resolution and restructuring in or of the financial sector’. Article 4(7) lit a ESM Guideline on Financial Assistance for the Direct Recapitalisation of Financial Institutions states that policy conditions in the MoU relate ‘to the requesting ESM Member’s financial sector and, where appropriate, its supervision, corporate governance of institutions, and relevant domestic legislation’ but may also ‘include, where appropriate, requirements related to the general economic policy’. 118 For policy conditions attached to a PCCL, see n 112. For policy conditions attached to an ECCL, Article 2(4) ESM Guideline on Precautionary Financial Assistance describes that the beneficiary ESM Member shall continuously respect the eligibility criteria, which were met at the time of its request and adopt corrective measures to address its failure to meet other eligibility criteria. Moreover, corrective measures shall aim at avoiding any future problems in terms of market access.

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According to Article 7(2) Regulation 472/2013, the Council shall approve the macroeconomic adjustment programme prepared by the Member State and the Commission shall ensure that the MoU to be signed by the Commission on behalf of the ESM is ‘fully consistent with the macroeconomic adjustment programme approved by the Council’.

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If the ESM rules do not require a macroeconomic adjustment programme,119 the third and fourth sub-paragraphs of Article 7(12) Regulation 472/2013 prescribe that the Commission shall ensure that the MoU signed by the Commission on behalf of the ESM is ‘fully consistent’ with the decision of the Council approving the main policy requirements which the ESM plans to include in the conditionality for its financial support, ‘to the extent that the content of those measures falls within the competence of the Union as laid down by the Treaties’.

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In addition, according to the praetorian evolution of the legal framework by the ECJ, the Commission must not sign an MoU which is not compatible with EU law, including the fundamental rights of the Charter.120

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Finally, the conditionality is necessary to make the granting of assistance compatible with the no bail-out clause. It must be ensured that the beneficiary Member State remains committed to sound budgetary policies.121 Accordingly, the design of the conditionality must take into account the impact on the pursuit of sound budgetary policies.

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2. Analysis of the applicable framework The legal framework relevant to the MoU is an interesting mix, combining various rules and principles which give some guidance as to the content of the MoU whilst leaving ample room for discretion. In essence, we can distinguish between target-oriented provisions, provisions concerned with ensuring consistency with EU economic policies and, finally, provisions setting outer limits to the scope of action.

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Most important are the target-oriented provisions of Article 12(1) and 13(3) ESM Treaty according to which the conditionality must be commensurate to the financial assistance instrument and ‘reflect the severity of the weaknesses to be addressed’.

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The possible scope of action is, thus, determined by the weaknesses, and virtually unlimited. Almost all functions of the state can possibly come into the ambit of the MoU measures, as this was in practice the case for Greece, according to the findings of the European Court of Auditors.122 For instance, defence expenditure and the financing of political parties were addressed in the MoU concluded for the third Greek programme.123

119 As this is currently the case for precautionary financial assistance, financial assistance for the recapitalization of financial institutions, primary market support facility (unless sourced from an ESM loan) and the secondary market support facility (unless sourced from an ESM loan) and financial assistance for the direct recapitalization of institutions. 120 See Section III.B. 121 See Section II.A. 122 European Court of Auditors, ‘The Commission’s intervention in the Greek financial crisis’ (2017) Special Report No 17/2017, para 139. 123 See for example Memorandum of Understanding (19 August 2015) 7 and 31; Supplemental Memorandum of Understanding (16 June 2016) 39.

The Memorandum of Understanding (MoU) 901 A first and important limitation is the requirement that the MoU must be appropriate to the financial instrument chosen. Whereas a full blown macroeconomic adjustment programme is required for the instrument of ESM loans, this is not the case for the other financial assistance instruments.124

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The requirement of consistency with the EU economic policy coordination in general and specific to the country in question125 gives some further guidance as to the content of the MoU. Furthermore, Article 7(1) Regulation 472/2013 calibrates the target of the MoU measures insofar as it puts some emphasis on the objective to achieve a quick turn-around: the macroeconomic adjustment programme ‘shall aim at rapidly re-establishing a sound and sustainable economic and financial situation and restoring the Member State’s capacity to finance itself fully on the financial markets’.126

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It is difficult to distill any precise guidance as to the possible content of the MoU from the requirement that the strict conditionality shall ensure that the beneficiary remains committed to sound budgetary policies.

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The requirement of compatibility with EU law, including the fundamental rights of the Charter, sets one hard limit to the measures to be included in the MoU.

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It is noteworthy that the principle of conferral of powers, which normally limits the scope of action of international organizations such as the ESM or supranational organizations such as the EU,127 does not provide for a meaningful limitation of the scope of the MoU or the macroeconomic adjustment programme. As Article 7(12) Regulation 472/2013 acknowledges implicitly, the scope of the MoU can go beyond the powers of the EU. However, the beneficiary Member State itself, which prepares the draft macroeconomic adjustment programme128 and negotiates the MoU benefits as a sovereign from comprehensive powers and can, within its constitutional framework, decide to have recourse to all tools available to address its difficulties.

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In any event, so long the measures in question can be regarded as conducive to the attainment of the targets to be achieved, it will be difficult to establish an objective limit as to the possible reach of the MoU. This even more so, since the targets themselves are particularly wide. Almost every function of the state can come into the ambit of the MoU when regarded as expenditure.129

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124 See Section III.G.1. In practice, however, financial assistance has been granted by the EFSF/ESM almost exclusively in the form of loans and accordingly, conditionality took the form of a macroeconomic adjustment programme. Only in the case of Spain, a full blown macroeconomic adjustment programme wasn’t needed and the ESM supported Spain through the instrument of financial assistance for bank recapitalization (Article 15 ESM Treaty). 125 Article 13(3) ESM Treaty; Article 7(2) and (12) Regulation 472/2013. 126 Although Article 7(1) Regulation 472/2013 applies only to the draft macroeconomic adjustment programme, it can be taken as an expression of the target of MoU measures in general. 127 See Article 5(1) and (2) TEU. 128 Cf Article 7(1) Regulation 472/2013. 129 Poulou, ‘Financial assistance conditionality and human rights protection’ (n 38) 997: ‘free from specific substantial requirements or the exclusion of any policy field from its scope, financial assistance conditionality may regulate the complete spectrum of legal relations within the recipient Member State’.

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In sum, the legal framework is characterized namely by target oriented provisions. These provisions do not allow for delimiting the potential scope of the MoU in an object related manner. This leaves ample room for discretion in the negotiation of the MoU conditionality.

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This discretion might be conducive to finding a compromise and tailoring the conditionality to the specific needs, weaknesses and strengths of the beneficiary Member State and thus to ensure that the ESM adjustment programmes are truly target oriented. All the same, the ample discretion implies accrued responsibility of all parties involved in negotiating the MoU and drawing up the macroeconomic adjustment programme. If the parties have in principle aligned views on the path to be followed, this is less of a problem. If, however, the reform agenda to be followed is very controversial, the democratic legitimacy of the Commission and possibly of the IMF to negotiate and possibly push for certain reform elements can be disputed. In practice, it appears that in such case the discussion amongst the institutions and the Member State requesting financial assistance will be escalated and ultimately decided, if need be, by the Heads of State or Government in the context of a Euro Summit, as this was the case for the third Greek programme.130

H. Monitoring, enforcement 30.112

During the programme period, compliance with the conditionality attached to the financial assistance (as described in the MoU) is monitored, according to Article 13(7) ESM Treaty, by the European Commission, in liaison with the ECB and, wherever possible, together with the IMF.131 The European Commission issues a so-called compliance report, on the basis of which the Board of Directors decides to disburse tranches under the loan subsequent to the first tranche (Articles 16(5) and 13(7) ESM Treaty).132

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Furthermore, Article 7(4) Regulation 472/2013 prescribes on EU level the monitoring of the progresses in the implementation of the macroeconomic adjustment programme and regular reporting (every quarter) to the Economic and Financial Committee (EFC).

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The ESM Treaty and the ESM’s internal law do not foresee a specific mechanism to legally enforce MoU compliance. According to the ‘cash for reforms’ approach, fundamental to the design of the ESM, the beneficiary Member State is incentivized to comply with the MoU as this is the prerequisite for the receipt of financial assistance whereas non-compliance with the MoU entails a draw stop. This cautious approach reflects the consideration that, in any event, the ESM has little means to ‘enforce’ MoU compliance and that any attempt to do so could be counterproductive. In fact, experience shows that programme success is contingent on the beneficiary Member State taking ownership of the programme. If the 130 Cf Euro Summit Statement (SN 4070/15, Brussels, 12 July 2015) accessed 5 February  2020. 131 According to draft Article 13(7) revised ESM Treaty, both the Managing Director and the Commission are tasked together to monitor compliance. 132 Similar mechanisms are foreseen for the other financial assistance instruments, cf Article 14(5) ESM Treaty for precautionary financial assistance; Article 15(5) ESM Treaty for financial assistance for the re-capitalisation of financial institutions of an ESM Member; Article 17(5) ESM Treaty for the primary market support facility; Article 6(1) and (5) of the ESM Guideline on the Secondary Market Support Facility for the secondary market support facility; and Article 6(3) of the ESM Guideline on Financial Assistance for the Direct Recapitalisation of Institutions for the direct recapitalisation of institutions.

The Memorandum of Understanding (MoU) 903 programme was perceived as an octroi being enforced in case of non-compliance, public acceptance in the beneficiary Member State would be undermined. Moreover, and from an EU law perspective, the Council approves, according to Article 7(2) or (12) Regulation 472/2013, by decision addressed to the Member State concerned, the macroeconomic adjustment programme or the main policy requirements attached to ESM financial assistance to the extent these requirements fall within the competence of the Union. In case of a significant deviation by a Member State from the macroeconomic adjustment programme, the Council may decide by qualified majority and on a proposal from the Commission that the Member State does not comply with the applicable policy requirements (Article 7(7) Regulation 472/2013). As a consequence of such decision, the Member State concerned shall, in close coordination with the programme partner institutions, take measures to stabilize markets and preserve the good functioning of its financial markets. Other than that, the Regulation 472/2013 does not foresee any consequences of either non-compliance of the Member State with its macroeconomic adjustment programme, or the Council decision establishing such non-compliance or the Council Implementing Decision approving the main and EU relevant policy requirements pursuant to Article 7(12) Regulation 472/2013.

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I. Post programme period The significance of the distinction between the ‘post programme period’ and the ‘programme period’ does not emerge from the text of the ESM Treaty but is nonetheless fundamental.133 Throughout the programme period, the beneficiary Member State implements the reforms foreseen in the MoU and, if the conditions are met, the ESM makes the corresponding disbursements. Differently than in the context of assistance by the IMF, the beneficiary Member State does in general not start paying back the principal during the programme period. Once the programme comes to an end,134 the beneficiary Member State does no longer need to implement reforms according to the MoU and can no longer perceive any disbursements, even if there are remaining funds within the programme envelope as approved by the Board of Governors, which have not been disbursed yet. Furthermore, the repayment of the principal will commence, though not necessarily from ‘day one’ of the post programme period.135

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The ESM operates an early warning system to ensure that it receives any repayments due by the beneficiary Member States in a timely manner (Article 13(6) ESM Treaty).136 The Board of Directors has established an early warning system procedure, which describes the elements to be taken into account (such as the beneficiary Member’s short-term liquidity, market access and medium to long-term debt sustainability) in order to detect financial assistance repayment risks and to allow for the adoption of corrective measures. The ESM applies its

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133 See, however, the reference to post-programme surveillance in Recital (17) ESM Treaty. 134 Regularly, the programme period is set at three years; it can be extended by mutual agreement as this happened several times for the second Greek programme under the EFSF. 135 The repayment dates are set in the relevant Confirmation Notice, see for more details Chapter 33 Section III.B. 136 EFSF Guarantors agreed that the ESM early warning system will be also applied to the EFSF Beneficiaries Greece, Ireland, and Portugal.

904 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE early warning system until the relevant beneficiary ESM Member has repaid any amounts due under the financial assistance programme.137 30.118

In addition, Member States are under EU post-programme surveillance from the end of the programme until they have repaid at least 75 per cent of ESM financial assistance (Article 14 Regulation 472/2103; cf. also recital 17 of the ESM Treaty).138 The duration of post- programme surveillance can be extended by the Council by reversed qualified majority voting on a proposal from the Commission, if risks to the financial stability and fiscal sustainability of the Member State persist. EU post-programme surveillance aims at preventing the reoccurrence of serious fiscal and financial stability problems in the former beneficiary Member State.139 During EU post-programme surveillance, the relevant Member State’s economic, fiscal and financial situation is assessed by the Commission, in liaison with the ECB, in regular (in practice bi-annual)140 review missions. Moreover, specific reporting requirements may apply to the Member State, and the Council may, based on a proposal by the Commission, decide by reverse qualified majority voting, to recommend corrective measures to the Member State under EU post-programme surveillance.

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At the end of the ESM stability support programme for Greece, the Commission decided to activate enhanced surveillance for Greece pursuant to Article 2(1) Regulation 472/2013 rather than to rely solely on the usual post-programme surveillance framework. It was considered that Greece continues to face risks to its financial stability with potential spill-over effects on other euro area Member States.141 This will not only lead to enhanced reporting requirements by Greece but also to a tighter review and reporting schedule by the institutions (quarterly instead of biannually) than under the ordinary post-programme surveillance framework (cf Article 3 Regulation 472/2013 on the one hand, Article 14 Regulation 472/2013 on the other hand).

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In practice, the ESM and the Commission combine missions conducted under the two respective frameworks to enhance effectiveness and reduce the burden for the beneficiary ESM Member.142

137 Without prejudice to early repayments or other forms of reprofiling of the repayment schedules, the ESM early warning system will be applied to Cyprus, Greece, Ireland, Portugal, and Spain until 2031, 2060, 2042, 2040, and 2027, respectively (information available at accessed 5 February 2020). 138 Without prejudice to early repayments, EU post-programme surveillance is expected to apply to Cyprus, Ireland and Portugal at least until 2029, 2031, and 2035, respectively (information available at accessed 5 February  2020). 139 René Repasi and Fabian Amtenbrink, ‘Compliance and Enforcement in Economic Policy Coordination in EMU’ András Jakab and Dimitry Kochenov (eds), The Enforcement of EU Law and Values: Ensuring Member States Compliance (OUP 2017) 145, 165 therefore call post-programme surveillance an ‘ex ante compliance mechanism’. 140 This bi-annual schedule is mainly due to the bi-annual reporting obligations of the Commission to the competent committee of the European Parliament, the EFC and the national parliament of the Member State under post-programme surveillance pursuant to Article 14(3) Regulation 472/2013. 141 Commission, ‘Commission Implementing Decision of 11 July 2018 on the activation of enhanced surveillance for Greece’ C (2018) 4495 final. 142 Cf also Section 3 of the Memorandum of Understanding on the working relations between the European Commission and the European Stability Mechanism (27 April 2018) accessed 5 February 2020; and Section 6 of the Joint Position on Future Cooperation between the European Commission and the ESM (14 November 2018) accessed 5 February 2020). In the context of enhanced surveillance for Greece: cf Recital (17) C (2018) 4495 final.

Accountability 905

IV. Accountability It is a common prejudice that the ESM lacks accountability and democratic oversight. Admittedly, the governance is complex and the involvement of various actors may blur the responsibilities and makes it more difficult to hold the various actors accountable. However, we are of the view that these issues are inextricable interwoven with the nature of the ESM, being a specific blend of intergovernmental and EU structures and accordingly labelled as ‘semi-intergovernmental’.143 Accordingly, in the given circumstance, the critique seems to be unfair. In any event, as long as the constitutional framework of the EMU stays as it is, it is not expected that the ESM’s governance could be changed significantly.

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A. ESM Governance, Oversight, Transparency The ESM highest decision-making body is the Board of Governors. It is composed of the finance ministers of the euro area Members, each of them being a Governor (cf Article 5(1) ESM Treaty). The Board of Governors takes, pursuant to Article 5(6) ESM Treaty, the most important decisions by mutual agreement (eg to provide stability support, to mandate the European Commission in liaison with the programme partners to negotiate the conditionality attached to financial assistance, to change the list of financial assistance instruments pursuant to Article 19 ESM Treaty, to change the capital stock, to decide upon the accession of new Members etc). Article 5(7) ESM Treaty contains a list of decisions that the Board of Governors takes by qualified majority. The member of the European Commission in charge of economic and monetary affairs and the President of the ECB may participate in the meetings of the Board of Governors as observers, Article 5(3) ESM Treaty.

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The Director and the alternate Director are appointed by the Governor of the respective ESM Member. The Board of Directors shall ensure that the ESM is run in accordance with the ESM Treaty and its By-Laws (Article 6(6) ESM Treaty) and defines the direction, in which the Managing Director conducts the current business of the ESM (Article 7(5) ESM Treaty). Generally and if not otherwise provided, the Board of Directors takes its decisions by qualified majority (Article 6(5) ESM Treaty).144 Other decisions by the Board of Directors require mutual agreement145 or simple majority.146 The observers from the Commission and the ECB to the meetings of the Board of Directors are appointed, respectively, by the member of the European Commission in charge of economic and monetary affairs and the President of the ECB, Article 6(2) ESM Treaty.

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If decisions by the Board of Governors or by the Board of Directors are taken by qualified majority, 80 per cent of the votes cast are required, according to Article 4(5) ESM Treaty. The voting rights of the ESM Members correspond, pursuant to Article 4(6) ESM Treaty, to

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143 Cf Keppenne, ‘Institutional Report’ (n 15) 203. 144 Such as the approval of the financial assistance facility agreement and, where applicable, the first disbursement of financial assistance, the adoption of the instrument-specific guidelines, and the investment and borrowing guidelines. 145 Such as maintaining precautionary financial assistance in the form of a credit line (Article 14(5) ESM Treaty) or disbursements under an ESM loan subsequent to the first tranche (Article 16(5) ESM Treaty). 146 Distribution of dividends (Article 23(1) ESM Treaty), capital calls pursuant to Article 9(2) ESM Treaty.

906 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE the number of shares allocated to them in the authorized capital stock.147 The authorized capital stock is based on the contribution key of the ESM which, in turn, is based, according to Article 11(1) ESM Treaty, on the ECB capital key. Currently, France and Germany have each more than 20 per cent of the ESM’s shares, giving them each the possibility to block a decision (by the Board of Governors or by the Board of Directors) to be taken by qualified majority. It should be added, that the ESM follows in practice a consensual approach and the examples of decisions which were not taken by consent, even where this was not required, are extremely rare. 30.125

Traditionally, the meetings of the Board of Governors are preceded by meetings of the Eurogroup and the meetings of the Board of Directors by meetings of the Eurogroup Working Group (EWG). These successive meetings had a legal sense under the EFSF, since according to the EFSF framework agreement decision-making of the Member States as Guarantors shall take place within the framework of the Europgroup or the EWG.148 No such mechanism applies in the context of the ESM and the continuous practice reflects today a well-established tradition which might be maintained for convenience in that way that Eurogroup or the EWG are used as discussion fora whereas the actual decision-making takes place in the ESM board meetings.

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According to the Council’s response reported in Bourdouvali and Others v Council and Others,149 the duplicity of decision-making on the EU and intergovernmental level reflects ‘a common practice that has developed since the beginning of the crisis of the euro area, according to which conditionality attached to assistance—that has been agreed intergovernmentally between the beneficiary Member State and the ESM—is coupled with Council Decisions based on Article 136 TFEU for the purpose of ensuring the correspondence and consistency between the intergovernmental and Union spheres of action’.150

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The Managing Director is the legal representative of the ESM and conducts its current business (Article 7(5) ESM Treaty). The Board of Governors appoints him or her for a once renewable term of office of five years (Article 7(1) and (2) ESM Treaty). From an institutional perspective, the most important prerogative of the Managing Director is the power to make a binding capital call to ESM Members, Article 9(3) ESM Treaty.

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The duties of the Governors are not specified in the ESM Treaty. Given that the ESM Members shall appoint a member of their government with the responsibility for finance as their Governor, it is assumed that the Governors and the Directors act, also in the context of the ESM, under the control of their respective government, being generally allowed to follow national instructions in their voting. This understanding is also the basis for the existence of extensive national procedures with the view to involve national parliaments in ESM decision-making.

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The Board of Directors approves annually the ESM budget (Article 25 ESM By-Laws). It keeps the accounts and draws up the annual accounts (Article 21 ESM By-Laws). According to Article 29 ESM Treaty, the ESM accounts shall be audited by independent external

147

Very critical Schwarz, ‘A Memorandum of Misunderstanding’ (n 1) 391ff. Cf Section 10(8) EFSF Framework Agreement. 149 Bourdouvali and others (n 58). 150 Bourdouvali and others (n 58) para 189. 148

Accountability 907 auditors; and according to Article 27 ESM Treaty, the annual accounts are approved by the Board of Governors. The ESM Annual Report, approved by the Board of Governors, is published on the ESM website (Article 27(2) ESM Treaty and Article 23 ESM By-Laws). Article 28 ESM Treaty requires an internal audit function according to international standards. Furthermore, the ESM is subject to oversight by its Board of Auditors, composed of five members, including two members from supreme audit institutions of Member States and one from the European Court of Auditors, Article 30(1) ESM Treaty. In addition, the ESM, in conformity with best practice, opted for additional evaluation by an independent High Level Evaluator, which led to a report on EFSF/ESM financial assistance in 2017.151

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Inasmuch as EU institutions are involved in the conduct of the ESM operations, their activities are accountable, according to the general rules, to the European Parliament and to the European Court of Auditors. The European Court of Auditors has audited in two reports the conduct of the Commission in the context of rescue programmes in general152 and in particular related to Greece.153 Similarly, the conduct of the IMF is subject to scrutiny by the IMF Independent Evaluation Office, which has rendered its report in 2016.154 Furthermore, the conduct of national players within the context of the ESM can possibly be made the subject of national parliamentary enquiry, as this was the case in Ireland (relating to the EFSF).155

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Most documents, relevant to the programme activity of the ESM, are published on the ESM’s website or are available on the website of the Commission. In addition, the ESM website is a source for exhaustive information spanning the entire range of the ESM’s activities. Access to documents drawn up or held by the ESM is governed by Article 17 ESM By-laws.

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B. Deficits in (democratic) accountability? It is often claimed that the ESM lacks democratic accountability.156 It is true that the ESM Treaty does not provide for any role of the European Parliament (EP)157 and likewise the relevant EU legal framework accords solely a limited role to the EP.

151 Available at accessed 5 February 2020. A second evaluation focussing on the Greek programme, which was still ongoing and therefore not evaluated as part of the first evaluation report, is expected to be concluded by June 2020. 152 European Court of Auditors, ‘Financial assistance provided to countries in difficulties’ (2015) Special Report No 18/2015. 153 European Court of Auditors, ‘The Commission’s intervention in the Greek financial crisis’ (2017) Special Report No 17/2017. 154 IMF Independent Evaluation Office, ‘The IMF and the Crises in Greece, Ireland, and Portugal’ (2016). 155 Cf Houses of the Oireachtas, ‘Report of the Joint Committee of Inquiry into the Banking Crisis’ (2016). 156 Schwarz, ‘A Memorandum of Misunderstanding’ (n 1) 400–04; Ioannidis, ‘Europe’s new transformations’ (n 1) 1276; cf Fabian Amtenbrink, ‘General report’ in Ulla Neergaard, Catherine Jacqueson, and Jens Hartig Danielsen (eds), The Economic and Monetary Union: Constitutional and Institutional Aspects of the Economic Governance within the EU (Djøf Publishing 2014) 104–12 reporting the critique by the national rapporteurs. 157 However, the draft revised ESM Treaty mentions the EP twice: draft Article 30(5) revised ESM Treaty establishes that the annual report by the Board of Auditors shall be made accessible not only to the national parliaments, supreme audit institutions and the European Court of Auditors but also to the EP. This reflects current practice based on Article 24(6) ESM By-Laws. Furthermore, Members acknowledge in the draft 7th Recital of the revised ESM Treaty the current practice of an informal and voluntary dialogue between the Managing Director and the EP.

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908 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE 30.134

However, it is in our view too hasty to equate the absence of a significant role of the EP with a democratic deficit of the ESM. The ESM’s capital is sourced from national fiscal revenue and not from the EU budget. Therefore, a more prominent role for the EP cannot be claimed on the basis of its budgetary rights. Moreover, democratic accountability towards the European Parliament is required for decisions taken at the level of the EU and does not arise for decisions taken in the context of an intergovernmental organization among EU Member States.158

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Admittedly, the MoU is of great importance as a document steering the economic policy of a Member State for years to come. Therefore, one may be tempted to suggest from a more political perspective that the EP, representing the European citizens, and not (solely) the Commission and the Council should shape the MoU. The EP could give a forum to a pan European debate on economic policy, reflecting its true European dimension and transgressing the national and technocratic discourse. At a second glance, this is less obvious.

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It is worth recalling that the EP’s role in the economic policy coordination is generally very limited. In particular, it is noteworthy that the EP has no role to play in the context of granting financial assistance on the basis of the EU balance of payments facility—the MoU concluded by the Commission is simply ‘communicated’ to the EP.159 And that albeit the assistance under the balance of payments facility is sourced from the EU budget. Accordingly, it appears counterintuitive that the EP should have a stronger role in the context of ESM programmes, which are funded by the ESM which itself is backed by national fiscal revenue.

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Furthermore, Regulation 472/2013, adopted as part of the so-called ‘Two-Pack’, does neither accord any significant role to the EP in the context of the decision-making at EU level. Pursuant to Article 7(1), (4), and (10) Regulation 472/2013, the Commission will report orally to the Chair of the competent committee of the EP on the progress of work on the macroeconomic adjustment programme and its monitoring, and the competent committee of the EP may invite representatives of the Commission to a debate. Against this backdrop, it would be inconsistent to accord the EP a more prominent role in the ESM governance than it has in the context of the EU decision-making.

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The reluctance to foresee a more prominent role for the EP may also be based on the emerging asymmetry, if the EP, comprising parliamentarians from all EU Member States, had a say in matters relevant to the euro area Member States only.160 As a side note, it should be emphasized that a solution consisting in creating a sub-committee of the EP, composed solely of lawmakers of euro area Member States,161 or allowing for separate voting procedures in the European Parliament on euro area related matters,162 is not commensurate to the euro as the single currency of the EU and being therefore necessarily a matter of common concern for all members of the EP. In that respect, it must be recalled that the European

158 Detailed on democratic accountability of the ESM and the role of the European Parliament see, Deutscher Bundestag, ‘Fragen zur Rechtsgrundlage und Subsidiarität des Vorschlags der Europäischen Kommission zur Einrichtung eines Europäischen Währungsfonds’ (PE 6-3000-05/18) 27ff. 159 Cf Article 3a Council Regulation (EC) 332/2002 of 18 February 2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments [2002] OJ L53/1. 160 Or, as the balance of payments facility is concerned: relevant to the non-euro area Member States only. 161 Cf Keppenne, ‘Institutional Report’ (n 15) 220. 162 As suggested for example by Andrew Duff, ‘The Protocol of Frankfurt: a new treaty for the eurozone’ (2016).

Accountability 909 citizens and not the Member States are represented in the Parliament, Articles 10(2) and 14(2) TEU. Another factor might be that, absent an explicit EU competence to intervene intensively into the major economic policy decisions of a Member State, any decision-making of the EP as to the appropriateness of the MoU measures would not be supported by the powers conferred on the Union.163 The idea, to compensate for the absence of competences derived from the EU Treaties by complementing the EP’s powers by a conferral of significant powers through the ESM Treaty, as this is the case for the Commission and the Council, seems to be at odds with democratic principles.

30.139

Interestingly, even the EP itself does not request this kind of formal powers conferred on it by virtue of the ESM Treaty. Instead, it proposes that the ESM and the EP establish a protocol to enter into a memorandum of cooperation.164

30.140

From a more political point of view, a meaningful role of the EP, being necessarily less discreet than the Commission and the Council, could be problematic. (Possibly) public and politicized debates would further strengthen the perception that the Member State concerned has lost autonomy. Members of the national parliament and citizens could claim that the destiny of the Member State is discussed and decided not by its own parliament elected solely by its own citizens but by the EP. Such perception would most likely be detrimental to ownership of the programme by the Member State concerned and its population and would, eventually, thus endanger its success.

30.141

In the given circumstances, we do not see a strong case in arguing that the ESM governance is suffering from a lack of democratic accountability due to the absence of a more prominent role of the EP.

30.142

As far as the role of the national parliaments is concerned, the ESM Treaty leaves ample scope for parliamentary involvement in the context of decision-making of ESM governing bodies.

30.143

Generally, the ESM Treaty is not concerned with national procedures as a requirement for the validity of ESM decision-making.165 It is therefore entirely a matter of national law, if and to what extent the ESM decision-making is embedded in decision-making on national level.166 The solutions on national level vary significantly.167 Whereas in some Member States the decision-making in ESM matters falls entirely in the prerogatives of the executive, the parliament is heavily involved in other Member States, as this is the case namely

30.144

163 It should however be noted that according to Keppenne, ‘Institutional Report’ (n 15) 193, the Council took prior to the adoption of Regulation 472/2013 ‘far-reaching’ decisions, ‘directly intrud[ing] into the budgetary and economic sovereignty of the concerned Member State’ on the sole basis of Article 136(1) TFEU. 164 European Parliament, ‘Resolution on the proposal for a Council Regulation on the establishment of the European Monetary Fund’ COM (2017) 827 final, para 17. 165 However, see Article 10(1) ESM Treaty—completion of national procedures. 166 Such national parliamentary procedures are also indirectly reflected by the interpretative declaration by the representatives of the parties to the ESM Treaty of 27 September 2012, according to which Articles 32(5), 34, and 35(1) ESM Treaty ‘do not prevent providing comprehensive information to the national parliaments, as foreseen by national regulation’. 167 See the comprehensive study of Deutscher Bundestag, ‘Beteiligung der nationalen Parlamente im Euro- Raum in Bezug auf Maßnahmen des ESM’ (WD 3-3000-086/14), which compares the legal situation on parliamentary involvement in the context of ESM decision-making in all ESM Members except for Malta and Lithuania.

910 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE for Germany.168 For instance, the plenary of the Bundestag must take a positive decision to support the granting of financial assistance.169 Absent a positive decision of the plenary or the budget committee of the Bundestag, as the case may be, the German representative on the Board of Governors or Directors must vote against the proposal.170 30.145

However, it must be acknowledged that the absence of sufficient time and the acute crisis situation are certainly limiting factors for the meaningful exercise of parliamentary rights.171

30.146

As far as the parliament of the Member State requesting financial assistance is concerned, it is hardly possible to postulate that the state, which is dependent on financial assistance, can negotiate the MoU at eye level. Nonetheless, the negotiating position of the beneficiary Member State and the role of its parliament should not be underestimated.172 A case in point is Cyprus.173 Its parliament rejected a measure that was agreed with the creditors prior to the formal adoption of the MoU. Afterwards an amended MoU was adopted. The example of Ireland is instructive as well. On the one hand, the Irish parliamentary report comes to the conclusion that the G7 and especially the ECB have intervened massively to ensure that Ireland refrains from the intended hair cut for bondholders of Irish banks.174 On the other hand, the report notes that for the remainder the MoU was in line with the proposal made by the Irish Government.175 This was possible because there was agreement in principle on the course to be taken.

30.147

Accordingly, a problem of democratic autonomy may arise in the Member State concerned only, if there are major divergences about the path to be followed and the steps to be taken.176

30.148

In summary, we do not think that the architecture of the ESM leads to major issues for democratic accountability. In particular, the ESM decision-making leaves ample scope for involvement of national parliaments, as practice shows.177 There are however some limiting factors, such as time pressure, the crisis momentum and the hard choices to be made. But this cannot be equated with a lack of democratic accountability. The acute crisis 168 Not least due to several judgements by the German Constitutional Court, in which it was concerned with the sufficient democratic oversight in the context of the rescue programmes, cf BVerfG, Judgment of the Second Senate of 7 September 2011—2 BvR 987/10; BVerfG, Judgment of the Second Senate of 28 February 2012—2 BvE 8/11; BVerfG, Judgment of the Second Senate of 19 June 2012—2 BvE 4/11; BVerfG, Judgment of the Second Senate of 12 September 2012—2 BvR 1390/12. 169 Section 4(1) German Federal Act on Financial Participation in the European Stability Mechanism (Gesetz zur finanziellen Beteiligung am Europäischen Stabilitätsmechanismus). 170 Cf Sections 4(2) and 5(2) German Federal Act on Financial Participation in the European Stability Mechanism (Gesetz zur finanziellen Beteiligung am Europäischen Stabilitätsmechanismus). The representative may not abstain from voting and must participate in the vote to avoid that the Board of Governors or Directors may adopt the decision without the vote of the German representative. 171 More sceptical Schwarz, ‘A Memorandum of Misunderstanding’ (n 1) 402, 403. 172 Lenaerts, ‘EMU and the EU’s constitutional framework’ (n 62) 766 highlights three different ways in which the principle of democracy expresses itself from the perspective of the beneficiary Member States: the participation of the parliament, when implementing measures, the possibility of the people to express during the next elections its consent or objection to the path chosen by the government or the control of national implementing measures by national constitutional courts. 173 Example also provided by Lenaerts, ‘EMU and the EU’s constitutional framework’ (n 62) 766. 174 Houses of the Oireachtas, ‘Report of the Joint Committee of Inquiry into the Banking Crisis’ (2016) 361–67. 175 Houses of the Oireachtas, ‘Report of the Joint Committee of Inquiry into the Banking Crisis’ (2016) 346. 176 More sceptical, Keppenne, ‘Institutional Report’ (n 15) 216–18. 177 See Deutscher Bundestag, ‘Beteiligung der nationalen Parlamente im Euro-Raum in Bezug auf Maßnahmen des ESM’ (WD 3-3000-086/14), according to which rights of parliamentary involvement similar to the rights of the Deutsche Bundestag exist in Austria, Estonia, Finland, and the Netherlands.

Accountability 911 management seems to be destined to be led by the executive178 and is, possibly with the exception of the beneficiary Member State, less disposed to being subjected to parliamentary co-decision. The limited say of parliament in the acute crisis could be compensated by shaping in advance the rules which will apply in the crisis.179

C. Interplay between various actors Another recurring point of critique of the ESM’s governance is the interplay between various actors which would blur responsibilities, making it difficult to hold the actors accountable.180

30.149

And indeed, the ESM’s governance assembles many actors: namely the Commission, the ECB, the IMF, and the Board of Governors constituted by the Finance ministers of the euro area countries, etc.

30.150

However, before condemning the governance framework as opaque, it is worth to take the time to try to recall the logic that led to the current governance arrangements. In fact, the ESM governance did not develop by accident but reflects the constraints resulting from European and national constitutional law and the economic fundamentals: Given the absence of enough financial resources on EU level, they had to be accorded by the Member States. Respect for the constitutional autonomy of the Member State requesting financial assistances implies that the conditionality may not be imposed as an octroi but must be negotiated. The involvement of the Commission in the negotiation of policy conditionality and signing of the MoU ensures respect of the EU’s competence of economic policy coordination and consistency with EU law.181 This also allows to mitigate, at least to some extent, the risk of direct confrontation between Member States. Recent research in political science suggests that the choice of multiple actors, in particular of the Commission plus the IMF, is explained by the interest of the Member States to be offered policy alternatives and can serve as a source of information for the Member State. It can also mitigate the confrontation of different economic views of the Member States. In particular, the Commission and the IMF function accordingly as intermediaries in the conflict between different economic approaches. Furthermore, and more specifically, coupling the IMF and the Commission could be perceived as a means of balancing the tendencies inherent in the institutions (‘agency drift’).182 For instance, in some Member States the IMF is perceived as being ‘tougher’ in setting the conditionality and more skeptical in terms of growth

30.151

178 Illustrated particularly by the limited involvement of the European Parliament in the context of the preparation of the macroeconomic adjustment programme pursuant to Regulation 472/2013. 179 Nettesheim, ‘It’s about legitimacy’ (n 2) 72. According to a similar suggestion, Member States should agree, prior to the conclusion of the MoU, on certain benchmarks and best practises to be incorporated in future MoU, leading to the gradual establishment of MoU templates, setting out the major achievables in given policy fields, eg unemployment insurance, social safety net, retirement schemes, heath care, modern public administration etc; cf Ulrich Forsthoff, ‘Fünf Jahre ESM—Entwicklungsperspektiven’ (2018) 29 Europäische Zeitschrift für Wirtschaftsrecht 108, 116 (hereafter Forsthoff, ‘Fünf Jahre ESM’). 180 Schwarz, ‘A Memorandum of Misunderstanding’ (n 1) 394, 395. 181 Cf de Gregorio Merino, ‘Legal developments in the Economic and Monetary Union’ (n 44) 1635–38. 182 C Randall Henning, Tangled Governance, International Regime Complexity, the Troika, and the Euro Crisis (OUP 2017).

912 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE perspectives and debt sustainability projections and thus more favourable to early debt restructurings.183 Furthermore, whereas the focus of the IMF tends to be on the needs of the individual country requesting assistance, the concern of the European institution was to maintain stability and to preserve the euro.184 30.152

Against this backdrop, the critique of the ESM’s governance structure as opaque and too complex seems less pertinent. The tasks to be provided by the ESM require necessarily a certain complexity and the interaction of various actors. Accordingly, it is inappropriate to measure the ESM governance against a structure in which solely one entity takes the decisions. This even more so as this would negate the constitutional autonomy of the Member State requesting financial assistance. It must be stressed that the multitude of actors does not imply that they were exempt from oversight. To the contrary: the Commission is subject to oversight by the European Court of Auditors, the IMF is scrutinized by the IMF Independent Evaluation Office, the governments acting in the context of the ESM are accountable to their parliaments and supreme audit institutions, the ESM itself is subject to comprehensive oversight by auditors and its activities have been and will be evaluated by Independent Evaluators. The transparency of the acting of the various players in the ESM’s governance helps to avoid a situation by which the actors could escape their responsibility. Accordingly, if, eg, the Commission and the IMF render public their dissenting views on aspects in the programme, this should not be regarded as a ‘communication disaster’ but welcomed as increasing transparency and accountability.

V. Judicial Control A. The ‘right’ forum 30.153

The programmes conducted by the EFSF and later by the ESM triggered some litigation on national,185 on EU186 and even on international187 level. The choice of different fora cannot come as a surprise inasmuch as acts of European and national entities are somewhat intermingled in the process of negotiating and implementing financial assistance.

30.154

National courts and the EU Courts (though in a more limited fashion) recognized each their respective jurisdiction. It must however be allowed to ask which is the appropriate forum. For answering that question, it is necessary to take a broader view, putting into perspective the different facets of the complicated governance arrangements under the ESM.

183 As regards to the Commission, Nettesheim, ‘It’s about legitimacy’ (n 2) 72 mentions that it would be in the Commission’s institutional interest to follow a soft approach in respect of conditionality and to be generous with (foreign) money. 184 Cf IMF Independent Evaluation Office, ‘The IMF and the Crises in Greece, Ireland, and Portugal’ (2016) 34. 185 See references by Poulou, ‘Financial assistance conditionality and human rights protection’ (n 38) 991ff. 186 See, for example, Ledra Advertising and others (n 42); Joined Cases C-105/15 to C-109/15 Mallis and others v Commission and ECB [2016] ECLI:EU:C:2016:702; Chrysostomides & Co and others (n 58). 187 See ICSID Case No ARB/13/27 Marfin Investment Group Holdings SA, Alexandros Bakatselos and others v Republic of Cyprus.

Judicial Control 913

1. Legal source One factor to determine the ‘right’ forum is the legal source of the measures which have a direct effect on the legal situation of the possible litigants: is the source a national act or an act by an EU entity?

30.155

Certainly, some measures taken by EU institutions or agencies in the context of an ESM programme may affect directly the legal sphere of the subjects to law. For example, bank resolution decisions by the Single Resolution Board (SRB),188 decisions by the ECB in its capacity as Single Supervisory Mechanism (SSM),189 such as a withdrawal of a banking license, state aid decisions by the Commission in the context of direct or indirect bank recapitalizations etc.

30.156

However, none of these decisions by the EU institutions or agencies is taken in the framework of the ESM Treaty on the basis of the tasks allocated and the powers delegated by the ESM. If we look instead solely at the activities of the EU institutions and agencies within the legal framework set by the ESM Treaty, we realize that the activities of the EU institutions do not result in any acts which could be regarded as affecting directly the sphere of individuals (eg the debt sustainability analysis, the assessment of a risk for the financial stability of the euro area, the negotiation and conclusion of the MoU, the surveillance of compliance with the MoU etc). Instead, the acts taken by the Member State concerned to implement the measures foreseen in the MoU are necessarily subsequent to the decision-making in the context of the ESM. It is solely the acts taken by the Member State which affect directly the subjects of law.

30.157

This clearly points to the jurisdiction of the Member State concerned (at least as an entry point for litigation).

30.158

However, not surprisingly, Member States whose measures implementing MoU conditionality were legally challenged tend to argue, among other things, that they were left without any margin and had to implement the measures required by the creditors in order to avoid defaulting on their payment obligations.190

30.159

Although the relevance of such defense can be scrutinized by the national judiciary on the basis of a purely domestic orientated reasoning, it nonetheless indicates that there is at least an European facet to the case which may benefit from being analysed from the EU law perspective.

30.160

Accordingly, our conclusion is, when analysing which act affects directly the legal position of possible litigants, that recourse should be had to the national courts, possibly coupled with the option to make an order for reference to the Court of Justice.

30.161

188 Established by European Parliament and Council Regulation (EU) 806/2014 of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) 1093/ 2010 [2014] OJ L225/1. 189 Established by Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63. 190 Cf Poulou, ‘Financial assistance conditionality and human rights protection’ (n 38) 1021.

914 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE 30.162

2. Adherence to the rule of law In its Ledra-judgment, the Court emphasized the Commission’s role as the ‘guardian of the Treaties’191 and sees the Commission obliged to ensure that the MoU it signs is compatible with EU law, including the fundamental rights of the Charter.192

30.163

We assume that when recalling the Commission’s obligations the Court felt compelled to do so equally by its own mission, which is, according to Article 19(1) TEU, to ensure that in the interpretation and application of the Treaties ‘the law is observed’. Indeed, until the ruling in Ledra, it appeared that the rescue programmes were more or less exempted from judicial control by the EU Courts. This was in stark contrast with the fact that the euro sovereign debt crisis was certainly one of the most controversial and important aspects of European politics. Furthermore, there was widespread belief that the rescue strategy, ad hoc established and further developed, lacked accountability and also risked to undermine, by its intergovernmental structure, the institutional framework of the EU.

30.164

Insofar, the Ledra judgment had certainly an important signalling effect, as it thwarted the view that the acts by EU institutions or agencies in the context of the ESM would be exempt from legal review by the EU courts. Subsequent case-law demonstrated that the rescue programmes are not conducted in a legal void.

30.165

It needs however to be seen, in which procedural situation the EU Courts can fulfill best their mission to uphold the rule of law and in which situations the EU Courts cannot be expected to intervene in a meaningful manner.

30.166

3. Limiting factors In reaction to the Ledra judgment, it was predicted that the possibility to bring an action for compensation to the EU Courts would necessarily be an ‘empty promise’.193 And indeed, so far the EU Courts have always rejected claims for compensation. This cannot be explained solely by the generally restrictive case-law of the EU Courts on matters of extra-contractual liability. Instead, it is due to structural aspects, imposing judicial restraint.

30.167

As explained above,194 these cases often concern central aspects of social burden-sharing in a society which must be assessed in the context of the national system. The Member State concerned is not only trustee of its citizens’ interests but also best placed to determine the measures which are likely to achieve the objectives pursued.195

30.168

Furthermore, an action for compensation may not be an effective means of redress, at least if it is directed at money and not, as a kind of in rem restitution, eg as a duty of the Commission to take certain action within the framework of the MoU negotiations. For example, in a case where a pensioner claims that his pension rights were reduced in a manner incompatible with EU law, it appears not immediately plausible that the amount by which

191 Ledra Advertising and others (n 42) para 59. 192 Ledra Advertising and others (n 42) para 67. 193 Martin Nettesheim, ‘Unionaler Grundrechtsschutz vor Austeritätspolitik?’ (2016) 27 Europäische Zeitschrift für Wirtschaftsrecht 801, 802. 194 See Section III.C. 195 Florescu and others (n 57) para 57 regarding measures adopted in the context of the rescue programme for Romania based on the balance of payments facility, established under Article 143 TFEU.

Judicial Control 915 pension benefits were reduced would have to be paid from the EU budget to the pensioner, possibly even on an ongoing basis until the infringement was brought to an end. Finally, the willingness of the EU Courts to scrutinize the MoU measures should be, in our view, in phase with the allocation of responsibility for the common good.

30.169

As stated above, on the one hand the legal framework relevant to the MoU does not give much guidance as to the content of the MoU. On the other hand, the measures foreseen can be particularly far-ranging; in fact, they can extend to almost all functions of a state.

30.170

In those circumstances, the question comes up: who is ultimately responsible for the common good in general and for the social balance in particular. The Member State concerned? The Commission? A shared responsibility between the Member State concerned, the EU and the other euro area Member States?

30.171

Addressing these questions from the point of view of the formal allocation of powers within the EU, the answer is relatively easy to give: Economic policy is foremost the Member States’ responsibility. Even in the context of an ESM programme, the conditionality is not an octroi but requires the consent of the Member State concerned. However, the clarity of this picture is blurred, when taking into account the ‘bargaining power’ of the parties to the MoU. Furthermore, by negotiating and signing the MoU, the Commission cannot escape sharing responsibility, be it at least in the eyes of the population, which will be only too inclined to assume that a perceived ‘social imbalance’ is (also) attributable to the Commission and also, ultimately, to the other euro area Member States. Does this mean that the Commission (and, secondarily, the Council and the Board of Governors of the ESM) has the right or even the duty to ensure the common good and the social balance?196 Is it permissible, however, to attribute to the Commission (and to the other actors) a broad degree of responsibility for the common good in the Member State concerned, limiting by the same the responsibility of the Member State concerned, or would this overstretch the basis of the legitimation of the Commission in particular?

30.172

These questions of the highest political relevance have not found a clear answer yet. In the absence of such answer, it seems wise for the EU Courts to exercise judicial restraint. Otherwise, the EU Courts would, by intervening too intensely, claim, by the same token, that the legal and political responsibility for the MoU measures is to be allocated to the EU.

30.173

Accordingly, from a conceptual point of view, legal redress should be sought and guaranteed above and foremost by the national jurisdiction, however with the possibility to make an order for reference to the Court of Justice.

30.174

B. Case law Actions for annulment under Article 263 TFEU against the MoU or the measures provided for therein are inadmissible according to settled case law, since the MoU is not an act emanating from an EU institution, office, body, or agency.197 196 Cf Schwarz, ‘A Memorandum of Misunderstanding’ (n 1) 397–400. 197 Case T-289/13 Ledra Advertising v Commission and ECB [2014] ECLI:EU:T:2014:981, paras 56–58. In this sense probably also the Ledra judgement of the ECJ, Ledra Advertising and others (n 42) para 55; unfortunately, the

30.175

916 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE 30.176

The Council decision approving the draft macroeconomic adjustment programme, pursuant to Article 7(2) Regulation 472/2013, or approving the main policy requirements which the ESM plans to include in the conditionality, pursuant to Article 7(12) Regulation 472/2013, is an act, which as such, can be made subject of an action for annulment. However, an action by natural or legal persons is only admissible, pursuant to Article 263(4) TFEU, if they can claim that the act is of direct and individual concern to them or, if the Council decision is to be qualified as a ‘regulatory act’, that it is of direct concern to them and does not entail implementing measures. Due to the absence of direct concern, the General Court dismissed an action for annulment against the Council decision.198

30.177

Actions for compensation have been declared admissible and most of the recent case law of the EU Courts was related to actions for compensation.

30.178

The ECJ affirmed in the Ledra judgment the admissibility of an action for damages under Articles 268 and 340 TFEU against the Commission related to the conclusion of the MoU.199

30.179

It is well known that according to settled case law the requirements to be met to be accorded compensation are relatively high. The European Union may incur non-contractual liability under the second paragraph of Article 340 TFEU only if a number of conditions are fulfilled, namely the unlawfulness of the conduct alleged against the EU institution, the fact of damage and the existence of a causal link between the conduct of the institution and the claimed damage. As regards the first condition, a sufficiently serious breach of a rule of law intended to confer rights on individuals must be established.200

30.180

However, as mentioned earlier,201 several considerations are limiting considerably the likelihood of success in action for damages, compared to actions for compensation in general. This finds its corroboration by the fact that the EU Courts have so far always rejected a claim for compensation.202

30.181

The ECJ has not yet ruled whether an order for reference related to the validity or the interpretation of the ESM MoU is admissible under Article 267 TFEU. The ECJ rejected some orders for reference; however, this was probably primarily for formal reasons, since no link to Union law had been established by the referring courts.203

30.182

In its judgment Florescu, the ECJ explicitly recognized the MoU, concluded between Romania and the Commission in the context of balance of payments assistance, as ‘an act of an EU institution within the meaning of Article 267(b) TFEU’.204 ECJ refrains from judging explicitly on the action for annulment brought by the applicants against passages of the MoU in the context of its examination of the matter in dispute which was pending before the General Court. 198 Case T-541/10 ADEDY and others v Council [2012] ECLI:EU:T:2012:626, paras 60–97 (hereafter ADEDY and others) with regard to a decision by the Council on the basis of Article 126(9) and 136 TFEU. 199 Ledra Advertising and others (n 42) paras 52–60. 200 Cf Ledra Advertising and others (n 42) paras 64ff. 201 Cf Section V.A.3. 202 Cf Ledra Advertising and others (n 42); Case T- 531/ 14 Sotiropoulou and others v Council [2017] ECLI:EU:T:2017:297; Bourdouvali and others (n 58); Chrysostomides & Co and others (n 58). 203 Cf Case C-128/12 Sindicato dos Bancários do Norte and others [2013] ECLI:EU:C:2013:149; Case C-264/ 12 Sindicato Nacional dos Profissionais de Seguros e Afins [2014] ECLI:EU:C:2014:2036; with regards to the MoU with Romania: Case C-434/11 Corpul Naţional al Poliţiştilor [2011] ECRI-196; Case C‑134/12 Corpul Naţional al Poliţiştilor [2012] ECLI:EU:C:2012:288; Case C-369/12 Corpul Naţional al Poliţiştilor [2012] ECLI:EU:C:2012:725. 204 Florescu and others (n 57) para 36. See also Section III.C.2.

Outlook 917 It cannot be inferred from the Florescu judgment that, likewise, the ESM MoU is to be considered as an act which can be made (directly) subject to an order for reference. However, there are some reasons for an extensive interpretation of Article 267 TFEU,205 not least as to allow the ECJ to ensure, according to its mandate, the rule of law. In any event, it appears that the MoU can be made, at least indirectly, subject of an order for reference, eg inasmuch as the Commission’s signature and duty to ensure the compatibility with EU law are at stake. Furthermore, the accompanying Council decision could be subject of an order for reference.206

30.183

VI. Outlook On 6 December 2017, the Commission made a proposal for a Council Regulation pursuant to Article 352 TFEU on the establishment of the European Monetary Fund (EMF).207 According to this proposal, the EMF was supposed to replace and succeed to the ESM (cf Article 2 of the proposed Council Regulation on the establishment of the EMF).

30.184

However, this proposal will not be further proceeded as the euro area Member States decided on 28 June 2018 to maintain and further develop the ESM on an intergovernmental basis.208 This approach seems to be acknowledged by the European Parliament (EP). In its resolution of 14 March 2019 on the Commission’s proposal for a Council Regulation on the establishment of the European Monetary Fund, the EP calls ‘for a meaningful ESM reform in the short term by means of a revision of the ESM Treaty, without prejudice to more ambitious developments in the future’.209

30.185

On 14 December 2018, the Euro Summit endorsed the term sheet on the ESM reform,210 providing for a comprehensive reform of the ESM. It tasked the Eurogroup to prepare the required amendments to the ESM Treaty by June 2019.211 In the meeting of 13 June 2019, the Eurogroup reached a broad agreement on a revised ESM Treaty text.212

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205 Sceptical, René Repasi, ‘Court of Justice: Judicial Protection against austerity measures in the euro area: Ledra and Mallis’ (2017) 54 Common Market Law Review 1123, 1141ff. 206 See ADEDY and others (n 198) para 90. 207 COM (2017) 827 final. 208 At the Euro Summit on 28 June 2018 the Heads of State or Government stated that the ESM should be ‘strengthened working on the basis of all elements of an ESM reform as set out in the letter of the Eurogroup President’ to the President of the Euro Summit dated 25 June 2018 accessed 5 February 2020. The latter clarified that the Heads of State or Government could decide ‘[i]‌n the longer term . . . to incorporate the ESM in the EU framework, preserving the key features of its governance’. This follows up on the Meseberg Declaration by the French President Macron and the German Chancellor Merkel on 19 June 2018 accessed 5 February 2020, according to which the ESM reform and the common backstop should be implemented as a first step in the intergovernmental setup on the basis of amendments to the ESM Treaty, before incorporating the ESM in a second step and preserving its key governance features in the EU legal framework. 209 COM (2017) 827 final, para 7. 210 The term sheet on the European Stability Mechanism reform was agreed by the Eurogroup on 4 December

accessed 5 February 2020. 211 ‘Euro Summit Statement’ (14 December 2018) accessed 5 February 2020. 212 The text of the revised ESM Treaty including two new Annexes as agreed by the Eurogroup is available at

accessed 5 February 2020.

918 POLICY CONDITIONALITY: ESM FINANCIAL ASSISTANCE 30.187

The term sheet on the ESM reform and the amendments to the ESM Treaty politically agreed by the Eurogroup address mainly, as it is of concern in the context of this chapter, two elements.213

30.188

First and most important from a governance perspective, is the strengthening of the ESM’s role in the design, negotiation and monitoring of conditionality attached to ESM financial assistance. This stronger role shall respect the European Commission and ECB competences as laid down in the EU legal framework. The Commission and the Managing Director of the ESM will sign the MoU detailing the conditionality, following its approval by the Board of Governors with the Member State being granted financial assistance.214

30.189

This reflects the new joint responsibility of the two institutions for the design and the negotiation of the Memorandum of Understanding.215 This element of the reform will allow to make full use of the expertise of the ESM and its staff acquired throughout the crisis and to better reflect the (European) lender’s perspective. In line with recommendation 2 of the Evaluation Report on EFSF/ESM financial assistance, priority could in the future be given to macro-critical conditionality supporting the return of a beneficiary Member State to the markets216 and providing comfort about its repayment capacity.

30.190

At the same time, the role of the European Commission to ensure consistency of the Memorandum of Understanding with EU law will be preserved both by its involvement in the negotiations of conditionality and the co-signing of future MoUs attached to ESM financial assistance. Therefore, the envisaged reformed institutional set-up of the ESM is in line with the requirements as spelled out by the Court in its Pringle judgment.217 EU law does not prevent Member States from amending the ESM Treaty in this regard.

30.191

The term sheet on the ESM reform does not address the role of the IMF. At some point in the discussions, it appeared that a consensus was emerging that the IMF should no longer be on board.218 Still, in the revised ESM Treaty text, the role of the IMF is largely maintained, the only amendment being in recital 8: an ESM Member requesting ESM financial assistance is expected to address a similar request to the IMF ‘whenever appropriate’, while so far such request was expected, ‘wherever possible’. Likewise, the ECB’s role had been questioned,219 213 The term sheet on ESM reform highlights that ‘[c]‌onditionality remains an underlying principle of the ESM Treaty and all ESM instruments, but the exact terms need to be adapted to each instrument’. Still, this must not be read as extending blindly the principle of policy conditionality to the new ESM instrument, the backstop for the SRF. Whilst strict criteria for disbursement under the backstop and other safeguards are foreseen by the terms of reference of the common backstop to the Single Resolution Fund endorsed by the Euro Summit (14 December 2018) accessed 5 February 2020 and foreseen in the new draft Annex IV to the revised ESM Treaty accessed 5 February 2020, the huge differences between sovereign lending and lending to an EU body imply that an MoU setting out policy conditionality will not be required under the backstop. The newly introduced draft Article 3(4) revised ESM Treaty does not seem to change this, as it simply reiterates the principle established in Article 12(1) ESM Treaty that conditionality shall be appropriate to the financial assistance instrument chosen. 214 Cf draft Article 13(4) revised ESM Treaty. 215 Cf draft Article 13(3) revised ESM Treaty. 216 ESM Independent Evaluator, ‘EFSF/ESM Financial Assistance’ (2017) 7, 79. 217 Pringle (n 3) paras 110ff, particularly para 112; notably the character of the MoU does not change—it does not constitute an instrument of economic policies coordination; the Commission retains its role to ensure consistency of the MoU with EU measures of economic policies coordination and EU law more in general; for details see Section II.A. 218 Forsthoff, ‘Fünf Jahre ESM’ (n 179) 115. 219 See, in the context of OMT Case C-62/14 Gauweiler and others [2015] ECLI:EU:C:2015:7, Opinion of AG Cruz Villalón, paras 140–50. Some guidance on how the ECB sees its role in future ESM stability support

Outlook 919 but remained unaffected as this is reflected in the term sheet on ESM reform, the joint position between the European Commission and the ESM on future cooperation220 annexed thereto and the revised ESM Treaty.221 Second, the instrument for precautionary financial assistance shall become more effective. It is assumed that the granting of precautionary financial assistance at an early stage could prevent the emergence of severe problems which, at a later stage, can only be solved at much higher costs. Nonetheless, the instrument has never been used so far. Experience suggests that this is due to the stigma attached to any financial assistance but also to a perceived lack of transparency relating to both, the eligibility criteria for accessing ESM precautionary financial assistance and the conditionality, which could be attached to precautionary financial assistance.222

30.192

The eligibility criteria for accessing ESM precautionary financial assistance will be clarified and defined in a new Annex to the ESM Treaty.223 Draft Article 14(7) of the revised ESM Treaty also clarifies the possible consequences of non-compliance of the beneficiary ESM Member with the conditionality attached to precautionary financial assistance: by default, the beneficiary ESM Member would lose access to funds under the precautionary credit line and an additional margin would apply on outstanding amounts.224 The Board of Directors can decide by mutual agreement to deviate from this default scenario and restore access to the credit line and/or disapply the margin, the latter namely if the non-compliance is due to events outside the control of the beneficiary ESM Member.

30.193

Moreover, the conditionality attached to a Precautionary Conditioned Credit Line (PCCL) will in the future no longer be included in the Memorandum of Understanding (as currently foreseen under Articles 13(3) and (4) and 14(2) ESM Treaty). Instead, the conditionality will consist of continuous compliance with ex ante eligibility criteria, to which the beneficiary ESM Member will commit in its request for precautionary financial assistance named Letter of Intent, and no ex post conditionality will apply.225

30.194

programmes can be found in its opinion of 11 April 2011 on a proposal for a regulation on the establishment of the European Monetary Fund (CON/2018/20), Section 1.3. 220 Joint position on future cooperation between the European Commission and the ESM (19 November 2018) accessed 5 February 2020. 221 Cf draft Article 13 revised ESM Treaty. 222 ESM Independent Evaluator, ‘EFSF/ESM Financial Assistance’ (2017) 60 reflects some of these concerns. 223 Draft Annex III ESM Treaty on eligibility criteria for ESM precautionary financial assistance. 224 According to the term sheet on ESM reform the margin would amount to 50 basis points initially and 115 basis points after six months. 225 Cf draft Article 14(2) revised ESM Treaty. While Article 12(1) ESM Treaty already provided for strict conditionality in the form of continuous compliance with strict ex ante eligibility criteria, the option for ex post conditionality was not explicitly excluded; see Section III.G.1 and n 112 on conditionality attached to a PCCL. This was not fully consequent, considering that conditionality ‘shall be appropriate to the financial assistance instrument chosen’ (Article 12(1) ESM Treaty), ‘reflect the severity of the weaknesses to be addressed and the financial assistance instrument chosen’ (Article 13(3) ESM Treaty) and that access to a PCCL shall be reserved for ESM Members whose ‘economic and financial situation is still fundamentally sound’ (Article 2(2) ESM Guideline on Precautionary Financial Assistance).

31

THE IMF’S FINANCING ROLE IN EUROPE DURING THE GLOBAL FINANCIAL CRISIS Katharine Christopherson and Wolfgang Bergthaler*

I. Introduction II. Key Aspects of the Legal Framework Governing IMF Financing

31.1 31.5

A. The IMF’s purposes and its financing function 31.5 B. Assisting members in addressing BoP problems while safeguarding IMF resources 31.8 C. The concept of BoP need 31.11 D. The objective of IMF financing 31.14 E. The legal nature of IMF arrangements 31.17 F. The requirement to establish policies for the use of IMF’s resources in the GRA 31.20 G. The policy on stand-by arrangements (SBAs) 31.23 H. Special policies and the extended fund facility (EFF) 31.25 I. The IMF’s policies on repurchases— safeguarding the temporary use of IMF resources 31.26 J. The IMF’s policies on conditionality 31.27

K. The IMF’s policies on debt sustainability and program financing (financing assurances) L. The IMF’s policies on access limits and exceptional access M. The IMF’s policies on members’ external arrears (the arrears policies) N. The IMF’s policies on charges and surcharges O. The IMF’s policy on overdue financial obligations P. The IMF’s policy on Post-Program Monitoring (PPM)

31.29 31.31 31.33 31.35 31.37 31.38

III. The Global Financial Crisis and IMF Lending to EU and EEA Members

31.39 A. Phase 1: IMF Financing of non-euro area members during the GFC 31.46 B. Phase 2: IMF Financing of euro area members 31.60

IV. Conclusions and Lessons for the Future

31.90

I. Introduction Since its establishment in 1945, the International Monetary Fund (IMF) has played a key role in ‘giv[ing] confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity’ through its crisis prevention * The views expressed in this chapter are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, nor IMF management. Katharine Christopherson and Wolfgang Bergthaler, 31 The IMF’s Financing Role in Europe During the Global Financial Crisis In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0038

31.1

924 IMF’S FINANCING ROLE IN EUROPE DURING GFC and resolution role.1 In exercising its mandate, the IMF has had to adapt over time to significant developments in the global monetary and financial systems.2 Since the Second Amendment of the IMF’s Articles in 1978, subject to certain obligations under the IMF’s Articles, members may freely decide on their exchange rate arrangements merely notifying the IMF of any changes to their own exchange arrangements, which is a departure from the par value system prevalent when the IMF was established. Further changes in the international monetary and financial systems stemmed from the move towards globalization, with more open trade and the expansion and integration of capital markets including the ever closer economic and financial regional integration of IMF members to common markets and currency unions (including banking unions) such as the European Union (EU) and the euro area. Capital markets—which have developed significantly globally—have now become the main source of financing for sovereigns in lieu of mainly other sovereigns’ and commercial banks’ financing and overwhelmingly current account and trade-based transactions that dominated the early decades following the IMF’s establishment. With all their benefits, these developments have also increased risks for IMF members leading to occasional balance of payments (BoP) problems and needs for access to IMF resources. Members’ banking and financial sectors have also become more sophisticated and complex, which has supported growth, but at the same time has also become a source of vulnerability leading to other types of BoP crisis, namely, financial crisis, different from the purely exchange rate crises of the past. 31.2

The global financial crisis (GFC) brought back to the fore the key role the IMF plays at the centre of the international monetary and financial systems, particularly by supporting its members in addressing their BoP problems through sound and member-focused policy advice as well as by making its resources temporarily available (commonly known as ‘lending’3) to members.4 The GFC challenged the international financial system and the IMF itself in a unique and unprecedented way not seen since the Great Depression of the 1930s. In this context, the IMF adopted and implemented key reforms. It also revamped its lending toolkit to be better equipped to respond to the needs of its members, sharpened its analytical tools, and used cross-country experience to offer tailored policy solutions to members affected by the GFC. Some of these changes were influenced by unprecedented and unquantifiable risks of contagion and spill overs due to the interconnectedness and close integration of economies and uncertainties about the shocks, transmission channels, and appropriate policy responses.5 To meet the financing needs of its members as well as to 1 See Article I of the IMF’s Articles of Agreement accessed 10 February 2020. All provisions referenced in this chapter refer to the IMF’s Articles, unless mentioned otherwise. See further Chapter 2 paragraph 2.5 and Chapter 5 paragraph 5.27. 2 Bernhard Steinki and Wolfgang Bergthaler, ‘Recent Reforms of the Finances of the International Monetary Fund: An Overview’ in Christoph Herrmann and Jörg Terhechte (eds), European Yearbook of International Economic Law 2012 (vol 3, Springer 2012) (hereafter Steinki and Bergthaler, ‘Recent Reforms of the Finances of the International Monetary Fund’). 3 As explained in more detail later, the IMF in the General Resources Account does not lend but rather provides its resources to an IMF member by way of a swap of currencies or reserve assets (SDRs). 4 All IMF members are eligible to use the resources in the General Resources Account (GRA)—which in its entirety (ie including all its three lines of defence: members’ quotas (first), New Arrangements to Borrow (NAB) (second), and bilateral borrowing agreements (third) currently add up to about 1 trillion US dollars. These are essentially quota resources contributed by all IMF members supplemented as needed through bilateral and multilateral borrowed resources. 5 IMF, ‘Crisis Program Review’ (2015) (hereafter IMF, ‘Crisis Program Review’).

KEY ASPECTS OF THE LEGAL FRAMEWORK: IMF 925 help strengthen the global economy, the IMF bolstered its resources by doubling quotas and securing large (bilateral and multilateral) borrowing agreements.6 This chapter focuses on the crisis prevention and resolution role played by the IMF in EU and European Economic Area (EEA) members affected by the GFC and is anchored in a discussion of the key elements of the legal and policy framework that governs the use of the IMF’s general resources (GRA). It underscores the robustness of the IMF’s legal framework, as well as its flexibility, which allowed the IMF to reform existing policies and adopt new ones to better tailor its lending toolkit to the evolving international financial architecture without the need to amend the IMF’s Articles. In particular, it discusses how the IMF applied these tools in assisting EU and EEA members during the GFC, underscoring the unique features of the crisis in Europe and the IMF’s engagement with members in the EU and the EEA in two different phases mainly through policy and technical advice as well as financing.7 The first phase included IMF-supported programs of EU members in Eastern Europe (Hungary, Latvia, Romania) and Iceland, a member of the EEA. The second phase included IMF-supported programs of members in the euro area (Greece, Ireland, Portugal, and Cyprus) which also raised interesting and challenging legal issues.8

31.3

The chapter is divided into four sections. Following this introduction, the second section provides an overview of the key aspects of the legal and policy framework governing IMF financing in the GRA, including the concept of BoP need, the requirement to ensure ‘adequate safeguards’ of IMF’s resources, and the design and implementation of economic adjustment programs that aim at assisting the member to achieve medium-term external viability, including market access and debt sustainability. The third section discusses how the IMF has provided GRA financing to EU and EEA members facing BoP problems during the GFC and how the IMF’s legal and policy framework was applied in specific cases. The final section draws conclusions and presents lessons for the future.

31.4

II. Key Aspects of the Legal Framework Governing IMF Financing A. The IMF’s purposes and its financing function The IMF, a treaty-based intergovernmental international financial institution9 with near universal membership—currently 189 members—is at the centre of the international 6 Steinki and Bergthaler, ‘Recent Reforms of the Finances of the International Monetary Fund’ (n 2). 7 For a discussion of the use of IMF resources and EU law, see Wolfgang Bergthaler, ‘The Relationship Between International Monetary Fund Law and European Union Law: Influence, Impact, Effect, and Interaction’ in Ramses A Wessel and Steven Blockmans (eds), Between Autonomy and Dependence (TMC Asser Press 2013) (hereafter Bergthaler, ‘The Relationship Between International Monetary Fund Law and European Union Law’). 8 In addition to the EU and EEA countries affected by the global financial crisis, the IMF has also provided financial assistance to other European countries (including from the IMF’s concessional resources, the Poverty Reduction and Growth Trust, PRGT) such as Armenia (2010 EFF/ECF, 2014 EFF), Belarus (2009 SBA), Bosnia and Herzegovina (2009 SBA, 2012 SBA, 2016 EFF), Georgia (2012 SBA, 2014 SBA, 2017 EFF), Moldova (2010 ECF, 2016 EFF/ECF), Serbia (2009 SBA, 2011 SBA, 2015 SBA), Ukraine (2010 SBA, 2014 SBA, 2015 EFF, 2018 SBA), and FYR Macedonia (2011 PLL), which was the sole user of the original Precautionary Credit Line (PCL). 9 Pursuant to Article XII, the IMF’s governance structure includes a Board of Governors, an Executive Board and a Managing Director. The IMF Board of Governors is the highest decision-making organ where all 189 members are represented by a Governor and an Alternate Governor and that meets on an annual basis. The IMF’s

31.5

926 IMF’S FINANCING ROLE IN EUROPE DURING GFC monetary and financial systems, and has the mandate to perform three main functions: surveillance, financing, and technical and financial services. As to its surveillance function, the IMF oversees the international monetary system (‘multilateral surveillance’) and exercises firm surveillance over members’ exchange rate policies (‘bilateral surveillance’) in accordance with Article IV of the IMF’s Articles.10 With respect to its financing function (‘lending’), under Article V, Section 3(a), the IMF may provide temporary financing to members from its general resources account (GRA)11 to assist them in addressing their BoP problems in a manner consistent with the IMF’s Articles and under adequate safeguards of the IMF’s resources. With regard to other services, under Article V, Section 2(b), the IMF may decide to provide technical and financial services, including the administration of resources contributed by members, provided such services are consistent with the IMF’s purposes. 31.6

IMF financing of members is thus, one of the purposes of the IMF as set forth in Article I(v), which calls for it: [t]‌o give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

31.7

Consistent with this purpose, which remains basically the same since the time of the Bretton Woods Conference in 1944 when the IMF’s Articles were drafted, the IMF plays a key role in the international monetary and financial systems by allowing members to temporarily use its general resources to give them time and space to adopt the economic adjustment measures needed to correct the underlying causes of their BoP problems without the need

day-to-day decision-making organ is the IMF Executive Board that ‘conducts the business of the Fund’ and exercises all functions assigned to it under the IMF’s Articles and all functions delegated to it from the IMF Board of Governors (see Article XII, Section 3(a) and (b); By-Law 15). The Managing Director is the chair of the IMF Executive Board and chief of the operating staff of the IMF. The IMF Executive Board sets generally applicable policies for the IMF (akin to a legislative function), adopts specific decisions based on such generally applicable policies (akin to an executive function), and exercises a quasi-judicial function (sanctions for violations of obligations under the IMF’s Articles). IMF members’ voting rights are based on quotas representing the relative share of such economy in the world economy. For most IMF policy decisions, a majority of votes cast is sufficient to take a decision; similarly, for IMF financing decisions to approve an arrangement or complete a review, a majority of the votes cast is needed. There are a number of decisions that require a qualified majority, ie 70 per cent or 85 per cent of total voting power. 10 While surveillance is conducted on a continuous basis, each member shall consult with the IMF, normally annually, in the context of an Article IV consultation. Under Article VIII, Sections 2(a) and 3, the IMF also exercises jurisdiction over members’ exchange rate systems by prohibiting members from establishing restrictions on the making of payments and transfers for current international transactions—as defined in Article XXX(d)—(‘exchange restrictions’), as well as engaging in discriminatory currency arrangements or multiple currency practices, without the prior approval of the IMF. 11 The primary source of IMF financing—and the first line of defence in the GRA–are the IMF’s quota resources, currently about SDR 477 billion. Each IMF member is assigned a quota expressed in SDRs dependent on the member economy’s relative size in the world economy. In addition, the IMF has the authority to replenish its currency holdings in the GRA through borrowing. The IMF has used this authority to borrow bilaterally from IMF members and through multilateral borrowing arrangements. The IMF has used its borrowing authority extensively during the global financial crisis. In this regard, the second line of defence has been the multilateral borrowing facility, the New Arrangement to Borrow (NAB) and the third line of defence has been two rounds of bilateral borrowing agreements. While the IMF may borrow from private capital markets it has never used such authority. See Steinki and Bergthaler, ‘Recent Reforms of the Finances of the International Monetary Fund’ (n 2).

KEY ASPECTS OF THE LEGAL FRAMEWORK: IMF 927 to resort to measures that are destructive of national or international prosperity.12 Thus, by helping to avoid such outcomes, IMF financing benefits both the group of members experiencing BoP problems as well as the group of members who are their partners in international commerce and financing. Furthermore, the IMF may be the only one willing to provide financing to a member in certain circumstances, particularly in the wake of adverse shocks. In this regard, the commitment of resources in support of a member’s adjustment program signals the IMF’s confidence in a member’s policies which in turn helps in catalysing financing from other sources (private and public) and restoring confidence. Also, the availability of IMF resources provides the incentives necessary for countries to engage in desirable domestic economic policies that may also have favourable externalities. Indeed, since the IMF must safeguard its resources—which is mainly achieved through program conditionality—it may be willing to provide financing to a member when the private sector is not, as the latter has less influence over the member’s policies. By supplementing private capital flows through its provision of financing as an international public good,13 the IMF incentivizes and supports openness in trade and capital flows—which benefits the entire membership through its preparedness to provide financing in times of adverse shocks.14

B. Assisting members in addressing BoP problems while safeguarding IMF resources While all members of the IMF have the right to use its general resources, members can do so provided certain conditions are met.15 In particular, that the member uses such resources in accordance with the provisions of the IMF’s Articles and the policies adopted under them (Article V, Section 3(b)(i)) and subject to adequate safeguards of the IMF’s resources.16 Therefore, when a member requests IMF financing (ie make purchases17 of 12 François Gianviti, ‘The Role of the Fund in the Financing of External Debt’ (1989) 215 Collected Courses of the Hague Academy of International Law 246 (hereafter Gianviti, ‘The Role of the Fund in the Financing of External Debt’); Paul R Masson and Michael Mussa, ‘The Role of the IMF Financing and Its Interactions with Adjustment and Surveillance’ (1997) IMF Pamphlet Series No 50 (hereafter Masson and Mussa, ‘The Role of the IMF Financing and Its Interactions with Adjustment and Surveillance’); IMF, ‘The Fund’s Mandate—The Legal Framework’ (2010) (hereafter IMF, ‘The Fund’s Mandate—The Legal Framework’). 13 Masson and Mussa, ‘The Role of the IMF Financing and Its Interactions with Adjustment and Surveillance’ (n 12). 14 This is particularly true to the extent that IMF financing is used by members to insure themselves against potential shocks—as in cases of the Flexible Credit Line (FCL) or other IMF arrangements treated by members as precautionary instruments (eg precautionary Stand-By arrangements). 15 IMF, ‘IMF Executive Board Provides Further Guidance to Enhance the Financial Safety Net for Developing Countries’ (Press Release No 16/530); there are four conditions set forth in Article V, Section 3(b)(i)–(iv), two of which may be waived by the IMF (see Article V, Section 4). 16 Gianviti, ‘The Role of the Fund in the Financing of External Debt’ (n 12). 17 The mechanism of financing in the GRA works through purchases and repurchases of currencies (exchange of a member’s currency for another member’s currency or SDRs). As a result, the IMF’s holding of the currency of the member receiving IMF financing increases while the IMF’s holdings of the currency of the member whose currency is sold decrease. The purchasing member is normally in need of currencies that can effectively be used for international payments. Therefore, such member is given the right under the IMF’s Articles to request a currency that is freely usable in the international payment system. The member whose currency is sold by the IMF establishes a liquid creditor position in the GRA for the amount by which the IMF’s holdings of its currency are below the member’s quota (‘reserve tranche position’) which is largely remunerated (ie pays interest). Conversely, the purchasing member who provides its own currency to the IMF establishes a debtor position for the amount of the purchase, which is subject to charges (ie interest). When an IMF member repays the financing, the reverse transaction takes place. A debtor member repurchases the IMF’s holdings of its currency with balances of another member’s currency specified by the IMF. The effect is that the IMF’s holdings of the member’s currency subject to

31.8

928 IMF’S FINANCING ROLE IN EUROPE DURING GFC foreign currency or Special Drawing Rights SDRs from the IMF for its currency) and, in the judgment of the IMF, meets the conditions required, the IMF must grant the request subject to an assessment of the consistency of the request with the provisions of the IMF’s Articles and the policies adopted under them.18 31.9

Under Article V, Section 3(a): The Fund shall adopt policies on the use of its general resources, including policies on stand-by or similar arrangements, and may adopt special policies for special balance of payments problems, that will assist members to solve their balance of payments problems in a manner consistent with the provisions of this Agreement and that will establish adequate safeguards for the temporary use of the general resources of the Fund.

31.10

This provision of the IMF’s Articles contains the three basic elements of IMF’s financing in the GRA, namely: the concept of ‘BoP problem’; the ‘objective of IMF financing’; and ‘the obligation to establish policies’ for the use of the IMF’s general resources.

C. The concept of BoP need 31.11

As set forth in Article V, Section 3(a), the IMF can only provide its general resources to a member to assist in solving its BoP problems. Thus, the IMF has no mandate to provide financing through GRA resources for purposes other than a member’s BoP problem.19 In this regard, Article V, Section 3(b)(ii) specifically establishes that: a member shall be entitled to purchase the currencies of other members from the Fund in exchange for an equivalent amount of its own currency subject to the following conditions: (ii) the member represents that it has a need to make the purchase because of its balance of payments or its reserve position or developments in its reserves

31.12

According to this provision, a member can only use such resources by making ‘purchases’ of foreign currency in exchange of its own domestic currency if the member makes a

charges (ie interest) are reduced while the holdings of the member’s currency with whose currency the repurchase was made are increased, thus reducing the remunerated reserve tranche position of that member by the amount of the purchase. The repurchasing member can repay the IMF with a freely usable currency as the member whose currency is selected for repurchase, is under the obligation to accept a freely usable currency of its choice and convert it into its own currency for credit to the member’s account. The IMF’s currency holdings in the GRA are maintained in SDRs, which means that the currency risk is borne by the member receiving IMF financing since the member needs to repay the IMF an equivalent in SDRs or freely useable currencies. See Steinki and Bergthaler, ‘Recent Reforms of the Finances of the International Monetary Fund’ (n 2). 18 Gianviti, ‘The Role of the Fund in the Financing of External Debt’ (n 12). 19 The IMF cannot provide budget financing. However, an IMF arrangement can allow the member using the domestic currency counterpart of IMF resources within the member’s domestic economy to finance the budget deficit of the government if: (i) the member has an actual BoP need when making a purchase, as represented by the member; (ii) the member has committed to implement policies, including in the context of a program, that will assist in resolving its BoP problem and ensure the IMF’s repayment; and (iii) the member’s program is designed, in broad terms, in a manner that envisages that the amount equivalent to the foreign exchange purchased from the IMF will be used to meet a BoP deficit or to strengthen reserves. See IMF, ‘Staff Guidance Note on the Use of Fund Resources for Budget Support’ (2010) (hereafter IMF, ‘Staff Guidance Note’).

KEY ASPECTS OF THE LEGAL FRAMEWORK: IMF 929 representation that it has a BoP need arising from a BoP deficit, or its reserve position or development in its reserves.20 Under the IMF’s legal framework, the concept of ‘BoP need’ refers to problems of the nature of a BoP deficit (arising from current or capital account21),22 or the member’s reserve position, or developments in its reserves. These three BoP need criteria are exclusive, and thus, a member’s representation of need would be satisfied if any of the three criteria is met (for instance, a member enjoying a relatively strong reserve position that is experiencing a BoP deficit). For the IMF’s purposes, a BoP problem arising from a ‘BoP deficit’ is determined when it has an above-the-line BoP deficit.23 A BoP problem arising from a member’s ‘reserve position’ would be determined on the basis of an analysis of its gross reserves position in light of the member’s specific circumstances.24 BoP needs arising from ‘developments in a member’s reserves’ refer to cases where members may have a need to use the IMF’s resources to settle balances among themselves (for example, within a region) without having a BoP deficit or a need to build up reserves.25

31.13

D. The objective of IMF financing The main objective of IMF financing in the GRA is to assist members in resolving their BoP problems. This financing is normally provided through an arrangement in support of an ‘economic adjustment program’ (except for outright purchases or the Flexible Credit Line (FCL)26) that the member designs with IMF staff 20 IMF, ‘The Fund’s Mandate—The Legal Framework’ (n 12); IMF, ‘Staff Guidance Note’ (n 19). 21 IMF, ‘Use of Fund Resources for Capital Transfers’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 283; however, under Article VI, Section 1, a member may not use the IMF’s general resources to meet a ‘large or sustained outflow of capital’. 22 A member’s overall BoP is calculated by making a distinction between: (i) ‘autonomous transactions’ that are undertaken for their own sake and that give rise to the member’s overall BoP surplus or deficit (‘above the line’ transactions); and (ii) those other transactions that are undertaken for the purpose of financing a BoP deficit or an increase in reserves (‘below the line’ transactions). Such financing transactions include official external borrowing, certain external transfers, such as official external public debt restructuring and grants received by the government from foreign official agencies. While, in most cases, transactions can be readily classified on the basis of standard accounting definitions, the member will be given the benefit of the doubt in any case of uncertainty. See IMF, ‘Staff Guidance Note’ (n 19). 23 IMF, ‘The Fund’s Mandate—The Legal Framework’ (n 12); IMF, ‘Staff Guidance Note’ (n 19). 24 In determining whether a member has a BoP problem on this basis, the IMF examines two questions: (i) what is the level of the member’s reserves; and (ii) whether or not they are adequate. With respect to the first question, the member’s reserve position takes into account the member’s gross (rather than its net) reserves: it is a stock concept that is measured at a point in time. With respect to the second question, the IMF exercises judgment and applies a wide range of criteria including the volume of the member’s foreign trade, the variability of exports and imports, the size of the member’s quota in the IMF, the past behaviour of reserves, the size of gross and net reserves and their prospective developments, the traditional level of reserves maintained by the member, seasonal factors, monetary aggregates, and the size of short-term foreign exchange liabilities. See IMF, ‘The Fund’s Mandate—The Legal Framework’ (n 12); IMF, ‘Staff Guidance Note’ (n 19). 25 This category has, in the past, mainly dealt with a relatively limited set of circumstances faced by members of a currency union that issue reserve currencies. See IMF, ‘Program Design in Currency Unions’ (2018) IMF Policy Paper (hereafter IMF, ‘Program Design in Currency Unions’). 26 The FCL is an instrument that provides financing to insure against potential shocks under an ‘FCL arrangement’ and that can be used on both a precautionary or disbursing basis. It aims at providing assistance to members assessed by the IMF as very strong performers without being subject to the GRA’s normal access limits. An FCL arrangement may be approved for a duration of either one or two years. It has no ex post conditionality, namely, there is no need for conditions to be implemented as part of a fund-supported program, but rather, only ex ante conditionality that operates as qualification criteria. Through the FCL, the IMF can now meet a broad range of BoP needs in the GRA, although it has been used so far as an insurance-like type of instrument to protect qualifying members from ‘tail risks’.

31.14

930 IMF’S FINANCING ROLE IN EUROPE DURING GFC assistance.27 This economic adjustment program aims precisely at implementing the economic policies that are considered necessary for addressing the member’s underlying BoP problems. While in certain circumstances IMF policies allow for financing to be provided through outright purchases (such as the Rapid Financing Instrument (RFI)) without the need for the member to have in place a full-fledged economic adjustment program, the IMF normally provides financing to its members through the approval of an arrangement. 31.15

The IMF may only provide financing to its members subject to ‘adequate safeguards for the temporary use’ of the IMF’s general resources. In this context, the IMF has established several policies to ensure the ‘temporary use’ of its resources, particularly on the repayment periods (ie ‘repurchase period’), as well as on program design (ie assisting the member in designing an economic adjustment program) and program conditionality, all with the aim of helping the member to address its BoP problems during the program period to be able to repay the IMF in full and on time.

31.16

Because of the requirement of adequate safeguards of the temporary use of IMF’s resources, the member’s economic adjustment program needs to be designed with the aim of assisting the member in resolving its BoP problem and restoring it to medium-term external viability, which in turn has been understood to mean that the IMF-supported program assists the member in restoring debt sustainability in the medium term and (re-)access to capital markets.28 Accordingly, by addressing its BoP problem with IMF assistance, the member is assumed to be able to repay the IMF, inter alia, by raising the necessary resources in capital markets. The existence of adequate safeguards also involves an assessment of the member’s capacity to repay the IMF. This is ultimately an issue related to the strength of the member’s policies and program design and its capacity to access other sources of financing after the IMF arrangement expires. If the member’s economic program is well designed and properly implemented—supported by program conditionality to ensure that the use of IMF resources is consistent with achieving the program’s objectives—it provides the strongest safeguard that the IMF will ultimately be repaid in full and on time. Given that understandings are reached on program design with the member’s authorities taking into account the member’s capacity to implement policies, the IMF assumes full program implementation.

E. The legal nature of IMF arrangements 31.17

IMF arrangements have a special legal nature under IMF law,29 as these are not international contracts, agreements or treaties.30 Rather, IMF arrangements are unilateral 27 The economic adjustment program to be supported by the IMF through an arrangement, which is aimed at assisting the member to solve its underlying BoP problems, is the member’s program—not the IMF’s. However, IMF staff assist the member in designing such a program, which takes into account the level of adjustment needed normally in terms of monetary, exchange rate and fiscal policies, as well as external and financial sector policies and structural adjustments that need to be undertaken during the arrangement period. 28 IMF, ‘Guidelines on Conditionality’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 284 (hereafter IMF, ‘Guidelines on Conditionality’). 29 There are a number of important consequences from this special nature of an IMF arrangement, namely, that contractual language should be avoided in program documents and the IMF arrangements, and that while purchases (financing) under an IMF arrangement will be suspended due to the member not meeting the conditions (ie conditionality) set forth for purchases under the IMF arrangement, the member is not in breach of its obligations under the IMF’s Articles or in violation of an international treaty or contract. See IMF, ‘Guidelines on Conditionality’ (n 28) 284. 30 IMF, ‘Guidelines on Conditionality’ (n 28) 284.

KEY ASPECTS OF THE LEGAL FRAMEWORK: IMF 931 decisions of the IMF (adopted by the IMF Executive Board)31 committing to provide financing to a member under certain conditions, up to a specified amount and for a specified period of time.32 Since IMF arrangements are not international treaties, agreements or contracts, not 31.18 meeting conditions established under-said arrangements does not per se trigger a breach of obligation by the member under the IMF’s Articles, unless of course the non- observance of a condition in and of itself constitutes a breach of obligation under the IMF’s Articles, such as the imposition of exchange restrictions or multiple currency practices,33 or the incurrence by the member of overdue financial obligations to the IMF. The IMF’s procedures for approval of arrangements are generally the same, regardless of the type of policy underlying the financing procedures. They involve a decision of the IMF Executive Board based on a recommendation made by the IMF Managing Director on the approval of the arrangement. Once approved by the IMF Executive Board, the arrangement enters into effect immediately.34 The Emergency Financing Mechanism (EFM) allows for expedited procedures on approval of an IMF arrangement in emergency situations under expedited deadlines.35 Under the IMF’s existing legal framework, there are currently four types of IMF arrangements that members can use to obtain IMF financing in the GRA. Three are in the IMF’s credit tranche policies36 (ie the SBA, the FCL and the Precautionary and Liquidity Line

31 The decision-making organ for approval of the use of IMF resources is the IMF Executive Board. It normally decides based on a recommendation by the IMF Managing Director. Under the IMF Managing Director’s authority the IMF staff discusses the IMF-supported program with the member’s authorities to reach understandings on key aspects such as program design and conditionality. In certain circumstances, the IMF Managing Director needs to regularly inform the IMF Executive Board in advance on developments (eg exceptional access policy, emergency financing mechanism—EFM, prior actions, etc). The IMF Executive Board also completes program reviews, which can be done on the basis of an IMF Executive Board meeting discussion, or on a lapse of time basis, if certain conditions are met. In this context, it is the IMF Executive Board, on the basis of the Managing Director’s and staff ’s recommendations, who determines that the conditions for disbursements under an arrangement have been met or not met; and if performance criteria (PCs) are not met, to approve the granting of waivers as in the case of waivers of non- observance of PCs. 32 IMF, ‘Guidelines on Conditionality’ (n 28) 284. 33 Members are obliged under Article VIII, Sections 2(a) and 3 not to impose exchange restrictions or engage in discriminatory or multiple currency practices (MCPs) without the prior approval of the IMF. However, IMF members are free to establish capital controls that do not also entail exchange restrictions or MCPs subject to the IMF’s jurisdiction. 34 In very exceptional circumstances however, the IMF may approve an arrangement ‘in principle’ (meaning that the arrangement’s entry into effect would happen at some time in the future and subject to conditions precedents). The approval in principle (AIP) allows the IMF to approve an arrangement for the member without the arrangement becoming effective immediately upon approval. 35 This is the procedure established by the IMF setting forth a special mechanism to help provide financing at short notice, which has been in place since 1995. 36 Under the credit tranche policies (ie the general policies adopted on the use of its resources in the GRA), the IMF makes financing available to members in the GRA in tranches (ie segments of credit divided between the first credit tranche equivalent to 25 per cent of quota and the upper credit tranches (UCT) which refer to amounts of credit beyond the first credit tranche). The IMF’s attitude to requests for transactions within the first credit tranche (ie 25 per cent of quota) is a liberal one. This means that the IMF does not set performance clauses (ie performance criteria) of phasing for accessing its resources within such first credit tranche. Requests for use of IMF resources beyond the first credit tranche (ie the upper credit tranches) require substantial justification for the member’s BoP difficulties to be resolved within a reasonable period of time.

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932 IMF’S FINANCING ROLE IN EUROPE DURING GFC (PLL))37 arrangements) and one under the only special policy currently in place (ie the extended arrangement under the Extended Fund Facility (EFF)).

F. The requirement to establish policies for the use of IMF’s resources in the GRA 31.20

Under Article V, Section 3(a), the IMF has the legal obligation (ie mandatory) to establish policies on the use of its general resources in a manner consistent with the IMF’s Articles and that establish adequate safeguards for the temporary use of its general resources. In accordance with this provision, the IMF has adopted several policies governing the use of its general resources.

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The most important use of IMF resources policies include: the policy on stand-by arrangements (in the credit tranches policy); the special policies for special types of BoP needs, such as the Extended Fund Facility; the policies on repurchase (repayments) obligations, the policies on conditionality, access limits and exceptional access, as well as the policies on program financing/financing assurances, external payment arrears, debt sustainability, overdue financial obligations to the IMF, and post-program monitoring.

31.22

To provide adequate context for the discussion of IMF financing of EU and EEA members during the GFC that follows this section, we summarize below the key policies established by the IMF on the use of its general resources with the aim to meet the objectives set forth in the Articles while providing adequate safeguards for said resources.

G. The policy on stand-by arrangements (SBAs)38 31.23

Article V, Section 3(a) establishes that the IMF shall adopt policies on the use of its general resources, including policies on stand-by or similar arrangements. One of the most important policies that the IMF has established on the use of its general resources as required under Article V, Section 3(a) is the policy on Stand-By arrangements, which is the type of arrangement that is commonly known as the IMF’s ‘workhorse’ and that members have been using since 1952. Article XXX(b) of the IMF’s Articles defines a stand-by arrangement as follows:

37 The Precautionary and Liquidity Line (PLL) was established after the FCL when it was found that there was a part of the membership that still needed an instrument in the IMF’s lending toolkit to address the needs of some members that did not qualify for an FCL and did not need an SBA. This instrument, initially called the Precautionary Credit Line (PCL, which was used by Macedonia) and then reformed to become the PLL, aims to assist strong performers and has elements of both the FCL and the SBA in that it has both ex ante conditionality (qualification criteria) and ex post conditionality (program conditionality aimed at addressing the member’s remaining vulnerabilities as identified by the IMF). The PLL arrangement can be of either six months (annual cap of 125 per cent of quota and cumulative cap of 250 per cent of quota net of scheduled repurchases, respectively) or, one or two years of duration (annual cap of 250 per cent of quota and cumulative cap of 500 per cent of quota net of scheduled repurchases, respectively). 38 The IMF Executive Board approved forms for the Stand-by Arrangement and the Extended Arrangement in IMF, ‘Form of Stand-By Arrangement’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 346, 351.

KEY ASPECTS OF THE LEGAL FRAMEWORK: IMF 933 Stand-by arrangement means a decision of the Fund by which a member is assured that it will be able to make purchases from the General Resources Account in accordance with the terms of the decision during a specified period and up to a specified amount.

An SBA is normally approved for twelve to eighteen months’ duration and up to a total of 31.24 three years and can be used by the member to address any type of BoP need. Members can purchase amounts committed under the arrangement as they become available,39 and they may also treat this type of arrangement as ‘precautionary’ (ie the member expresses that it does not intend to draw the resources under the arrangement, which allows it to accumulate resources as they become available under the arrangement, but can always draw what is available at any time it represents the existence of an actual BoP need provided it complies with the relevant polices and conditions under the arrangement). The repurchase period for purchases made under the SBA (which is the same for all arrangements in the credit tranches (FCL and PLL arrangements) must be completed five years after the date of the purchase, provided that the repayment is made in equal quarterly instalments during the period beginning three years and ending five years after the date of the purchase (three- and-a-quarter to five years).40

H. Special policies and the extended fund facility (EFF) In accordance with Article V, Section 3(a) of the Articles, the IMF may adopt special policies for special BoP problems. While the IMF has established many special policies to assist members address special types of balance of payments problems over the years, these were all eliminated at the outset of the GFC41 except for the Extended Fund Facility (EFF).42 The IMF established the EFF as a ‘special policy’ in the GRA for a special BoP problem. It aims at assisting members in addressing more structural BoP problems that require a longer term to resolve, and thus, members using this source of financing in the GRA have programs that include a heavier structural component. Thus, the arrangement under the EFF (ie the ‘extended arrangement’) is not available for any type of BoP needs as is the case of the stand-by arrangement, but rather, it is only available for the type of structural and prolonged BoP problems noted above. Given the special type of BoP need that the EFF aims to address, which requires a longer term to resolve, the repurchase (repayment) terms of the EFF are also longer (ie to be repaid within a period of four-and-a-half to ten years) than 39 IMF, ‘Relationship Between Performance Criteria and Phasing of Purchases Under Fund Arrangements— Operational Guidelines’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 292. 40 IMF, ‘Repurchase’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 442. 41 IMF, ‘The Acting Chair’s Summing Up—GRA Lending Toolkit and Conditionality—Reform Proposals’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 310. The reasons for the elimination of these special policies included the rigidity and artificial distinction of the BoP needs addressed by these special facilities which, as experience demonstrates, did not correspond to the nature of recent crises. See IMF, ‘GRA Lending Toolkit and Conditionality: Reform Proposals’ (2009) IMF Policy Paper (hereafter IMF, ‘GRA Lending Toolkit and Conditionality: Reform Proposals’). 42 Special policies are those policies established by the IMF for the use of its resources in the GRA for special BoP problems (Article V, Section 3(a)) normally subject to special repurchase periods (Article V7 Section (d)) and special rate of charges (Article V, Section 8(d)). Under the existing legal framework, the Extended Fund Facility (EFF) is currently the only special policy in the GRA.

31.25

934 IMF’S FINANCING ROLE IN EUROPE DURING GFC those applicable to financing in the credit tranches (ie SBA, FCL, PLL, and RFI). Also, the period of the extended arrangement under the EFF is normally of three years but can be extended to up to a maximum of four years (contrary to arrangements in the credit tranches, which can go up only to a maximum of two (FCL/PLL) or three years (SBAs). Exceptionally, an extended arrangement can also be approved for a maximum period of four years from the outset.

I. The IMF’s policies on repurchases—safeguarding the temporary use of IMF resources 31.26

One of the main tools used by the IMF for establishing adequate safeguards for the ‘temporary use’ of its resources is through its policies on repurchase (repayment) periods. The general rule on repurchase period set forth in Article V, Section 7(c) is of maximum five years after the date on which the purchase was made subject to provisions for payments in instalments during the period beginning three years and ending five years after the date of the purchase. The IMF may establish different periods than the general ones mentioned before in the case of ‘special policies based on special BoP needs’, provided this is approved by an eighty-five percent majority of the total voting power. There is however a general expectation that the member will repurchase the IMF’s holdings of its currency that resulted from purchases in the GRA as its BoP and reserve position improves as determined by Article V, Section 7(b). A member is free to repurchase at any time in advance of maturity and to attribute repurchases to any outstanding obligation to the IMF as set forth in Article V, Section 7(a). Currently, the repurchase period for purchases in the credit tranches policy (whether it is for purchases under a SBA, FCL, or PLL arrangements, or for outright purchases under the RFI) is of three-and-a-quarter to five years. In turn, the repurchase period for purchases under the EFF, which is a special policy as explained above, is of four-and-a- half to ten years.

J. The IMF’s policies on conditionality43 31.27

In order to meet the objective of assisting the member in addressing its BoP problems in a manner consistent with the IMF’s Articles and to ensure adequate safeguards of the IMF’s resources, the IMF has also established policies on conditionality.44 These program-related conditions are established only on the basis of variables or measures that are reasonably within the member’s direct or indirect control,45 and that are 43 See further Chapter 30 paragraph 30.42. 44 Ross Leckow, ‘Conditionality in the International Monetary Fund’ (IMF 2002) (hereafter Leckow, ‘Conditionality in the International Monetary Fund’). 45 In the case of members of currency unions, program design is based on policies over which the national authorities of the member have direct or indirect control; however, where currency union members delegated important economic and financial policies to union-level institutions, policy assurances from these institutions would be sought when the member’s adjustment policies alone could not meet the program objectives. These policy assurances can be country specific (only applicable to one member of the union) or union-wide policy actions (applicable to all members of the union), The modality will be in writing either in the form of a letter to the Managing Director or a published statement by the union level institution (See IMF, ‘Program Design in Currency Unions’ (n 25)).

KEY ASPECTS OF THE LEGAL FRAMEWORK: IMF 935 generally either of critical importance for achieving the goals of the member’s program, or for the monitoring of the implementation of said program, or necessary for the implementation of specific provisions of the IMF’s Articles or policies adopted under them. These normally pertain to areas that are within the IMF’s core areas of responsibility, which include monetary, fiscal, and exchange rate policies, as well as financial sector measures related to the functioning of the domestic and international financial markets. However, measures or variables that are outside of the IMF’s core areas of responsibility may also be established as conditions, although they may require more detailed explanation of their critical importance.46 While there is a need to reach understandings between the IMF and the member on the relevant measures or variables to be established as program conditionality (by engaging with the government authorities—for instance, Ministry of Finance, and the central bank) the IMF is fully responsible for the establishment and monitoring of all conditions attached to the use of its resources. The IMF’s Guidelines on Conditionality recognize different modalities of conditions used particularly for monitoring implementation of an IMF-supported program, of which the following five are particularly relevant: prior actions, performance criteria, structural benchmarks, indicative targets and program reviews. Prior actions (PAs) refer to measures that should be adopted prior to the approval of an arrangement, completion of a program review, or granting of a waiver of a performance criterion when it is critical for the successful implementation of the program that such actions be taken to underpin the upfront implementation of important measures.47 Performance criteria (PCs) refer to variables or measures clearly specified and objectively monitorable, that are established as formal conditions for the making of purchases or obtaining disbursements under Fund arrangements. Accordingly, purchases or disbursements of amounts committed by the IMF under arrangements are interrupted if a PC is not met, unless the IMF (ie the IMF Executive Board) grants a waiver of the nonobservance or applicability of the relevant PC. Currently, the IMF only establishes ‘quantitative PCs’ as ‘structural PCs’ have been discontinued.48 In addition

46 IMF, ‘Guidelines on Conditionality’ (n 28) 284. 47 Leckow, ‘Conditionality in the International Monetary Fund’ (n 44). A prior action is set by the IMF Managing Director (and not the IMF Executive Board as for other types of conditionality) although the IMF Executive Board is informed in an appropriate manner of the progress of discussions with the member about these. Since the IMF Managing Director sets PAs, it is also for her to decide whether to continue to recommend approval of an arrangement, completion of a review or granting of a waiver despite the non-observance of a PA, provided however that she determines that despite the nonobservance: (i) the member’s program continues to be consistent with the IMF’s provisions and policies; and (ii) the program will be carried out, in particular, that the member is sufficiently committed to implement the program to recommend the approval of the arrangement or the completion of the review. 48 Since 2009, the IMF no longer establishes structural performance criteria. IMF, ‘GRA Lending Toolkit and Conditionality: Reform Proposals’ (n 41). The IMF Executive Board may waive the nonobservance of a PC if the deviation is either temporary, minor, or the member has undertaken corrective action. When data needed to assess observance of a PC is not yet available and there is no clear evidence that the PC is not missed, the member may still make purchases under an arrangement if the IMF Executive Board grants a waiver of applicability of said PC. Provided certain safeguards (eg PCs are on track, data is reported on time, representation that indeed data is unavailable) are met, the 2009 Extended Rights to Purchase policy extends the period (no more than forty-five days) in which an IMF member may access accumulated but undrawn balances under a GRA arrangement once a new test date for PCs is reached but for which the test data are not yet available. In so doing the policy addresses some access ‘blackouts’ (ie a period in which before 2009 no purchases under the GRA arrangement could be made) which can affect all GRA arrangements with the IMF, but especially precautionary ones. See IMF, ‘Reduction of Blackout Periods in GRA Arrangements’ (2009) IMF Policy Paper.

31.28

936 IMF’S FINANCING ROLE IN EUROPE DURING GFC to the quantitative PCs, the IMF also establishes continuous PCs, which are mainly PCs on non-accumulation of new external payment arrears, contracting or guaranteeing of public debt, and non-introduction, modification or intensification of exchange restrictions and multiple currency practices. Structural benchmarks (SBs) are structural measures set forth as program conditions that cannot be specified in terms that may be objectively monitored or where their non-implementation would not, by itself, warrant an interruption of purchases or disbursements under an IMF arrangement (as is the case of PCs which interrupt purchases automatically if not met).49 Indicative targets (ITs) are variables established for the part of an arrangement for which they cannot be established as PCs because of substantial uncertainty about economic trends.50 Program reviews encompass an assessment of both backward-looking elements of program implementation (including whether or not program conditionality is met) and forward-looking elements pertaining to the achievement of program objectives (whether or not the program continues to be on track to meet its objectives). When program reviews are included as part of conditionality in a specific country case, the member will not be able to make further purchases under the IMF arrangement until a program review is completed by the IMF Executive Board. In this regard, to monitor program implementation and ascertain the member is on track to meet its program objectives, the IMF needs reliable and timely information from the member.51 Misreporting of information to the IMF in the context of the use of its resources is subject to specific procedures and remedial measures that range from asking the member to repay the amounts it purchased based on misreported information to a declaration of the member being in breach of its obligation to provide accurate information to the Fund as required by Article VIII, Section 5 of the IMF’s Articles.52

49 IMF financing containing SBs is subject to review-based conditionality, meaning that the assessment of observance of SBs has to be done in the context of a program review, and that the completion of said review is not per se impeded by the non-observance of any specific SB. Rather, the determination as to whether to complete a program review takes into account the implications for the program of an overall assessment of implementation of all the relevant SBs. This could result in the IMF Executive Board considering that non-observance of key structural measures signifies that the IMF-supported program is no longer on track for meeting its objectives, and thus that the review cannot be completed. Conversely, despite the non-observance of certain SBs, the IMF Executive Board may decide that the member is still on track to meet the program objectives and thus, complete the review. 50 As uncertainty is reduced, these targets will normally be subsequently established as PCs, with appropriate modifications as necessary. Indicative targets may also be established in addition to performance criteria as quantitative indicators to assess the member’s progress in meeting the objectives of a program in the context of a review. 51 Without such information, the IMF cannot provide sound policy advice in its consultations with members or judge confidently the basis on which to provide financial support. Poor data can lead to inaccurate assessments, and inappropriate policy advice and program design, with negative outcomes and reputational effects for the member and the IMF itself. The provision of timely and accurate information to the IMF to the extent of its ability is the responsibility of the member. The IMF’s relationship of trust with the member is fundamental to securing such information. While the IMF is not merely a passive recipient of information, the procedures and safeguards that exist within member countries must play the primary role in ensuring the quality of the data provided to the IMF. 52 The IMF’s legal framework addresses the issue of misreporting of information. It rests primarily on two pillars: (i) Article VIII, Section 5, which applies to all members, and which contains general provisions on the furnishing of information by members to the IMF with some qualifications (eg relating to capacity and confidentiality); and (ii) the misreporting guidelines. The Guidelines apply to performance criteria and other conditions (eg prior actions) applicable to an outstanding purchase in the GRA, and to information provided in the context of requests for waivers. See IMF, ‘Misreporting and Noncomplying Purchases in the General Resources Account– Guidelines on Corrective Action’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 317; IMF, ‘Strengthening the Effectiveness of Article VIII, Section 5’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 531.

KEY ASPECTS OF THE LEGAL FRAMEWORK: IMF 937

K. The IMF’s policies on debt sustainability and program financing (financing assurances) The concept of debt sustainability is a key element in IMF financing. It is a prerequisite for external viability and therefore for the success of the program and for providing safeguards that the IMF will be repaid. The IMF is precluded from providing financing to a member unless its debt is assessed by the IMF to be sustainable in the medium term.53 Otherwise, IMF financing would not be assisting the member to address its underlying BoP problems and would not be ensuring adequate safeguards for the temporary use of its resources as required under the IMF’s Articles. If the IMF were to finance a member with unsustainable debt, this would compound the crisis by adding to the member’s debt stock rather than resolving it. To the extent that a member’s debt is assessed to be unsustainable, the IMF is precluded from lending, unless the member takes steps to restore debt sustainability. These steps could include a sovereign debt restructuring of official and/or private sector claims, or concessional financing.54 In addition, when the IMF is requested to provide financing in the GRA above the normal access limits, the assessment of debt sustainability is subject to heightened scrutiny under the IMF’s exceptional access policy (EAP). This, inter alia, requires that the debt needs to be assessed by the IMF to be sustainable with a ‘high probability’. The IMF has developed a rigorous methodology to assess debt sustainability (the debt sustainability analysis—DSA) which takes into account macro-economic fundamentals, as well as debt to gross domestic product (GDP), gross financing needs, and the debt profile, the so-called market access countries-debt sustainability analysis (MAC-DSA).55

31.29

The IMF’s policy on program financing or financing assurances requires that the IMF be satisfied that an IMF-supported program is fully financed, meaning, that the overall amount of program financing is considered adequate to fill any identified financing gaps during the program period, as well during the post-program period to help the program succeed and the member achieve medium-term viability, so as to provide adequate safeguards for IMF’s resources. This policy has evolved over time to require in practice, at a minimum, that: (i) upon approval of an IMF arrangement, there are ‘firm commitments’ of financing in place for the first twelve months of the arrangement; and (ii) there are ‘good prospects’ that there will be adequate financing for the remaining period of the arrangement beyond the first twelve months. During program reviews, assurances on full financing of successive twelve-month periods beyond the initial twelve months (or whatever period is left under the arrangement) must be ascertained. Specifically, the ‘good prospects’ must become ‘firm commitments’ or actual financing.56

31.30

53 IMF, ‘Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework’ (2013) IMF Policy Paper (hereafter IMF, ‘Sovereign Debt Restructuring’). 54 IMF, ‘Sovereign Debt Restructuring’ (n 53). Sean Hagan, Maurice Obstfeld, and Poul M Thomsen, ‘Dealing with Sovereign Debt—The IMF Perspective’ (IMFBlog, 23 February 2017) accessed 13 February  2020. 55 Rigorous DSAs are also a key tool in crisis prevention efforts. A DSA provides a thorough examination of the structure of debt and projections for debt burden indicators in baseline, alternative, and stress test scenarios over the medium term (generally understood to cover a period of five years). The IMF has a separate debt sustainability framework for use by all PRGT-eligible countries that also have access to International Development Association (IDA) resources and all countries that are eligible for IDA grants: the IMF-World Bank Debt Sustainability Framework for Low-Income Countries (the DSF). 56 IMF, ‘Sovereign Debt Restructuring’ (n 53).

938 IMF’S FINANCING ROLE IN EUROPE DURING GFC

L. The IMF’s policies on access limits and exceptional access 31.31

Another important policy established by the IMF on the use of its general resources is the access limits policy, which determines the member’s access to IMF financing in terms of a percentage of the member’s quota.57 The amount of access to IMF resources that is approved in each individual case is determined on the basis of the member’s actual or potential need for IMF resources, its capacity to repay the IMF, its outstanding credit to the IMF and its track record in using such resources in the past, and is subject to access limits. The access limits in the GRA are currently 145 per cent of quota annually, and 435 per cent of quota cumulatively (the latter, net of any rescheduled repurchases). As noted above, access to IMF financing under the FCL is not subject to access limits, while the PLL and the RFI have their own instrument-specific access limits, in addition to the access limits set out above.

31.32

Any access to IMF resources in the GRA beyond those limits can only be provided in accordance with the IMF’s Exceptional Access Policy (EAP). The EAP establishes substantive and procedural requirements to safeguard the use of IMF resources in the GRA beyond normal limits of access.58 The requesting member needs to meet all four substantive criteria of the EAP for the IMF to approve exceptional access to its resources in the GRA (ie at arrangement approval, and any subsequent review under the arrangement). The four exceptional access criteria (EACs) require that: (i) the member be experiencing or may experience exceptional BoP pressures (EAC1); (ii) a high probability of public debt sustainability in the medium-term (EAC2);59 (iii) prospects for member’s gaining or regaining access to capital markets (EAC3); and (iv) that the member’s program provides reasonable prospects of success including not only the member’s adjustment plan but also its institutional and political capacity to deliver that adjustment (EAC4).60 The procedural requirements of the EAP mainly relate to the early involvement of the IMF Executive Board in order to proceed with the approval of a request for exceptional access, which are triggered once the IMF Managing Director decides that new or augmented exceptional access to IMF resources may be appropriate.61 57 Note that any purchase that causes the IMF’s holding of the member’s currency to exceed 200 per cent of quota requires a waiver under Article V, Section 4. 58 IMF, ‘Access Policy and Limits in the Credit Tranches and under the Extended Fund Facility and on overall access to the Fund’s General Resources, and Exceptional Access policy—Review and Modification’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 404. The Exceptional Access Policy does not apply to arrangements under the Flexible Credit Line which have their own framework. IMF, ‘Flexible Credit Line (FCL) Arrangements’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 356. 59 Where the member’s debt is considered sustainable but not with a high probability, exceptional access would be justified if financing provided from sources other than the IMF, although it may not restore sustainability with high probability, improves debt sustainability and sufficiently enhances the safeguards for IMF resources. 60 It should be noted that in normal access cases, the IMF needs to make the similar judgment as with EAC4 under the Guidelines on Conditionality. See IMF, ‘Guidelines on Conditionality’ (n 28) 284: A member’s request to use Fund resources will be approved only if the Fund is satisfied that the member’s program is consistent with the Fund’s provisions and policies and that it will be carried out, and in particular that the member is sufficiently committed to implement the program . . . In helping members to devise economic and financial programs, the Fund will pay due regard to the domestic social and political objectives, the economic priorities, and the circumstances of members, including the causes of their balance of payments problems and their administrative capacity to implement reforms. 61 IMF, ‘The Acting Chair’s Summing up—Review of access policy under the credit tranches and the Extended Fund Facility and access policy in capital account crisis’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (39th edn, IMF 2017) 458. To further enhance the safeguards of IMF’s resources

KEY ASPECTS OF THE LEGAL FRAMEWORK: IMF 939

M. The IMF’s policies on members’ external arrears (the arrears policies) There are two principles that have had an important effect on the scope and the objectives of the arrears policies.62 The arrears policies were conceived as a means of helping to ensure that members resolve their BoP problems ‘without resorting to measures destructive of national or international prosperity’.63 These policies are designed to ensure adequate safeguards for the temporary use of the IMF’s resources by limiting the ability to achieve financing through the accumulation of arrears. Additional financial support from creditors was viewed as an essential component to the IMF’s financial support. Different arrears policies apply depending on the type of creditor, namely, whether the creditor is a sovereign bilateral creditor, a private sector creditor, or a multilateral creditor.64

31.33

In cases without an official sector involvement, the IMF continues a policy of non-toleration of arrears. However, tacit approval of an official bilateral creditor has been deemed sufficient to satisfy the Fund's arrears policy. Such tacit approval is generally conveyed through non-objection in the Executive Board to the Fund financial support notwithstanding the arrears.65 In the case of an official sector involvement, the policy on arrears by a sovereign to sovereign bilateral creditor(s)66 envisages a two-step process, whereby the IMF would first encourage the debtor and its creditors to reach a representative collective agreement (such as through the Paris Club) or, failing that, agreements with each creditor. If, after this process has run its course, the remaining creditors are unwilling to reach an agreement with the debtor and do not consent to IMF financing despite arrears owed to them, the IMF would nevertheless consider lending into arrears owed to official bilateral creditors where specific criteria were satisfied.67 The policy on arrears by a sovereign to private creditors or

31.34

in exceptional access cases, all arrangements with exceptional access are also subject to an ex post evaluation (EPE). The requirement for EPEs was agreed by the IMF Executive Board in 2002 for members using exceptional access in capital account crisis and extended to any use of exceptional access in 2003. The aim of an EPE is to determine whether justifications presented at the outset of the individual program were consistent with IMF policies and to review performance under the program. To do this, EPEs seek to provide a critical and frank consideration of two key questions: (i) were the macroeconomic strategy, program design, and financing appropriate to address the challenges the member faced in line with IMF policy, including exceptional access policy; and (ii) did outcomes under the program meet the program objectives. 62 See IMF, ‘Sovereign Debt Restructuring’ (n 53) 45. 63 See Article I(v). 64 When the policies were initially defined in the 1970s, the IMF recognized that incurrence of external payment arrears was destructive of a member’s own national prosperity, the international payments and credit system as well as the member’s capacity to repay the IMF and was an inappropriate way to address BoP problems. By providing support for programs that call for the elimination of existing external arrears and the non-accumulation of new external arrears, the IMF assists the member to return to external viability and contributes to the orderly functioning of international capital markets. 65 IMF, ‘Sovereign Debt Restructuring’ (n 53). 66 See IMF, ‘Reforming the Fund’s Policy on Non-toleration of arrears to Official Creditors’ (2015) IMF Policy Paper; IMF, ‘The Chairman’s Summing Up—Reforming the Fund’s Policy on Non-toleration of Arrears to Official Creditors’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 391 (hereafter IMF, ‘Reforming the Fund’s Policy on Non-toleration of Arrears to Official Creditors’). 67 Importantly, the lending into sovereign bilateral arrears policy provides appropriate safeguards for official bilateral creditors, as any decision to lend into arrears in this context is subject to the debtor’s good faith efforts to reach agreement with its creditors, is applied in a way that preserves the IMF’s ability to mobilize official financing packages in the future, and is subject to the IMF Executive Board’s approval, case by case. In this regard, under the policy the IMF may proceed with lending if the creditor consents or the three criteria are met. These criteria are: (i) Prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies; (ii) The debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with

940 IMF’S FINANCING ROLE IN EUROPE DURING GFC the ‘Lending-into-Arrears (LIA) policy’ is a limited exception to the IMF’s general rule of non-toleration of external arrears.68 This policy was introduced in 1989 and intended to address the negative consequences of a delayed financing of a member by the IMF when the member had arrears to private sector creditors (effectively removing a veto of such private sector creditors). It applies to IMF lending into sovereign arrears to external private creditors including bondholders and commercial banks (since 1998). Under the LIA policy, the IMF can lend to a member in arrears on a case-by-case basis and only where: (i) prompt IMF support is considered essential for the successful implementation of the member’s adjustment program; and (ii) the member is pursuing appropriate policies and is making a ‘good faith’ effort to reach a collaborative agreement with its private creditors. The good faith criterion, which was clarified in 2002, encourages the debtor to substantively engage with its external private creditors. Under the policy on arrears of a sovereign to multilateral creditors,69 the IMF maintains a policy of non-toleration of arrears to multilateral creditors and thus requires the elimination of existing arrears and the non-accumulation of new arrears during the program period with respect to multilateral creditors. In practice, arrears to multilateral creditors are considered resolved if the program provides for their clearance through a credible plan. However, with respect to arrears to the World Bank (WB), upfront clearance of the arrears at the beginning of the IMF-supported program, or an agreed plan between the member and the World Bank on terms of clearance over a defined period, has generally been required in line with the terms of the 1989 WB-IMF Concordat.70

N. The IMF’s policies on charges and surcharges 31.35

The IMF has also established policies governing the use of its resources in the GRA involving the imposition of charges, surcharges and commitment fees that must be paid by the member using such resources. Charges, surcharges and commitment fees are paid in SDRs unless the IMF determines that a member pay them in the currency of another member or in its domestic currency in exceptional circumstances.71 Under Article V, Section 8(d), all financing charges are uniform and any differentiation needs to be consistent with the principle of uniformity.72 the parameters of the Fund-supported program—ie that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and (iii) The decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. 68 IMF, ‘Fund Involvement in Debt Strategy’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 391; IMF, ‘Fund Policy on Arrears to Private Creditors—Further Considerations’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 396; IMF, ‘Fund Policy on Lending into Arrears to Private Creditors—Further Considerations of the Good Faith Criterion’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 398. 69 IMF, ‘Sovereign Debt Restructuring’ (n 53). 70 IMF, ‘IMF-World Bank Concordat’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 560. IMF staff has sought the views of the World Bank in all cases where the use of IMF resources was requested by a member with arrears to the World Bank. A similar approach has been applied to other multilaterals that are expected to provide substantial financing to the program. 71 Article V, Section 8(e). 72 IMF, ‘The Fund’s Mandate—The Legal Framework’ (2010). Uniformity of treatment is a long-standing and central tenet of the IMF’s operations. It does not mean that members be treated identically, but that members in similar circumstances should be treated similarly. See IMF, ‘The Acting Chair’s Summing Up—Even-handedness

KEY ASPECTS OF THE LEGAL FRAMEWORK: IMF 941 Special policies may be subject to different charges. IMF members are encouraged to repay the IMF as soon as possible. There is no pre-payment penalty. The rate of charge on funds purchased from the GRA is set at a margin (currently 100 basis points) over the weekly SDR interest rate. The rate of charge is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter. In addition, a one-time service charge of 0.5 per cent is levied on each drawing of IMF resources in the GRA, other than reserve tranche drawings.73 Further, the IMF charges level and time based ‘surcharges’ if a percentage of quota is outstanding for more than a specific time period. The surcharges first introduced in 1997 were streamlined and aligned across facilities in 2009 to simplify the structure of charges and to eliminate sources of misalignment of terms across facilities. The current surcharge policy adopted in February 2016 sets a surcharge of 200 basis points on credit outstanding for more than 187.5 per cent of quota resulting from purchases in the credit tranches and under the EFF.74

31.36

O. The IMF’s policy on overdue financial obligations Members have an obligation to repay (ie to make repurchases of amounts purchased as part of IMF financing in the GRA) within the specified repayment period. If a member does not repay the IMF when due it violates its obligations under the IMF’s Articles, and if it persists in such violation, the member may be subject to sanctions under Article XXVI.75 The policy of Fund Surveillance—Principles and Mechanism for Addressing Concerns’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 29. 73 IMF, IMF Financial Operations 2018 (IMF 2018) (hereafter IMF, IMF Financial Operations 2018). See Article XXX(c) for a definition of a reserve tranche purchase. 74 IMF, ‘Surcharges on Purchases in the Credit Tranches and under the Extended Fund Facility’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 446. IMF, IMF Financial Operations 2018 (n 73). They were first introduced in conjunction with the establishment of the Stand-By Arrangement (SBA) in 1952. An up-front commitment fee (15 basis points on committed amounts of up to 115 per cent of quota; 30 basis points for amounts in excess of 115 per cent and up to 575 per cent of quota; and 60 basis points for amounts in excess of 575 per cent of quota) applies to the amount available for purchase under arrangements (SBAs, Extended Arrangements under the EFF, PLL, and FCL arrangements) that may be drawn during each (annual) period; this fee is refunded on a proportionate basis as subsequent drawings are made under the arrangement. An additional time-based surcharge of 100 basis points applies to credit outstanding for more than 36 months in the case of purchases in the credit tranches, or 51 months in the case of purchases under the EFF. The difference in the starting point of time-based surcharges between purchases under the credit tranches and those under the EFF aims to achieve alignment of the surcharges with the start of repurchases (fifty-four months under extended arrangements) and the nature of the BoP needs specific to the EFF (ie structural in nature and thus requiring a longer period of time for addressing the issues). In addition, members pay a ‘commitment fee’ for IMF arrangements, which is refunded to the extent that amounts under the arrangement are purchased. Commitment fees were originally put in place to help manage incentives and compensate the IMF for cases in which commitments were not drawn. 75 The policy on overdue financial obligations provides for procedural steps (including informing the relevant Executive Director, Governor, and the IMF Executive Board of the event) and if necessary, the IMF Executive Board may subsequently impose sanctions in the form of the limitations on the use of GRA resources, followed by a declaration of ineligibility to use the IMF’s GRA resources; a declaration of non-cooperation and suspension of technical assistance to the member; a suspension of the member’s voting and related rights; and ultimately, the compulsory withdrawal of the member from the IMF. An immediate consequence of not repaying the IMF when due is of course that the member can no longer draw under an existing arrangement. See for instance, paragraph 4 of the Form of Stand-By Arrangement in IMF, ‘Stand-By and Extended Arrangement—Standard Forms’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 346, 347. The IMF has several tools available to ensure that members comply with their obligations under the IMF’s Articles. The IMF may impose sanctions under Article XXVI on members that violate obligations under the IMF’s Articles including expulsion (‘mandatory withdrawal’).

31.37

942 IMF’S FINANCING ROLE IN EUROPE DURING GFC on overdue obligations to the IMF aims at balancing cooperation with the member to solve its BoP problems and the imposition of sanctions for members that do not repay the IMF when due.76 The rationale for such policy is that the IMF needs to establish mechanisms to address situations where arrears to the IMF affect the temporary nature of the use of its general resources. This means that the member shall repay the IMF within the established repurchase period. Accordingly, since members have to always repay the Fund to conform with the temporary nature of the IMF’s GRA, the IMF does not have the legal capacity to write off or reduce its claims on members in the GRA, as they all have to repay the IMF when due. While under Article V, Section 7(g), the IMF may postpone repurchase obligations, ie extension of maturities of obligations to repurchase amounts purchased from the IMF, as a matter of IMF policy, the IMF Executive Board has decided not to exercise this authority since the early 1980s, since it will not assist the member in resolving its underlying balance of payments problems.77

P. The IMF’s policy on Post-Program Monitoring (PPM) 31.38

The IMF has also established a policy that calls for the monitoring of the member’s economic developments after an IMF-supported program has ended. Under the post-program monitoring (PPM) policy, the member is expected to engage in such monitoring with the IMF following the expiration of an IMF arrangement, when the outstanding credit from the IMF for that member reaches certain thresholds. One is an absolute size threshold relative to the IMF’s loss absorption capacity (ie the minimum floor of precautionary balances for credit outstanding from the GRA, which is now SDR 1.5 billion). The other is a quota-based threshold, that remains a backstop, which is equivalent to outstanding credit in excess of a certain percentage of the member’s quota (currently 200 per cent of quota).78 The rationale for this process is that the IMF needs to ensure ‘adequate safeguards’ for its resources during the ‘repurchase’ (repayment) period, which is typically after the IMF arrangement has expired. From a legal perspective, post-program monitoring is grounded in the consultation clause contained in all IMF arrangements and in the member’s Letters of Intent according to which the member commits to consult with the IMF during the program and after the program period while credit continues to be outstanding to continue to pursue medium term external viability. In terms of process, these consultations take place twice a year, one at the time of the annual Article IV consultation and one additional PPM discussion focusing on the assessment as to whether the member continues to have the capacity to repay the IMF.79

76 See IMF, ‘Procedures for Dealing with Members with Overdue Financial Obligations to the General Department and the SDR Department’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 689. 77 Under Article V, Section 7(g), the IMF has the authority to postpone the date of the discharge of a repurchase— but not beyond the maximum period (ie five years in the credit tranches and ten years for the extended arrangements)—by a majority of the votes cast –, unless the IMF determines by a 70 per cent majority of the total voting power that a longer period for repurchase, which is consistent with the temporary use of the general resources of the IMF, is justified because discharge on the due date would result in exceptional hardship for the member. 78 IMF, ‘Post-Program Monitoring’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 427. 79 IMF, ‘Strengthening the Framework for Post Program Monitoring’ (2016) IMF Policy Paper.

THE GLOBAL FINANCIAL CRISIS AND IMF LENDING 943

III. The Global Financial Crisis and IMF Lending to EU and EEA Members The GFC affected EU/EEA members in several different ways, which determined the manner the IMF supported these countries. Along with their European partners and the financing mechanisms devised for this purpose, the IMF provided support to its EU and EEA members through lending as well as through policy and technical advice. In this context, understandings were reached between IMF staff and the relevant member authorities on economic adjustment programs that could be supported by the IMF through arrangements, mainly using stand-by and extended arrangements.80

31.39

The IMF’s involvement in supporting these members during the GFC can be separated into two phases: A first phase, where IMF support was provided to some EU and EEA members, which was in line with the IMF’s traditional crisis resolution role. A second phase, where the IMF assisted euro area members affected by the crisis, which raised somewhat novel and complex issues and challenges.

31.40

Throughout the GFC, the IMF also assisted members not directly affected by the crisis but facing risks. One of these members was Poland, which received assistance through arrangements under the FCL81 until November 2017.82

31.41

Rather than with financial assistance, the IMF supported Spain with policy and technical advice during its implementation of its banking program supported by the European Stability Mechanism (ESM).83

31.42

80 The authorities’ policy intentions on implementation of said programs were described in what is called ‘program documents’ which normally include the Letter of Intent (LOI), with an attached Memorandum on Economic and Financial Policies (MEFP) that may be accompanied also by a Technical Memorandum of Understanding (TMU). The LOI is typically signed by the Minister of Finance and the Central Bank Governor since these are the members’ authorities who have normally the power to implement the policy adjustments committed under the LOI and are also the instrumentalities through which the IMF interacts with the member (see Article V, Section 1). These are submitted by the IMF Managing Director to the IMF Executive Board reflecting the authorities’ policy objectives and strategies. In all their program documents, the authorities should clearly distinguish between the conditions on which the IMF’s financial support depends (ie program conditionality under IMF’s policies) and other policy commitments and key elements of the member’s program. 81 At the inception of the GFC, it was found that an important element was missing from the IMF’s financing toolkit in the GRA. It was found that members facing risks because of the crisis that may need support from the IMF as a backstopping of their very strong policies and fundamentals (ie innocent by-standers), may not come to the IMF mainly due to the perceived stigma associated with an IMF-supported program. This was considered as problematic because it prevented those members from receiving the support needed in a timely manner precisely to avoid a full-blown crisis in their specific cases. This instrument was established as part of a process of overhauling the legal framework to develop new ways for the IMF to finance members that find themselves in a cash crunch, with the idea of tailoring its lending instruments to the diverse needs and circumstances of member countries. A key objective of the reform was to reduce the perceived stigma of borrowing from the IMF, and to encourage countries to ask for assistance before they face a full-blown crisis. In light of this, the IMF established a new instrument as a window in the credit tranches policy of the GRA aimed at making available this specific new instrument to members. This instrument is the Flexible Credit Line (FCL) aimed to be used for crisis-prevention and crisis-mitigation for countries with very strong policy frameworks, fundamentals and track records in economic performance. 82 The other two countries using the FCL are Colombia and Mexico. See IMF, ‘Poland Ends the Two-Year 8.24 Billion Euro Flexible Credit Line Arrangement with the IMF’ (Press Release No 17/418) accessed 13 February 2020. 83 In 2012, the IMF staff reached understandings with the Spanish authorities on terms of reference to assist them in monitoring the implementation of their plan for recapitalization of Spanish financial institutions. See IMF, ‘Terms of Reference for Fund Staff Monitoring in the Context of European Financial Assistance for Bank Recapitalization’ (20 July 2012). This service was provided in accordance with the authority granted to the IMF

944 IMF’S FINANCING ROLE IN EUROPE DURING GFC 31.43

All EU and EEA members receiving IMF financial assistance during the GFC in both phases have already successfully exited such support and moved into PPM or already graduated from PPM.84 In the case of Greece, following the authorities’ notification of the cancellation of the extended arrangement in January 2016, discussions between the authorities and the IMF on a possible successor arrangement continued, including through the approval in principle (AIP) of a stand-by arrangement in 2017.85

31.44

Financial sector vulnerabilities and debt overhang played a critical role in designing fund supported programs. For example, given the sizable impact of the crisis on household and corporate balance sheets leading to non-performing loans (NPLs), it was a common feature of program design that, part of the structural conditionality included measures involving not only mechanisms for NPL resolution but also insolvency and effective debt workout measures aiming at deleveraging the non-financial private sector. NPLs constrained the supply of credit back into the economy to support economic growth and thus created a negative feedback loop to recovery also threatening financial stability.86 The IMF’s Legal Department played a critical role in this area by providing advice to members in designing and implementing measures related to the corporate and personal insolvency, out-of-court workouts, and debt enforcement regimes.87 under Article V, Section 2(b) and qualified legally as a form of technical assistance (TA). This IMF TA in turn supported Spain’s ESM-supported program. IMF, ‘Spain: Financial Sector Reform—First Progress Report’ (IMF Country Report No 12/318, 2012). 84 Countries like Cyprus, Hungary, Iceland, Ireland, Latvia and Portugal, which have successfully exited IMF- supported programs, all underwent PPMs. IMF, ‘Press Release: Portugal to Engage in Post-Program Monitoring with the IMF’ (Press Release No 14/380); IMF, ‘Ireland: Twelfth Review Under the Extended Arrangement and Proposal for Post-Program Monitoring ‘(IMF Country Report No 13/366, 2013); IMF, ‘Republic of Latvia: Fifth Review Under the Stand-By Arrangement and Proposal for Post-program Monitoring’ (IMF Country Report No 12/31, 2012); IMF, ‘Hungary: Staff Report for the 2010 Article IV Consultation and Proposal for Post-Program Monitoring’ (IMF Country Report No 11/35, 2011); IMF, ‘Iceland: Sixth Review Under the SBA and Proposal for Post-Program Monitoring’ (IMF Country Report No 11/263, 2011). For Romania, the Managing Director did not initiate PPM. 85 The AIP of an IMF arrangement was used in several cases in which policy understandings had been reached with the member, while allowing additional time for agreement to be reached between the member and its creditors in respect of financing or debt relief. Once this agreement was reached and, accordingly, the necessary financing assurances granted, the IMF Executive Board would then decide to make the arrangement effective. It was used nineteen times in the 1980s. The AIP procedure was designed to address coordination issues relating to the necessity of an IMF arrangement as a precursor to extraordinary treatment at the Paris Club and to catalyse agreement with private creditors. Over time, due to a growing willingness of Paris Club creditors to give assurances on debt relief—including for extraordinary financing—before arrangement approval, this procedure was no longer needed and the 1984 Guidelines have since lapsed. In addition, the need for an AIP approval was obviated by more informal interactions between IMF staff and the Paris Club, as well as the necessary financing assurances being granted by way of the anticipated Paris Club Agreed Minutes. With respect to private creditors, the procedure was no longer needed because of the willingness of the IMF to ‘lend into arrears’—ie to go forward even in the absence of an agreement (in these cases, the arrears provided the necessary financing under the arrangement). See IMF, ‘Request for Stand-By Arrangement—Press Release; Staff Report; and Statement by the Executive Director for Greece’ (IMF Country Report No 17/229, 2017) 42; see further key questions on approval in principle accessed 13 February  2020. 86 IMF, ‘Crisis Program Review’ (n 5). 87 Shekhar Aiyar and others, ‘A Strategy for Resolving Europe’s Problem Loans’ (2015) IMF Staff Discussion Note; Wolfgang Bergthaler, Kenneth H Kang, Yan Liu, and Dermot Monaghan, ‘Tackling Small and Medium Enterprise Problem Loans in Europe’ (2015) IMF Staff Discussion Note; Sebastiaan Pompe and Wolfgang Bergthaler, ‘Reforming the Legal and Institutional Framework for the Enforcement of Civil and Commercial Claims in Portugal’ (2015) IMF Working Paper 2015/279; IMF, ‘Greece: Selected Issues’ (IMF Country Report No 17/41, 2017); IMF, ‘Portugal: Selected Issues’ (IMF Country Report No 15/127, 2015); Michaela Erbenova, Yan Liu, and Magnus Saxegaard, ‘Corporate and Household Debt Distress in Latvia: Strengthening the Incentives for a Market-Based Approach to Debt Resolution’ (2011) IMF Working Paper 11/85; IMF, ‘Crisis Program Review’ (n 5).

20 July 2017 to 31 Aug 2018 15 March 2012 to 15 Jan 2016 9 May 2010 to 14 March 2012

Stand-By Arrangement (approved in principle)2

Extended Arrangement

Stand-By Arrangement

Greece

12 Jan 2017 to 2 Nov 2017 14 Jan 2015 to 13 Jan 2017 18 Jan 2013 to 13 Jan 2015 21 Jan 2011 to 17 Jan 2013 2 July 2010 to 20 Jan 2011

Extended Arrangement

Stand-By Arrangement

Extended Arrangement

Flexible Credit Line

Flexible Credit Line

Flexible Credit Line

Flexible Credit Line

Flexible Credit Line

Ireland

Latvia

Portugal

Poland

20 May 2011 to 30 June 2014

23 Dec 2008 to 22 Dec 2011

16 Dec 2010 to 18 Dec 2013

19 Nov 2008 to 31 Aug 2011

Stand-By Arrangement

Iceland

6 Nov 2008 to 5 Oct 2010

Stand-By Arrangement

Hungary

15 May 2013 to 14 May May 2016

Extended Arrangement

Cyprus

Duration

Arrangement

IMF Member

1,000%

1,400%

1,303%

770%

159%

2,305.7%

1,200%

2,321.8%

1,190%

1,015%

3,212%

2,158.8%

55%

563%

% quota1

Access in

Table 31.1 IMF Arrangements Approved for EU and EEA Members between 2008–17

13,690.00

19,166.00

0.00

0.00

0.00

0.00

13,000.003 22,000.00

0.00

22,942.00

982.24

19,465.80

1,400.00

7,637.00

17,541.80

10,224.50

0.00

792.00

6,500.00

23,742.00

1,521.63

19,465.80

1,400.00

10,500

26,432.90

23,785.30

1,336.00

891.00

SDR amounts (in million)

Amounts disbursed in SDR (in million)

N/A

N/A

N/A

N/A

N/A

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

No

Exceptional access

N/A

N/A

N/A

N/A

N/A

No

Yes

No

Yes

Yes

Yes

No

No

No

Emergency financing mechanism

(continued)

1

1

1

1

1

11

5

12

5

5

5

5

0

9

Reviews completed

THE GLOBAL FINANCIAL CRISIS AND IMF LENDING 945

27 Sept 2013 to 26 Sept 2015 31 March 2011 to 30 June 2013 4 May 2009 to 30 March 2011

Stand-By Arrangement Stand-By Arrangement

6 May 2009 to 5 May 2010

Flexible Credit Line

Stand-By Arrangement

Duration

Arrangement

300% 1,110.77%

170%

1,000%

% quota1

Access in

3,090.6 11,443.00

1,751.34

13,690.00

SDR amounts (in million)

0.00 10,569.00

0.00

0.00

Amounts disbursed in SDR (in million)

Yes Yes

Yes

N/A

Exceptional access

No No

No

N/A

Emergency financing mechanism

8 7

2

1

Reviews completed

For amounts approved before the entry into force of the 14th General Review of Quotas on 26 January 2016, the quotas in this table represent those in effect on the date of arrangement approval. 2 Not effective. 3 The amount at FCL arrangement approval was SDR 15,500 million.

1

Romania

IMF Member

Table 31.1 Continued

946 IMF’S FINANCING ROLE IN EUROPE DURING GFC

THE GLOBAL FINANCIAL CRISIS AND IMF LENDING 947 In this section we discuss the two phases of IMF engagement with some EU and EAA members and how IMF policy described in section 2 has been applied to these members during the GFC (see Table 31.1).

31.45

A. Phase 1: IMF Financing of non-euro area members during the GFC88 1. The Balance of Payment Problem Common to most members in the EU/EEA affected by the GFC during this phase was that they had some form of fixed or heavily managed exchange rate arrangement.89 In addition, most members also experienced some form of loss of market access90 which these members had enjoyed previously before capital flows dried up. Others experienced an asset boom (for instance, in the real estate market) in the run up to the crisis, which then burst and led to instability in the financial sector and fiscal and exchange rate pressures. Latvia faced a BoP crisis from an overvalued exchange rate. The problem in Iceland was that it had a severe financial sector crisis resulting in combined BoP and exchange rate crises. As to Hungary, its BoP problems were triggered by a loss of confidence resulting in loss of international market access. Finally, Romania had a vulnerable fiscal position which challenged its BoP. Moreover, private sector vulnerabilities also played a major role in many countries affected by the crisis.91

2. Type of IMF Arrangement In this phase of the crisis, all members—Latvia, Hungary, Iceland, and Romania (2009, 2011, and 2013)—used SBAs. The SBA has been the main tool used by the IMF for assisting members in the GRA’s credit tranche policies, as it can be used to help the member address any type of BoP problem. In terms of process, all these arrangements were approved by the IMF Executive Board based on management and staff ’s recommendations following the customary assessment that all relevant policies and procedures for providing IMF financing in the GRA were met. It is worth noting that the IMF employed the emergency financing mechanism (EFM)92

88 See further Chapter 34 paragraph 34.54. 89 IMF, ‘Crisis Program Review’ (n 5). 90 Whether a country is assessed to have market access will depend on its ability to tap international capital on a sustained basis through the contracting of loans and/or issuance of securities across a range of maturities, regardless of the currency denomination of the instruments, and at reasonable interest rates. See IMF, ‘Sovereign Debt Restructuring’ (n 53). 91 IMF, ‘Crisis Program Review’ (n 5). 92 The EFM can be used if the member faces an exceptional situation that threatens its financial stability and a rapid response is needed to contain the damage to the country or the international monetary system. IMF management informs the IMF Executive Board immediately about a member’s request for assistance with a short- written report circulated as quickly as possible. An IMF staff team is quickly deployed to the member and the IMF Executive Board is regularly informed about the developments. As soon as IMF staff reaches an understanding with the member, documents would be circulated as quickly as possible to the IMF Executive Board (within five days) which would consider the request to support a program within forty-eight to seventy-two hours. The IMF Executive Board would conduct a full review of the emergency procedures within one or two months of the IMF arrangement approval. IMF, ‘Summing up by the Chairman—Emergency Financing Mechanism’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 422.

31.46

31.47

31.48

31.49

948 IMF’S FINANCING ROLE IN EUROPE DURING GFC to expedite the procedure for approval of IMF arrangements for some countries during its first phase of engagement.93 The EFM was used for Hungary, Latvia, and Iceland in order to respond to members’ needs in an expedited manner.94 In this context, the IMF also conducted the required interim review required under the EFM for these cases.95

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3. Program Design and Conditionality Program conditionality in this phase was focused and overall program implementation was high. This appeared to have been a reflection of an improved level of country ‘ownership’ of IMF-supported programs.96 Program conditionality focused on measures and variables pertaining to the core areas of the IMF’s expertise, namely, monetary, exchange rate and fiscal policies, as well as external and financial sector issues.97 Program objectives and conditionality were tailored, as is required under the IMF’s Guidelines on Conditionality, to country-specific circumstances, and aimed primarily at mitigating external and financial sector pressures. Given that most countries were generally facing large external imbalances the key program objectives focused on smoothing current account adjustments and mitigating liquidity pressures, while at the same time trying to restore/preserve market confidence through addressing underlying vulnerabilities during the respective program periods. Another key feature in these IMF-supported programs was measures aimed at avoiding systemic banking crises or restoring bank solvency where banking crises were underway. In cases where weak structural fiscal positions called for adjustment, excessive frontloading of measures that would have exacerbated the economic downturn was avoided as part of program design, with market confidence secured via medium-term fiscal consolidation plans backed by key critical structural reforms.98 The structural reform component in program design and conditionality in this first phase however, was not as prominent as in the second phase.

93 IMF, ‘Hungary: Request for Stand- By Arrangement— Staff Report’ (IMF Country Report No 08/ 36, 2008) (hereafter IMF, ‘Hungary: Request for Stand-By Arrangement—Staff Report’); IMF, ‘Republic of Latvia: Request for Stand-By Arrangement—Staff Report’ (IMF Country Report No 09/3, 2009) (hereafter IMF, ‘Republic of Latvia: Request for Stand-By Arrangement—Staff Report’); IMF, ‘Greece: Request for Stand-By Arrangement—Press Release’ (IMF Country Report No 10/110, 2010) (hereafter IMF, ‘Greece: request for Stand- By Arrangement—Press Release’); IMF, ‘Iceland: Request for Stand-By Arrangement’ (IMF Country Report No 08/362, 2008) (hereafter IMF, ‘Iceland: Request for Stand-By Arrangement’). The IMF also conducted the required interim review under the EFM for these cases: IMF, ‘Hungary—Stand-By Arrangement—Interim Review Under the Emergency Financing Mechanism’ (IMF Country Report No 09/21, 2009) (hereafter IMF, ‘Hungary—Stand- By Arrangement—Interim Review Under the Emergency Financing Mechanism’); IMF, ‘Republic of Latvia: Stand- By Arrangement—Interim Review Under the Emergency Financing Mechanism’ (IMF Country Report No 09/ 125, 2009) (hereafter IMF, ‘Republic of Latvia: Stand-By Arrangement—Interim Review Under the Emergency Financing Mechanism’); IMF, ‘Iceland: Stand-By Arrangement—Interim Review Under the Emergency Financing (IMF Country Report No 09/52, 2009); IMF, ‘Greece: Stand-By Arrangement—Review under the Emergency Financing Mechanism’ (IMF Country Report No 10/217, 2010). 94 IMF, ‘Hungary: Request for Stand-By Arrangement—Staff Report’ (n 93); IMF, ‘Republic of Latvia: Request for Stand-By Arrangement—Staff Report’ (n 93); IMF, ‘Greece: request for Stand-By Arrangement—Press Release’ (n 93); IMF, ‘Iceland: Request for Stand-By Arrangement’ (n 92). 95 IMF, ‘Hungary—Stand-By Arrangement—Interim Review Under the Emergency Financing Mechanism’ (n 93); IMF, ‘Republic of Latvia: Stand-By Arrangement—Interim Review Under the Emergency Financing Mechanism’ (n 93); IMF, Iceland: Stand-By Arrangement—Review under the emergency financing mechanism (IMF Country Report No 09/26, 2009); IMF, ‘Greece: Stand-By Arrangement—Review under the Emergency Financing Mechanism’ (n 93). 96 IMF, ‘Review of Recent Crisis Programs’ (2009) IMF Policy Paper (hereafter IMF, ‘Review of Recent Crisis Programs’). 97 See further IMF, ‘Crisis Program Review’ (n 5). 98 IMF, ‘Review of Recent Crisis Programs’ (n 96).

THE GLOBAL FINANCIAL CRISIS AND IMF LENDING 949 Since these IMF-supported programs were designed at the inception of the GFC, such design occurred in the context of an unusual degree of global economic uncertainty, and therefore, program design had to be adjusted during the period of the arrangements as programs were being implemented and in light of the evolving circumstances.99 This was done in the context of program reviews where necessary, by modifying existing conditionality and/or establishing new ones.

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4. Access: The Need for Exceptional Access to IMF Resources Another common aspect of IMF financing of members in the EU/EEA during the GFC 31.52 was that a number of these members (Hungary, Romania, Latvia, and Iceland) needed large amounts of financing. Indeed, almost all arrangements during the first phase entailed exceptional access, namely, access beyond the normal access limits in the GRA, with frontloaded disbursements of resources.100 Accordingly, these members had access to IMF resources under the EAP which required that the IMF be satisfied that all these members met the four substantive criteria set forth under the EAP which was indeed the case. In turn, the EAP procedural framework also required early consultations by the IMF Managing Director with the IMF Executive Board.101 In all these cases, when the respective IMF arrangements expired, the IMF also conducted the ex post evaluations (EPEs) of the IMF- supported programs as required under the EAP.102 5. Controls on Capital and Current Account Transactions103 The introduction by members of capital controls as a mechanism to stem capital outflows during the GFC was also a prominent feature of this crisis, which prompted the need for 99 Ibid. 100 Ibid. 101 Under the procedures set forth in the EAP, once the IMF Managing Director decides that exceptional access may be warranted in a case, the IMF Managing Director will then consult with the IMF Executive Board promptly in an informal meeting. IMF Executive Directors will be provided with a concise note that sets out the following as fully as possible: (i) a tentative diagnosis of the problem; (ii) the outlines of the needed policy measures; (iii) the basis for a judgment that exceptional access may be necessary and appropriate, with a preliminary evaluation of the four substantive criteria applying in capital account crises, and including a preliminary analysis of external and sovereign debt sustainability; and (iv) the likely timetable for discussions. Additional consultations with Executive Directors will normally be expected to occur between the initial informal meeting and the IMF Executive Board’s consideration of the report prepared by staff supporting the member’s request for exceptional access. The briefings will aim to keep the IMF Executive Board abreast of program-financing parameters, including assumed rollover rates, economic developments, progress in negotiations, any substantial changes in understandings, and any changes to the initially envisaged timetable for Board consultation. The IMF staff will provide the IMF Executive Board with a separate report evaluating the case for exceptional access based on further consideration of the four substantive criteria, including debt sustainability. Finally, the IMF Managing Director will consult with the IMF Executive Board specifically before concluding discussions on a program and before any public statement on a proposed level of access. Informal meetings are meetings of IMF Executive Directors (either to engage or inform) in which they are not deliberating as a decision-making organ of the IMF. 102 IMF, ‘Hungary: Ex Post Evaluation of Exceptional Access Under the 2008 Stand-By Arrangement’ (IMF Country Report No 11/145, 2011); IMF, ‘Republic of Latvia: Ex Post Evaluation of Exceptional Access Under the 2008 Stand-By Arrangement’ (IMF Country Report No 13/30, 2013); IMF, ‘Romania: Ex Post Evaluation of Exceptional Access under the 2009 Stand-By Arrangement’ (IMF Country Report No 12/64, 2012); IMF, ‘Romania: Ex Post Evaluation of Exceptional Access Under the 2011 Stand-By Arrangement’ (IMF Country Report No 14/88, 2014); IMF, ‘Romania: Ex-Post Evaluation of Exceptional Access Under the 2013 Stand-By Arrangement’ (IMF Country Report No 17/135, 2017). 103 Under the IMF’s legal framework, there is a distinction between a member introducing restrictions on current international transactions (ie exchange restrictions)—as defined in Article XXX(d), or engaging in discriminatory or multiple currency practices (which constitute a breach of the member’s obligations under the Articles) and introducing restrictions on capital transactions (ie capital controls or capital flow management measures), which members are free to impose under Article VI, Section 3 (although subject to some specific limitations as also set forth in the Articles—eg a capital control that also gives rise to an exchange restriction or a multiple currency

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950 IMF’S FINANCING ROLE IN EUROPE DURING GFC the IMF to reconsider its stance with regard to capital flow management (CFM) issues and resulted in a series of analytical pieces that concluded with the IMF’s institutional view on CFMs.104 31.54

During this first phase, Iceland was the most prominent member to introduce capital controls at the inception of the crisis, which were subsequently tightened and/or reformulated and continued in place even after Iceland’s successful exit from the IMF-supported program. The introduction and maintenance of these measures were considered necessary by the member because of the severity of the crisis to stem capital outflows and to support Iceland’s financial stability, and thus, they were also supported by the IMF during the period of the IMF arrangement with Iceland.

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Some of the controls imposed by Iceland also gave rise to exchange restrictions subject to IMF approval under Article VIII, Section 2(a). Therefore, the IMF made findings of exchange restrictions subject to Article VIII, Section 2(a) but approved the retention of these measures temporarily.105 In the meantime, Iceland has removed these exchange restrictions.106

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In similar fashion, the IMF also found that some measures of their respective exchange systems gave rise to exchange restrictions and multiple currency practices in Latvia and Hungary, which were also subject to IMF approval and have been removed in the meantime.107

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6. Program Financing: Financing Assurances and Arrears Policies A key element of IMF-supported programs relies on finding the appropriate mix of macroeconomic adjustment and external financing. Therefore, the IMF was required to assess two issues: First, the IMF identified the program objectives and reached understandings on the conditionality related to the macro-economic adjustment program relevant for each country case relative to each member’s own circumstances. Second, the IMF needed to assess the respective financing needs of these members which was also key to the design of each IMF-supported program. practice (MCP) under the Articles). However, under Article VI, Section 1 of the IMF’s Articles, it is precluded from financing ‘large or sustained outflows of capital’. Furthermore, in cases like this, the IMF may request the member to impose capital controls to prevent such use of the IMF’s resources in the GRA. 104 Building on a series of IMF policy papers and IMF Executive Board discussions, as well as analytical work, the IMF adopted the institutional view on the liberalization and management of capital flows in 2012, with related guidance issued in 2013 and 2015, in order to facilitate clear and consistent policy advice on these issues. It was reviewed in 2016. See IMF, ‘IMF Executive Board Discusses Review of Experience with the Institutional View on the Liberalization and Management of Capital Flows’ (Press Release No 16/573). 105 Given that these restrictions were imposed: (i) temporarily; (ii) for BoP reasons; and (iii) non-discriminatorily among IMF members, the IMF approved the temporary retention. IMF, ‘Republic of Latvia: Request for Stand-By Arrangement—Staff Report’ (n 93); IMF, ‘Iceland: Request for Stand-By Arrangement’ (n 93); IMF, ‘Greece: 2016 Article IV Consultation’ (IMF Country Report No 17/40, 2017) (hereafter IMF, ‘Greece: 2016 Article IV Consultation’); IMF, ‘Cyprus: Request for Arrangement under the extended Fund Facility’ (IMF Country Report No 13/125, 2013) (hereafter IMF, ‘Cyprus: Request for Arrangement under the extended Fund Facility’). 106 IMF, ‘Annual Report on Exchange Arrangements and Exchange Restrictions’ (hereafter AREAER). IMF, ‘Crisis Program Review’ (n 5). 107 Given that these restrictions were also imposed: (i) temporarily; (ii) for BoP reasons; and (iii) non- discriminatorily among IMF members, the IMF approved the temporary retention. IMF, ‘Republic of Latvia: Request for Stand-By Arrangement—Staff Report’ (n 93); IMF, ‘Hungary: 2011 Article IV consultation’ (IMF Country Report No 12/13, 2012).

THE GLOBAL FINANCIAL CRISIS AND IMF LENDING 951 IMF-supported programs catalysed lending from other European partners—the Nordics in the case of Iceland—and financing through the balance of payment assistance for EU members.108 In the latter case, the European Commission (EC) was actively monitoring the implementation of these members’ programs. This additional financing was critical to meet financing assurances during the course of the IMF arrangement.109

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The application of the IMF’s arrears policies to the official or private sector did not feature prominently in this phase of the IMF engagement with EU and EEA member countries.

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B. Phase 2: IMF Financing of euro area members110 1. Key Legal Issues The first key legal issue was whether a currency union member can experience a BoP problem and continue to be eligible for IMF lending.111 Under the IMF’s Articles, all IMF members are eligible to use IMF resources in the GRA in order to assist them in addressing their BoP problems. A member of the euro area facing a BoP problem is thus eligible to use IMF resources.112 Therefore, if the member represents that it has a need because of a BoP deficit, reserve position or developments in its reserves, it can obtain IMF financial support in the GRA.113 Also, currency union members can experience BoP problems. Like other countries, members of a currency union or union-level institutions may adopt policies (or experience shocks) that are inconsistent with the expected path of the common exchange rate. In turn, this could lead to a sudden and persistent BoP deficit, putting pressure on the union’s currency or reserves. To determine the BoP need of a currency union member, two issues are particularly relevant. Specifically: (i) even though transactions within a currency union may take place in a single currency, as long as they take place between residents and nonresidents, they have a BoP impact—that is, residency rather than currency is the basis for the BoP need; and (ii) even though reserves are typically understood as being in foreign currency, in a currency union that issues a reserve currency (eg the euro), reserves may be the currency of the member (because the member does not have full control over the issuance). Hence, the BoP needs in currency union members manifest themselves in a net drain

108 Article 143 of the Treaty on the Functioning of the European Union (TFEU) and Council Regulation (EC) 332/2002 of 18 February 2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments [2002] OJ L53/1. 109 See further Chapter 34 paragraph 34.8. 110 See further Chapter 33 paragraph 33.145. 111 See Article 143(2)(a) TFEU. See further Bergthaler, ‘The Relationship Between International Monetary Fund Law and European Union Law’ (n 7). The IMF has provided financial support to members of currency unions for many years (ie Central African Economic and Monetary Community, West African Economic and Monetary Union, and Eastern Caribbean Currency Union); those currency unions however do not issue a reserve currency. 112 Given the dual nature of the euro as a domestic and foreign currency and the separation in the IMF’s accounts of its holdings of euros corresponding to different IMF members of the euro area, a sale of euros by the IMF to a euro area member drawn on another euro area member’s account with the IMF should be regarded as the sale of another member’s currency and accordingly authorized under the IMF’s Articles. See IMF, ‘The European Economic and Monetary Union and the International Monetary Fund—Main Legal Issues Relating to Rights and Obligations of EMU Members in the Fund’ (1998). 113 See Article 122(2) TFEU. See further Bergthaler, ‘The Relationship Between International Monetary Fund Law and European Union Law’ (n 7).

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952 IMF’S FINANCING ROLE IN EUROPE DURING GFC of funds out of the country (from residents to non-residents)—regardless of whether the drain is in foreign or domestic currency or to countries inside or outside the union.114 31.61

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The second legal issue was whether the IMF can lend to a member of the currency union individually, or rather, whether the financial assistance must be provided to the ‘union as a whole’. Under the IMF’s Articles, as a member country based institution, the IMF can only provide financial support through the GRA to its ‘members’. Because only ‘countries’ can be members of the IMF,115 not other entities or unions such as currency unions, the IMF cannot provide such financing to the union as a whole. Furthermore, IMF resources in the GRA can only be used by a member for its own BoP need (and not the BoP of the union as a whole), as described above.

2. Type of Balance Payment Problem Euro area members were affected differently through the GFC facing problems that were partly associated with the GFC but whose more immediate origin was their public and private balance sheet vulnerabilities and the accumulation of large current account imbalances within the euro area.116 Contagion risk played a key role in responding to the crisis. Ireland had a financial sector crisis where problems in large banks triggered BoP and fiscal crises leading to a loss of market access. Portugal faced a BoP crisis stemming from large fiscal and current account deficits and loss of market access as well as vulnerabilities in the financial sector. Greece was a classic BoP and fiscal crisis coupled with a sovereign debt crisis and the loss of market access. Cyprus’ BoP problems arose from the financial sector crisis, where its banking system was severely affected by a real estate boom-bust cycle and the Greek sovereign debt restructuring of 2012, resulting in a loss of market access.117

3. Type of IMF Arrangement Since Portugal, Greece (2012), Ireland, and Cyprus had a more structural adjustment agenda aimed at resolving their underlying BoP problems, they requested the use of extended arrangements under the EFF (except for Greece in 2010 and 2017 where SBAs were requested). The decision to use an extended arrangement under the EFF derives from the nature of this facility aimed at addressing a special type of BoP need experienced by these members. Indeed, for members experiencing BoP problems that are more structural in nature, and thus, would require not only a longer period of time to resolve the underlying BoP problems, but also would need more structural type of measures to address said problems, the most suitable tool to finance such members is the extended arrangement under the EFF. 4. Conditionality In the case of euro area members receiving IMF financing during the crisis, since monetary and exchange rate policy cannot be considered part of the mix of economic adjustment, conditionality in IMF-supported programs from these countries focused instead on fiscal adjustment and structural reforms.118 Indeed, the monetary and exchange rate policies of 114 Sean Hagan, ‘10 Years of the Euro: A Perspective from the IMF’ (European Central Bank, Frankfurt, 29 January 2009); IMF, ‘Program Design in Currency Unions’ (n 25). 115 See Article II, Section 2. 116 IMF, ‘Crisis Program Review’ (n 5). 117 IMF, ‘Crisis Program Review’ (n 5). 118 IMF, ‘Crisis Program Review’ (n 5).

THE GLOBAL FINANCIAL CRISIS AND IMF LENDING 953 the currency union were taken as a given by the IMF, and thus program design focused instead on policies under the direct or indirect control of the national member authorities such as fiscal and structural policies. While the IMF provided advice on union-wide policies through surveillance, countries’ IMF supported programs were considered viable on the basis of country-level policy measures, taking prevailing union-level policies as a given,119 and hence the IMF did not call for union-wide adjustments as a condition for its lending. On the fiscal side, these programs aimed primarily at reducing fiscal deficits and lowering debt ratios over the medium term taking into account available financing. In terms of structural policies, these measures aimed primarily at reforms in areas key to obtaining a successful internal devaluation and enhancing competitiveness.120 As a general matter, Article V, Section 3(a) mandates the IMF to adopt policies for the use of its resources that will help members to resolve their BoP problems and ensure adequate safeguards for the use of the IMF’s resources. This provision thus establishes the IMF’s inherent ability to call for the adoption of union-level measures where such measures are necessary for the success of a member’s IMF supported program and/or to safeguard IMF resources.121 Over the years, the IMF has in some instances found it necessary to call for the implementation of union-level policies in order to support a member of the union. These were normally limited to policies applicable to the specific member country requesting the IMF’s financial assistance. In some very exceptional cases, however, the IMF may need to seek assurances regarding adjustments in union-wide policy settings, which may affect other members in the currency union beyond the one receiving financing from the IMF.122 Furthermore, these assurances are provided by the relevant union-level institutions voluntarily and in accordance with their own assessment of what policies are appropriate, and as is the case in any other program context (even outside a currency union), the IMF will not seek policy assurances from institutions that would involve it taking actions inconsistent with the institution’s mandate and legal and institutional frameworks. In cases where the institution is prevented by its mandate or legal and institutional frameworks from providing assurances sought by the IMF, then every effort will be made to work with the relevant member country to adapt the program design in a way that its objectives can be achieved with an alternative policy mix. The policy assurances that the IMF can seek from union-level institutions are those that are deemed by the IMF as critical for the success of the member’s program, and are formulated in a clear, specific, monitorable, and timebound (the latter, where necessary) manner. Since the legal, institutional, and policy frameworks differ across currency unions, those differences are to be taken into account by the IMF, on a case-by-case basis, in assisting members in designing Fund-supported programs.123 119 Since union-level policies were taken as a given, the IMF did not find it necessary to call for specific policies to be implemented by union-level institutions of the euro area as conditions to provide financing to the euro area crisis countries during the GFC. It should also be noted that the Single Supervisory Mechanism (SSM) had not yet been established at the time of the arrangement approval for euro area members. 120 IMF, ‘Crisis Program Review’ (n 5). 121 IMF, ‘Crisis Program Review’ (n 5); IMF, ‘Program Design in Currency Unions’ (n 25). 122 These exceptional circumstances could occur when policies at the union level, such as unsustainable foreign exchange interventions, have contributed to the BoP problem facing the union’s members, or when a critical mass of the union’s members face a contemporaneous BoP problem. See IMF, ‘Program Design in Currency Unions’ (n 25). 123 IMF, ‘Program Design in Currency Unions’ (n 25); IMF, ‘The Chairman’s Summing Up—Program Design in Currency Unions’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 294.

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954 IMF’S FINANCING ROLE IN EUROPE DURING GFC 31.67

5. The IMF and the ‘Troika’124 In the case of euro area members (Greece 2010, 2012, 2017, Portugal, Ireland, and Cyprus), first other euro area Member States, and then the European Financial Stability Facility/ European Financial Stability Mechanism (EFSF/EFSM) and finally the ESM co-financed members’ programs with the IMF. The Troika–consisting of the IMF, the EC, and the European Central Bank (ECB) (later complemented by the ESM)–took the role of assisting members in the design of the adjustment programs, establishment of program conditionality and the monitoring of the respective programs’ implementation.125 The Troika was a new experience for the IMF since previously the IMF had mostly coordinated with institutions/countries that provided financing. But these institutions/countries were not involved in program design and monitoring.126 While co-financing with other members or institutions has been common over the years, in the case of the euro area IMF supported programs, the troika monitored a macro-economic adjustment program with the member that was almost identical to the IMF supported program.

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This required close coordination between the IMF and the European institutions to ensure an alignment of program objectives and also completion of reviews. As more specifically explained later, IMF supported programs must be fully financed. For this reason, if the European program was off track, the IMF could also not complete the review and disburse (and vice versa) due to the requirement of financing assurances. It did not mean however, that the IMF was obliged to complete a program review under an IMF-supported program just because the EU partners together with the troika completed their relevant program review, as the IMF could only complete a program review and make amounts committed available to the member, when it was satisfied that all relevant IMF policies and all program conditions were met (or waived in the case of PCs) and that the program was on track to meet its objectives. Indeed, for purposes of the IMF-supported programs, IMF staff and management ensured that at all times IMF policy was complied with in order for the IMF Executive Board to take a decision and to determine whether the necessary conditions to complete a program review were met. The IMF as an independent international organization may take decisions only in compliance with the IMF’s Articles and the decisions adopted under them.

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The issue of coordination with the partners in the Troika was a very important experience for all involved and was also in a way unique. This experience brought to the fore the need for the IMF to reconsider more generally the way it relates and collaborates with regional financing arrangements in order to strengthen and make such collaboration more effective and efficient. In this context, the IMF endorsed six operational principles to guide future IMF-Regional Financing Arrangements (RFA) collaboration. This framework allows the IMF to tailor its engagement with RFAs depending on the form of operations (capacity development, surveillance, non-financial support, and lending) and the capacity of each RFA. The roles of the IMF and the RFA in program design and monitoring need to reflect their respective mandates and policies, as well as the capacity of the RFA. The principles underline

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See further Chapter 33 paragraph 33.145. IMF, ‘Crisis Program Review’ (n 5). 126 Ibid. 125

THE GLOBAL FINANCIAL CRISIS AND IMF LENDING 955 the importance of sharing technical information between the IMF and RFAs, conditional on reciprocity and confidentiality assurances.127 In particular for members who have exited IMF financial assistance, consideration was given to modalities of continued engagement with the IMF.128

6. Program Financing/Financing Assurances in Euro area Crisis Countries The IMF needed to ensure that all programs were fully financed. This assessment needed to be made at every review. Given the changing circumstances and developments, the IMF had to assess this carefully. In practice, the Europeans provided the financing assurances through regular euro-group statements and through the statements by IMF Executive Directors elected by euro area members at the IMF Executive Board.129 7. Exceptional Access Policy and Debt Sustainability130 Given the large BoP needs of euro area members, most of the IMF-supported programs with euro area members required IMF financial support in excess of the normal access limits.131 The four substantive EAP criteria at that time required that the member’s debt be judged to be sustainable with high probability. The exemption (the so called ‘systemic exemption’ that was introduced to the EAP in the context of the approval of the SBA for Greece in 2010) however allowed for the financing of members even when the debt was not judged to be sustainable with high probability but when there were risks of systemic spill overs.132 127 IMF, ‘Collaboration Between Regional Financing Arrangements and the IMF’ (2017) IMF Policy Paper. 128 IMF, ‘Adequacy of the Global Financial Safety Net—Proposal for a New Policy Coordination Instrument’ (2017) IMF Policy Paper. In some instances, discussions proceeded on possible successor arrangements, in others the modality was simply through PPM. As these discussions proceeded, and not only with members of the EU and EEA, but with respect to members in other regions also receiving financing from the IMF during the GFC, the IMF concluded that its toolkit did not include a specific instrument that would allow the IMF to monitor programs at the request of members that were not also financial arrangements. This type of instrument exists already but only for low income countries (Policy Support Instrument) but was not available to other members. Accordingly, in 2017, the IMF established the Policy Coordination Instrument (PCI) which is available to all IMF members that do not need IMF financial resources at the time of approval. It is designed for IMF members seeking to demonstrate commitment to a reform agenda or to unlock and coordinate financing from other official creditors or private investors. The PCI aims to help countries better coordinate their access to multiple layers of the global financial safety net, particularly regional financing arrangements. The PCI enables a close policy dialogue between the IMF and a member country, regular monitoring of economic developments and policies, and the endorsement of those policies by the IMF Executive Board. The PCI aims to help countries formulate and implement a macroeconomic policy agenda to: (i) prevent crises and build buffers against external shocks; (ii) enhance macroeconomic stability; and (iii) address macroeconomic imbalances. 129 See for instance IMF, ‘Sovereign Debt Restructuring’ (n 53). 130 The assessment of debt sustainability requires a judgment that the primary balance needed to stabilize debt under both the baseline and realistic shock scenarios is credible, ie economically and politically feasible, and the level of debt is consistent with an acceptably low rollover risk and with preserving potential growth at a satisfactory level. In the context of an IMF-supported program that involves debt restructuring, the DSA also plays the essential role of determining the envelope of financial resources that is available for debt service payments to official and private creditors by charting out the program’s medium-term paths for key macroeconomic, policy, and financing variables. IMF, ‘Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis’ (2011) IMF Policy Paper; IMF, ‘Staff Guidance Note for Public Debt Sustainability Analysis in Market Access Countries’ (2013) IMF Policy Paper. 131 IMF, ‘Greece: Ex-post Evaluation of Exceptional Access under the 2012 Extended Arrangement’ (IMF Country Report No 17/44, 2017); IMF, ‘Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement’ (IMF Country Report No 13/156, 2013); IMF, ‘Portugal: Ex Post Evaluation of Exceptional Access Under the 2011 Extended Arrangement’ (IMF Country Report No 16/302, 2016); IMF, ‘Ireland: Ex Post Evaluation of Exceptional Access Under the 2010 Extended Arrangement’ (IMF Country Report No 15/20, 2015). 132 The four EAP criteria between 2010–16 were:

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The modification of the EAP in turn may illustrate a very interesting evolution of IMF’s policy. It requires however a non-linear historical discussion:

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In 2010, the IMF received a request for financial assistance from Greece above the normal access limits. Because the IMF did not assess Greece’s debt to be sustainable with high probability—as the EAP required at the time—the framework would have required a debt reduction to restore debt sustainability with high probability. However, there were serious concerns at the time that this could lead to severe contagion both in the euro area and beyond (ie a high risk of systemic spill overs).133 The collapse of the US investment bank Lehman Brothers had only occurred a little over one year before and there was considerable uncertainty in the markets. Thus, at the time, the IMF changed its EAP and established a ‘systemic exemption’ for cases where there were significant uncertainties around debt sustainability. In such cases, the exemption allowed large-scale financing to go ahead without a debt reduction operation if there was a high risk of systemic international spill overs. The EAP was thus amended to allow the IMF’s financing to Greece in 2010, and this amendment, which remained in place as part of the IMF’s exceptional access policy from 2010–16, was also applied subsequently to Ireland, Portugal, and Greece 2012.134

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This policy change was necessary given the rigidity with which the 2002 exceptional access framework was applied. The IMF established a comprehensive EAP access policy framework in 2002,135 under which, the IMF could only provide large-scale financing in capital account crises if all of four criteria were met, one of which was as follows: that there is a ‘high probability’ that the member country’s debt is sustainable. With respect to the criterion on debt sustainability, if the high probability bar was met, the IMF could lend without the need for a debt operation. If, however, the bar was not met, the member would typically need to decide to undergo a sufficiently deep debt restructuring to restore debt sustainability with high probability. In practice, there was no middle ground between providing financing and the member needing a deep debt reduction. In particular, it was recognized that where there is uncertainty as to whether a member’s debt is sustainable with high probability, requiring a debt restructuring that is sufficiently definitive to restore debt sustainability with high probability may impose unnecessary costs on the member, its creditors, (a) The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current account or the capital account, resulting in a need for Fund financing that cannot be met within the normal limits. (b) A rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term. However, in instances where there are significant uncertainties that make it difficult to state categorically that there is a high probability that the debt is sustainable over this period, exceptional access would be justified if there is a high risk of international systemic spill overs. Debt sustainability for these purposes will be evaluated on a forward-looking basis and may take into account, inter alia, the intended restructuring of debt to restore sustainability. This criterion applies only to public (domestic and external) debt. However, the analysis of such public debt sustainability will incorporate any potential contingent liabilities of the government, including those potentially arising from private external indebtedness. (c) The member has prospects of gaining or regaining access to private capital markets within the timeframe when Fund resources are outstanding. (d) The policy program of the member provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment. 133 IMF, ‘Crisis Program Review’ (n 5). 134 Ibid. 135 IMF, ‘Summing Up by the Acting Chair—Access policy in capital account crisis’ in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (40th edn, IMF 2019) 407.

THE GLOBAL FINANCIAL CRISIS AND IMF LENDING 957 and the system given the fact that the debt reduction involved in these types of restructuring can have a disruptive effect. In 2016, the IMF Executive Board approved changes to the EAP to make it more calibrated to members’ debt situations and contribute to the efficient resolution of sovereign debt crises, while avoiding unnecessary costs for the members, creditors, and the financial system as a whole.136 The 2016 reform sought to improve the 2002 framework (as amended in 2010) in two important ways: First, it removed the ‘systemic exemption’ because, inter alia, it did not prove reliable in mitigating contagion, it increased subordination risks for private creditors, it had the potential to aggravate ‘moral hazard’ in the international financial system, and finally, by delaying the restoration of debt sustainability, the member could face additional costs, while the IMF would face additional risks to safeguards. Second, it explicitly gave the IMF more flexibility to make its financing conditional on a broader range of debt operations, not only a deep restructuring, but including the less disruptive option of a ‘debt reprofiling’—that is, an extension of maturities falling due during the program, with normally no reduction in principal or coupons.

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In particular: the reformed policy—like the 2002 framework—prescribes that when debt is sustainable with high probability, the IMF will continue to use its catalytic role and provide financing support to the member without the need of any debt operation. When debt is clearly unsustainable, a prompt and definitive debt restructuring will continue to be needed in order to restore debt sustainability with ‘high probability’, otherwise the IMF could not financially support the member as the IMF is precluded from exceptional financing unless the relevant criteria are met.

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However, for countries where debt is assessed to be sustainable but not with a high probability, the reformed policy allows the IMF to approve exceptional access without the country needing to decide on a debt reduction, if the member also receives financing from sources other than the IMF during the program. This financing should be on a scale and terms that: (i) help improve the member’s debt sustainability prospects, without necessarily bringing debt sustainability with high probability at the outset; and (ii) provide sufficient safeguards for IMF resources. The revised EAP does not automatically presume that a reprofiling or any other particular option would be implemented at the outset when debt is assessed to be sustainable but not with a high probability. Instead, the choice of the most appropriate option, from a range of options that could meet the two conditions noted above, would depend on the member’s specific circumstances, and in any case, it is for the member to decide along with its legal and financial advisors what way to proceed. Where a reprofiling is undertaken, the scope of debt to be reprofiled would be determined on a case-by-case basis, recognizing that it would not be advisable to reprofile a particular category of debt if the costs for the member of doing so—including risks to domestic financial stability—outweighed the potential benefits.137

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136 See IMF, ‘The Fund’s Lending Framework and Sovereign Debt—Preliminary Considerations’ (2014) IMF Policy Paper; IMF, ‘The Fund’s Lending Framework and Sovereign Debt—Further Considerations’ (2015) IMF Policy Paper. 137 The reformed EAP also allows the IMF to deal with rare ‘tail-event’ cases where even a reprofiling is considered untenable because of contagion risks so severe that they cannot be managed with normal defensive policy measures. In these rare cases, the IMF could still provide large-scale financing without a debt operation but would require that official partners provide financing on terms sufficiently favourable to backstop debt sustainability and safeguard IMF resources.

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Specifically, with respect to Greece, the IMF continued its program engagement with Greece since the formal cancellation of the extended arrangement in 2016 until the expiration of the ESM supported program in August 2018. Since 2015, the IMF on two occasions has formally found Greece’s debt to be unsustainable.138 In order to enable the IMF to participate in the third ESM supported program after the second review, the IMF approved in principle an SBA in July 2017 that would have become effective once the IMF determined that Greece’s debt was sustainable based on credible and specific assurances on debt relief from Greece’s European partners, provided that Greece implemented the IMF-supported program, and there were no other developments that, in the IMF’s view, undermined program implementation.139

8. Overcoming Collective Action The 2012 Greek sovereign debt restructuring—the largest in history—brought to light a weakness in the international financial architecture of the contractual approach of collective action clauses (CAC).140 While Greece’s domestic law-governed debt could be restructured without any holdouts because of the statutory approach through domestic legislation, out of 36 foreign law governed bonds series, only 17 could successfully be restructured since for the remaining series creditors were able to build up a blocking minority of 25 per cent which prevented the CAC from being triggered. Greece needed to pay these creditors in full.

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CACs allow the key financial terms of a bond to be modified upon receipt of support of a qualified majority of bondholders holding a requisite percentage of the outstanding principal permit. Conventional CACs only bind creditors bond series-by-bond series. Even euro-CACs—which are mandatory for euro area members since 2013—require two thresholds, one series by series and one across series of bonds.141

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After a consultative process of eighteen months with market participants, the International Capital Markets Association (ICMA), and private sector lawyers, the IMF proposed a solution in the form of enhanced CACs for this issue of holdouts.142 This includes an enhanced CAC to be inserted into new international bond instruments that include a more robust ‘aggregation’ feature to address collective action problems more effectively. Specifically, the ‘single-limb’ voting procedure that enables bonds to be restructured on the basis of a single vote across all affected instruments is an effective tool to limit the ability of holdouts to undermine the restructuring process. As a safeguard to protect the interests of creditors 138 IMF, ‘Greece: Preliminary Draft Debt Sustainability Analysis’ (IMF Country Report No 15/165, 2015); IMF, ‘Greece: Preliminary Debt Sustainability Analysis-Updated Estimates and Further Considerations’ (IMF Country Report No 16/130, 2016). 139 IMF, ‘Greece: Request for Stand-By Arrangement—Press Release; Staff Report; and Statement by the Executive Director for Greece’ (IMF Country Report No 17/229, 2017); IMF, ‘Iceland: Request for Stand-By Arrangement’ (n 93); IMF, ‘Cyprus: Request for Arrangement under the extended Fund Facility’ (n 105). 140 IMF, ‘Greece: Request for Extended Arrangement Under the Extended Fund Facility—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece’ (IMF Country Report No 12/57, 2012). 141 Under the ESM treaty, as of 2013, euro area members are required to issue bonds with euro area CACs. See euro CACs accessed 13 February 2020. More recently, there has been momentum towards refining euro CACs along the lines of the ICMA endorsed enhanced CACs in the context of an ESM treaty amendment. 142 IMF, ‘Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring’ (2014) IMF Policy Paper.

THE GLOBAL FINANCIAL CRISIS AND IMF LENDING 959 where such a procedure is used, the CAC should require that all affected bondholders be offered the same instrument or an identical menu of instruments and include a voting threshold of 75 per cent of the aggregated outstanding principal of all affected series. The CAC should be flexible enough to allow for differentiation among creditors where appropriate. For this reason, the inclusion in new international sovereign bonds of a single CAC with a menu of voting procedures, including: (i) a single-limb voting procedure with the possibility for ‘sub-aggregation’ (that is, the ability to conduct separate votes for different groups of bond issuances); (ii) a two-limb aggregated voting procedure; and (iii) a series- by-series voting procedure. The CAC accommodates a broad range of debt instruments, including bonds denominated in different currencies and governed by different foreign laws. While recognizing that there may be benefits in including a CAC with an aggregated voting procedure in bonds governed by domestic law, the priority of the IMF has been to promote inclusion in foreign law-governed bonds, given that these bonds give potential holdouts the greatest amount of legal leverage. So far, the acceptance of enhanced CACs has been overwhelming by both sovereign and creditors alike. Given that this is a contractual approach, there continues to be a large outstanding stock of bonds. Therefore, the issue of potential holdouts may be a significant problem for the next decade to come for those bonds that do not yet include the enhanced CACs.143

9. Controls on Capital and Current Account Transactions Because of the severity of the crisis and to stem capital outflows and support financial stability, two euro area members (Cyprus and Greece) introduced current and capital account restrictions (capital flow management measures) in the course of the crisis. The IMF made findings of exchange restrictions subject to Article VIII, Section 2(a) in Greece and Cyprus; given that these restrictions were imposed: (i) temporarily; (ii) for BoP reasons; and (iii) non-discriminatorily among IMF members, the IMF approved the temporary retention.144 Cyprus and Greece has removed these exchange restrictions in the meantime.145

10. Repayment The IMF’s Articles enable members to make early repayments (repurchases) at any time of outstanding credit from the IMF’s GRA. IMF members are actually encouraged to repay their outstanding credit as soon as their BoP position improves given the revolving nature of IMF financing. Several members in the euro area (Ireland, Portugal, Cyprus, and Greece) made use of this option shortly after exiting the IMF financial assistance.

143 IMF, ‘Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts’ (2015) IMF Policy Paper; IMF, ‘Second Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts’ (2017) IMF Policy Paper. 144 IMF, ‘Greece: 2016 Article IV Consultation’ (n 105); IMF, ‘Cyprus: Request for Arrangement under the extended Fund Facility’ (n 105). 145 AREAER (n 106); IMF, ‘Crisis Program Review’ (n 5); IMF, ‘Greece: 2019 Article IV Consultation’ (IMF Country Report No 19/340, 2019).

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960 IMF’S FINANCING ROLE IN EUROPE DURING GFC 31.88

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11. Non-Compliance with Obligations under the IMF’s Articles In 2010, the IMF determined that Greece had misreported under its obligations under Article VIII, Section 5 in the years before 2010.146 In addition, there has been one misreporting episode under Greece’s extended arrangement in 2013.147 The IMF specified that no remedial measures or sanctions should be imposed because the IMF was satisfied with the member’s own remedial measures taken at that time. In 2015, Greece was facing liquidity problems. As the situation deteriorated further and the liquidity crisis deepened, Greece did not make repayments to the IMF when they fell due, becoming the first member of an advanced economy to accumulate overdue financial obligations to the IMF.148 While access to resources under the terms of the extended arrangement for Greece was immediately interrupted upon failing to repay the IMF on time,149 the IMF did not impose sanctions on Greece since it cleared its overdue financial obligations to the IMF promptly on July 20, 2015.

IV. Conclusions and Lessons for the Future 31.90

The IMF’s experience in assisting members during the GFC in Europe demonstrated that the IMF’s legal framework is sufficiently robust and flexible. It permitted the IMF to reform its lending toolkit to address specific needs of its members and requirements of the evolving international financial architecture without the need to amend the IMF’s Articles. In addition, the IMF managed to boost its lending capacity relative to the demand for its financing during the GFC, while at the same time enhancing its legitimacy through quota and governance reforms. The key objective was for the IMF to better assist its membership facing the effects of the GFC and to be better equipped to tailor its assistance to the specific needs of its members. It should be emphasized that all available IMF tools and instruments were applied to EU and EEA members in accordance with the applicable and relevant IMF legal and policy framework as well as being consistent with the principle of uniformity of treatment. However, it also asserted the IMF as an independent international organization that needs to comply with its Articles and the decision adopted under it.

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The engagement with EU and EEA members has been generally very effective and productive. Given the unprecedented depth, geographic coverage, and length of the GFC, this engagement posed significant challenges to the IMF and its members. Many EU and EEA members borrowed for the first time from the IMF (or after a prolonged period without tapping IMF financing) and had little experience in dealing with the IMF as a lender. Furthermore, one of the key challenges of this engagement was the need to coordinate the 146 IMF, ‘Greece: Request for Stand-By Arrangement—Press Release’ (IMF Country Report No 10/111, 2010). 147 IMF, ‘Greece: Third Review under the Extended Arrangement under the Extended Fund Facility—Staff Report’ (IMF Country Report No 13/153, 2013). 148 See IMF, ‘Greece’ (Press Release No 15/310) accessed 13 February 2020. 149 The extended arrangement with Greece had already been off track. The extended arrangement provides: (Member) will not make purchases under this extended arrangement during any period in which (member): (i) has an overdue financial obligation to the Fund or is failing to meet a repurchase expectation in respect of a noncomplying purchase pursuant to Decision No. 7842-(84/165) on the Guidelines on Corrective Action . . .

Conclusions and Lessons for the Future 961 monitoring of program implementation—rather than just co-financing as had been done in the past many times—for the first time with European partners such as the EC, ECB, and later also the ESM when financing euro area members. The objective of IMF financing for EU and EEA member was indeed met, as these IMF- 31.92 supported programs have enabled virtually all affected members to resolve their BoP problems, restore medium term viability, and exit official assistance successfully. The general level of ownership and commitment on the part of the relevant members’ authorities in implementing the IMF-supported programs has been key to this endeavour. Most members completed most program reviews under the IMF supported program and no successor arrangement was necessary.150 Finally, the confidence function of IMF-supported programs should not be underestimated in the sense that IMF-supported programs inspired confidence to other similarly situated countries in the region facing challenges during the two phases of the GFC.151 In terms of lessons for the future, it is also important to take stock of what has been learnt during the process from the positive aspects of the IMF’s engagement with EU and EEA members as well as from those aspects that have been subject to criticism. Some have voiced concerns about certain IMF decisions and actions taken when assisting EU and EEA members during the GFC and the IMF, as well as independent observers, have assessed the IMF’s role during the GFC.152 As has been the spirit at the IMF, it continues to learn lessons from the experience of dealing with crises and take stock of them to be better prepared to assist members in the future. In this context, some of the key lessons stemming from the IMF’s experience in assisting members during the GFC (not only in the EU or EEA) can be summarized as follows:

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The IMF’s leveraging of its crisis prevention tools such as the FCL, PLL, or precautionary SBAs during periods of heightened stress is key to the prevention or mitigation of the effects of a crisis for a member. The IMF should promote the use of its instruments and facilities available to the member dependent on the individual member’s needs. It is important to continue exploring ways to further reform the IMF lending toolkit to mitigate the perception of stigma attached to IMF financing, to promote timely use of these instruments and facilities, and to avoid members requesting such assistance too late when already faced with a full-blown crisis given the increased costs to all involved. The IMF has adopted the PCI to provide non-financial support to members interested in the IMF’s monitoring of the implementation of their economic programs rather than its financing, including members receiving financing from RFAs.

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The authorities’ ownership over program design and technical capacity and political will to implement needed reforms needs to be in place. This is a requirement under the Guidelines on Conditionality153 for all IMF-supported programs, but particularly relevant for cases

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150 IMF, ‘Crisis Program Review’ (n 5). 151 Sean Hagan, ‘The Eurozone Crisis Defining a Path to Recovery’ (2015) 63 University of Kansas Law Review 1067–75. 152 Independent Evaluations Office, The IMF and the Crises in Greece, Ireland, and Portugal (IMF 2016). See also IMF, ‘Crisis Program Review’ (n 5) and ex post evaluations for members with EAP arrangements conducted by IMF staff. 153 IMF, ‘Guidelines on Conditionality’ (n 28) 284.

962 IMF’S FINANCING ROLE IN EUROPE DURING GFC of members in crisis embarking on demanding fiscal adjustments and structural reforms. Most country cases have demonstrated that with strong ownership and commitment on the authorities’ side, successful implementation of an IMF-supported program helps members to achieve medium-term external viability and addresses their underlying BoP problems without resorting to measures destructive of national or international prosperity. 31.96

To engage in strong and collaborative relations with relevant RFAs, particularly before a crisis erupts is key to assist the member in a more coordinated, efficient, and effective manner in cases of co-financing with the IMF. The IMF itself has recently engaged more intensively with RFAs such as the ESM. More generally, RFAs have increased in importance around the globe and the IMF has recognized this development including by recently adopting a general framework that lays out the basis for a closer and more collaborative approach of dealing with RFAs in terms of allocating responsibilities for program design and conditionality, monitoring of members’ programs and sharing of relevant information,154 all within the respective roles and mandates of each institution.155

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Providing financing to members of a currency union brought to the fore the need to take stock of the IMF’s approach towards program design and conditions in Fund-supported programs of members of said unions. In this context, in February 2018, the IMF discussed the practices and procedures used in the past for assisting members in currency unions which was done mostly on an ad hoc basis and decided to clarify the policy framework to ensure consistency and even-handedness going forward. This includes the basis and procedures under which the IMF may seek policy assurances from union-level institutions. However, to the extent possible, the member’s program should be based on policies over which the national authorities have reasonably ‘direct or indirect control’. Under the framework, the threshold for the IMF to seek policy assurances on certain policy actions by union level institutions is that the measure or action is deemed critical for success of the relevant member’s program. In turn, assurances over critical policy actions need to be clear, specific, monitorable and where necessary, timebound. Given the differences of legal, institutional, and policy frameworks across currency unions a case-by-case basis should be used safeguarding even-handedness in the IMF’s treatment of its members.156

154 Recently, the IMF reformed its policy for document transmittal. Before that reform, IMF staff reports pertaining to surveillance and use of IMF resources, as well as TA reports, could be transmitted to international organizations: (i) that have specialized responsibilities within the IMF’s field of interest (generally, organizations that are or will be providing substantial financial assistance to the particular member country concerned); (ii) that agree to a reciprocal transmittal of comparable documents of the recipient organizations to the IMF (comparable documents include those relating to the IMF’s mandate on common members: surveillance, the role of the IMF in the international monetary system, monetary and fiscal stability, and where relevant, flagship documents); and (iii) that have agreed to keep the reports confidential. Since 2017, in addition to surveillance documents, staff reports on use of IMF resources and other documents relating to the currency union’s individual members (and the related Summings up) may be transmitted. Article IV consultations with SDR currency basket members may be shared with the ECB. Documents may be made available shortly after their issuance to the IMF Executive Board in the absence of an objection by the member that is the subject of the report. Summings up may be made available shortly after issuance to the IMF Executive Board, provided that there is no objection by the member country to whom the Summing up pertains. IMF, ‘Transmittal policy: the exchange of documents between the Fund and other organizations’ (2017) IMF Policy Paper. 155 IMF, ‘Collaboration between Regional Financing Arrangements and the IMF’ (2017) IMF Policy Paper. 156 IMF, ‘Program Design in Currency Unions’ (n 25).

32

EU FINANCIAL ASSISTANCE Vestert Borger*

I. Introduction II. Article 122 TFEU: Origin, Context, and Purpose III. The European Financial Stabilisation Mechanism (EFSM)

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IV. Questions Surrounding the Use of Article 122(2) TFEU V. Conclusion

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I. Introduction With the euro crisis behind us, it is hard to picture the currency union without a rescue mechanism. Almost eight years have passed since the European Stability Mechanism (ESM) was created in September 2012. All states that once benefitted from its financial support have successfully exited their programs. A new round of institutional reform is now in the offing, with the ESM possibly getting ‘beefed up’ to a European Monetary Fund. But the currency union’s set-up has not always had assistance instruments like these at its disposal. At the start of 2010, when the crisis threatened the survival of the euro and the Union as a whole, its toolbox was empty. Or almost empty. The Union Treaties contained one, somewhat obscure, provision on financial support in Article 122(2) of the Treaty on the Functioning of the European Union (TFEU), enabling the Union to grant assistance to Member States threatened with or facing ‘severe difficulties’ caused by ‘exceptional occurrences’ beyond their control. It seemed the only instrument the Union could fall back on to get around the ‘no-bailout clause’ in Article 125 TFEU.

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One may question the importance of discussing this provision now that the Union is much better equipped to take on crises. The fact is, however, that it has exercised a great influence on how the Union and its Member States read the currency union’s legal set-up back in 2010. As such it has shaped the initiatives they took to support financially distressed states just as it is bound to influence new reforms of the currency union. Moreover, the assistance facility that was established on the basis of Article 122(2) TFEU at the very beginning of the

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* This contribution builds on previously published work by the author, in particular Vestert Borger, ‘The ESM and the European Court’s Predicament in Pringle’ (2013) 14 German Law Review 113; and Vestert Borger, The Transformation of the Euro: Law, Contract, Solidarity (Doctoral dissertation, Leiden University, 31 January 2018). This contribution was made possible by funding from the Niels Stensen Fellowship and the Leiden University Fund/Kroese-Duijsters Fund (www.luf.nl). Vestert Borger, 32 EU Financial Assistance In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0039

964 EU FINANCIAL ASSISTANCE crisis continues to exist up until this day. There is every reason, therefore, to analyse the provision in greater detail. 32.3

This chapter does so in three steps. It first traces the origins of the provision and examines its place in the economic policy set-up of the Union, in particular in the light of the no-bailout clause. Attention then shifts to its activation during the crisis. The chapter discusses how in spring 2010, when the crisis was about to spread from Greece to other Member States, politicians pondered over the extent to which they could draw on Article 122(2) TFEU to establish a rescue mechanism for the currency union at large. It shows how this eventually led to the creation of the European Financial Stabilisation Mechanism (EFSM) and how this was used in the first stage of the crisis to grant assistance to Portugal and Ireland and again in 2015, when the ESM was already in operation, to Greece. Finally, the chapter reflects on some key interpretative questions surrounding the use of Article 122(2) TFEU. Some of these questions concern the wording of the provision itself, others have come up in reaction to the judgment of the Court of Justice on the ESM in Pringle.1 The answers to these questions not only have a bearing on the legality of the EFSM, but also on that of potential future reforms of the currency union, in particular a European Monetary Fund.

II. Article 122 TFEU: Origin, Context, and Purpose 32.4

As with so much of the law, Article 122 TFEU can only be understood by studying its legislative history and place in the overall Treaty scheme for the EMU.2 That scheme is truly a product of its time.3 When the Treaty of Maastricht was being negotiated at the start of the 1990s, economic science had just undergone two major developments. The first is a change in views on the structure and operation of the economy. After the Second World War, ‘Keynsianism’ held sway among academics and policy-makers. Characteristic of Keynesians, Peter Hall makes clear, is that they ‘regard the private economy as unstable and in need of government intervention’.4 Growth and employment can be actively targeted by the government, not in the least by elevating demand through proactive monetary and fiscal policies.5 Keynesians in particular contended there was a ‘permanent trade-off ’ between inflation and unemployment, meaning the latter could be brought down at the expense of a rise in the former.6

1 Case C-370/12 Thomas Pringle v Government of Ireland and Others [2012] ECLI:EU:C:2012:756 (hereafter Pringle). 2 The following account of the history and place of Article 122(2) TFEU in the treaty framework of EMU is based on the one in Vestert Borger, The Transformation of the Euro: Law, Contract, Solidarity (Doctoral dissertation, Leiden University, 31 January 2018) 78–119, 306–07 (hereafter Borger, The Transformation of the Euro). 3 See Chapter 2 on the history of European monetary integration. 4 Peter Hall, ‘From Keynesianism to monetarism: Institutional analysis and the British economic policy in the 1970s’ in Sven Steinmo, Kathleen Thelen, and Frank Longstreth (eds), Structuring Politics: Historical Institutionalism in Comparative Analysis (CUP 1992) 92 (hereafter Hall, From Keynesianism to monetarism). See also Kathleen McNamara, The Currency of Ideas: Monetary Politics in the European Union (Cornell UP 1998) 144– 46 (hereafter McNamara, The Currency of Ideas). 5 Paul De Grauwe, Economics of Monetary Union (10th edn, OUP 2014) 150 (hereafter De Grauwe, Economics of Monetary Union); see also Hall, From Keynesianism to monetarism (n 4) 92. 6 McNamara, The Currency of Ideas (n 4) 145–46.

Article 122 TFEU: Origin, Context, and Purpose 965 But in 1973 Keynesianism received a significant blow by the oil crisis.7 Many western states were suffering from ‘stagflation’; instead of trading off employment against inflation, they had to concurrently deal with a recession and inflation. Gradually, a different economic philosophy came to the fore: ‘monetarism’. Monetarists, Hall explains, perceive of ‘the private economy as basically stable and government intervention as likely to do more harm than good’.8 The best a government can do is building an economy capable of delivering durable growth, especially by maintaining a stable price level.9 In so far as it does want to fight unemployment it should favour ‘structural’ reforms, such as changes to employment laws and taxation, over short-term expansionary monetary and fiscal policies.10

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During the 1980s and 1990s, there also appeared a lot of studies showing that independent central banks were better at achieving price stability than those operating under government control.11 To what extent central bank independence is indeed conducive to price stability can be debated,12 yet the fact is that at the time of the drafting of the Treaty of Maastricht this was a broadly held believe among experts and policy-makers.13

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In combination with the strong negotiating position of Germany, which traditionally favours stability oriented policies,14 these two developments—the shift towards monetarism and central bank independence—have helped shape the set-up of the economic and monetary union. Characteristic of this set-up is that it attributes great value to price stability and seeks to embed the central bank in a structure allowing the latter to realize such stability.15

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This focus on stability naturally makes itself heard in the guiding principles of the economic and monetary union, among which price stability and sound public finances feature prominently,16 and the mandate and independence of the European Central Bank.17

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7 McNamara, The Currency of Ideas (n 4) 65, 146. 8 Hall, From Keynesianism to monetarism (n 4) 92; see also McNamara, The Currency of Ideas (n 4) 144–46. 9 McNamara, The Currency of Ideas (n 4) 67, 145; De Grauwe, Economics of Monetary Union (n 5) 150. 10 De Grauwe, Economics of Monetary Union (n 5) 150; see also McNamara, The Currency of Ideas (n 4) 147. 11 See eg Alberto Alesina, ‘Macroeconomics and Politics’ (1988) 3 NBER Macroeconomics Annual 13; Vittorio Grilli, Donato Masciandaro, and Guido Tabellini, ‘Political and Monetary Institutions and Public Financial Policies in the Industrial Countries’ (1991) 13 Economic Policy 341; Alberto Alesina and Lawrence Summers, ‘Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence’ (1993) 25 Journal of Money, Credit and Banking 151; Thomas Havrilesky and James Granato, ‘Determinants of inflationary performance: Corporatist structures vs. central bank autonomy’ (1993) 76 Public Choice 249. 12 Bernd Hayo, ‘Inflation culture, central bank independence and price stability’ (1998) 14 European Journal of Political Economy 241; Kathleen McNamara, ‘Rational Fictions: Central Bank Independence and the Social Logic of Delegation’ (2002) 25 West European Politics 47, 58–59 (hereafter McNamara, ‘Rational Fictions’). 13 For explanations of the popularity of the idea see McNamara, ‘Rational Fictions’ (n 12) 59–66; James Forder, ‘Why is Central Bank Independence So Widely Approved?’ (2005) 39 Journal of Economic Issues 843. 14 For analyses of Germany’s negotiating position on the Treaty of Maastricht, in particular the arrangements for EMU, see eg Andrew Moravcsik, The Choice for Europe: Social Purpose and State Power From Messina to Maastricht (Cornell UP 1999) 440–47, 461–67 (hereafter Moravcsik, The Choice for Europe); Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union (OUP 2003) 306–451 (hereafter Dyson and Featherstone, The Road to Maastricht). 15 Similarly arguing that the set-up of the economic and monetary union embodies a ‘sound money’ or ‘stability paradigm’ are, amongst others, Kenneth Dyson, The Politics of the Euro-Zone: Stability or Breakdown? (OUP 2000) 27; Martin Heipertz and Amy Verdun, The Politics of the Stability and Growth Pact (CUP 2010) 91–93 (hereafter Heipertz and Verdun, The Politics of the Stability and Growth Pact). For a legal analysis of the paradigm, see eg Matthias Herdegen, ‘Price Stability and Budgetary Restraints in the Economic and Monetary Union: The Law as Guardian of Economic Wisdom’ (1998) 35 Common Market Law Review 9. 16 Article 119(3) TFEU. See further Chapter 9 on objectives and principles. 17 See eg Articles 130, 127(1), and 282(2) TFEU. See also Chapters 14 and 15.

966 EU FINANCIAL ASSISTANCE But the preoccupation with stability is also clearly discernible in relation to economic, and in particular fiscal, policy. Whereas fiscal negligence is problematic for several reasons, an important one is that it may force the central bank to set its official rates at undesirably low levels from the perspective of price stability or even to finance government debt.18 The Union Treaties therefore contain two instruments that seek to get Member States to display fiscal prudence.19 One is the instrument of public discipline, laid down in Article 126(1) TFEU. It states that Member States ‘shall avoid excessive deficits’. The reference values to determine the excessiveness of deficits and debts are set out in Article 126(2) TFEU and Protocol No 12 and compliance with them is verified on the basis of the excessive deficit procedure.20 32.9

What matters most for present purposes, however, is the instrument of market discipline. It is incorporated in three prohibitions in Articles 123–125 TFEU.21 They each rule out certain financing possibilities for Member States so as to subject them ‘to the full rigour of the market’.22 This arrangement is premised on the idea that by making sure that Member States can only (re)finance their debt on the market under similar conditions as private entities, those with weaker fiscal positions will be charged higher interest rates, which may incentivize them to straighten their fiscal policies.23 The first prohibition, set out in Article 123 TFEU, contains a ban on monetary financing. It prohibits the Bank to grant overdraft facilities or other credit facilities to Member States or to purchase their debt instruments on the primary market.24 The second prohibition, laid down in Article 124 TFEU, bans privileged access to financial institutions. Article 125 TFEU complements the above two prohibitions by making clear that neither the Union nor any Member State ‘shall be liable for’ or ‘assume’ the financial commitments of another Member State.

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Interestingly, secondary legislation provides for various specifications and exemptions concerning the first two prohibitions,25 yet it does not for the third, the so-called ‘no-bailout clause’. Regulation (EC) 3603/93 only clarifies the notions ‘public sector’ and ‘public

18 For an overview of these reasons see Heipertz and Verdun, The Politics of the Stability and Growth Pact (n 15) 71–75; Daniel Gros and Niels Thygesen, European Monetary Integration: From the European Monetary System to Economic and Monetary Union (2nd edn, Longman 1999) 320–29. 19 See Stefaan Van den Bogaert and Vestert Borger, ‘Twenty Years After Maastricht: The Coming of Age of the EMU?’ in Maartje de Visser and Anne Pieter van der Mei (eds), The Treaty on European Union 1993– 2013: Reflections from Maastricht (Intersentia 2013) 454–55. 20 The procedure is laid down in Article 126(3)–(14) TFEU, Protocol No 12 and the corrective part of the Stability and Growth Pact (SGP). See Chapter 27 on economic policy coordination and Chapter 29 on the excessive deficit procedure. 21 See further Chapter 9. 22 René Smits, The European Central Bank: Institutional Aspects (Kluwer Law International 1997) 75 (hereafter Smits, The European Central Bank). Articles 123 and 124 TFEU not only deny the Member States access to certain financing options, but also Union institutions, offices, bodies, and agencies. 23 Smits, The European Central Bank (n 22) 75–77; Fabian Amtenbrink, Leendert Geelhoed, and Suzanne Kingston, ‘Economic, Monetary and Social Policy’ in PJG Kapteyn and others (eds), The Law of the European Union and the European Communities (4th revised edn, Kluwer Law International 2008) 907–08, 910–11. 24 The prohibition also applies to national central banks and is repeated in Article 21 of the Statute of the ESCB and ECB. 25 See Council Regulation (EC) 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions referred to in Articles 104 and 104b(1) of the Treaty [1993] OJ L332/1 as well as Council Regulation (EC) 3604/93 of 13 December 1993 specifying definitions for the application of the prohibition of privileged access referred to in Article 104a of the Treaty [1993] OJ L332/4. Regulation (EC) 3603/93 provides for various exemptions from the prohibition on monetary financing in Articles 1(2), 2, and 4–7. Regulation (EC) 3603/94 does the same in relation to the prohibition on privileged access in Articles 1(2) and 2.

Article 122 TFEU: Origin, Context, and Purpose 967 undertaking’.26 This is not to say that Article 125 TFEU applies without reservation.27 In fact, during the negotiations on the Treaty of Maastricht this issue received considerable attention. Stability minded states argued in favour of budgetary discipline and consequently against exceptions to the ban.28 Telling is the draft treaty that Germany presented to the Intergovernmental Conference in late February 1991, which did not mention any exceptions.29 Southern Member States, however, were frightened of unconditional application.30 They were supported in this regard by the Commission which had also prepared a draft treaty. It argued in favour of an assistance mechanism that could be used in case of ‘serious economic problems’ or when ‘economic convergence required a particular effort on the part of the Community’.31 For Member States like Germany the proposal was unacceptable, raising fears that the monetary union would become a ‘transfer union’ with permanent capital flows from prosperous members to those less well-off.32 Eventually negotiators settled for a compromise in Article 122 TFEU (ex Article 103a EC). Its first paragraph allows the Council, on a proposal from the Commission, to ‘decide, in a spirit of solidarity between the Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy’. Over the years this paragraph has been amended twice. Since the Treaty of Nice the Council no longer decides on the basis of unanimity but a qualified majority of votes.33 The reference to ‘solidarity’ and the specification about ‘the area of energy’ were inserted by the Treaty of Lisbon.34

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The real significance of Article 122 TFEU resides in its second paragraph. Contrary to the proposal of the Commission, it does not allow for assistance to speed up economic convergence but constitutes a ‘true crisis clause’.35 It reads as follows:

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Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to 26 See Article 8 Regulation (EC) 3603/93. 27 Note that Article 125(1) TFEU itself clarifies that it does not apply to ‘mutual financial guarantees for the joint execution of a specific project’. A different question is, of course, how unconditionally the no-bailout clause is formulated. That question was at the centre of attention during the crisis and answered by the Court in Pringle (n 1). See Chapter 41 on the legality of crisis responses. 28 As far as Germany is concerned see eg Moravcsik, The Choice for Europe (n 14) 442, 445–47. 29 Overall proposal by the Federal Republic of Germany for the intergovernmental conference (Agence Europe No 1700, 20 March 1991). The proposal did contain a provision resembling the current Article 122(1) TFEU concerning difficulties in the supply of certain products. See also Moravcsik, The Choice for Europe (n 14) 442; Dyson and Featherstone, The Road to Maastricht (n 14) 411. 30 Jörn Pipkorn, ‘Legal Arrangements in the Treaty of Maastricht for the Effectiveness of the Economic and Monetary Union’ (1994) 31 Common Market Law Review 263, 273–74; Ulrich Häde, ‘Haushaltdisziplin und Solidarität im Zeichen der Finanzkrise’ (2009) 20 Europäische Zeitschrift für Wirtschaftsrecht 399, 402–03 (hereafter Häde, ‘Haushaltdisziplin und Solidarität im Zeichen der Finanzkrise’); Jean-Victor Louis, ‘Guest Editorial: The No-Bailout Clause and Rescue Packages’ (2010) 47 Common Market Law Review 971, 982 (hereafter Louis, ‘Guest Editorial: The No-Bailout Clause and Rescue Packages’). 31 Commission, Commentary to the Draft Treaty amending the Treaty establishing the European Economic Community with a view to achieving economic and monetary union (Bulletin of the European Communities, Supplement 2/91) 54. 32 Louis, ‘Guest Editorial: The No-Bailout Clause and Rescue Packages’ (n 30) 982. 33 Treaty of Nice [2001] OJ C80/01. Article 122 TFEU no longer specifies voting arrangements, which means that the default rule (qualified majority voting) applies. See Article 16(3) TEU. 34 Treaty of Lisbon [2007] OJ C306/01. 35 Louis, ‘Guest Editorial: The No-Bailout Clause and Rescue Packages’ (n 30) 982–83.

968 EU FINANCIAL ASSISTANCE the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken. 32.13

Like the first paragraph, Article 122(2) TFEU has been amended by the Treaty of Nice to change voting arrangements. Whereas the Council first only voted on the basis of a qualified majority in case of difficulties caused by natural disasters, this now also applies when they originate from an exceptional occurrence.

III. The European Financial Stabilisation Mechanism (EFSM) 32.14

For a long time following the entry into force of the Treaty of Maastricht, Article 122 TFEU did not receive much attention. Its first paragraph was used twice, in 2004 and 2006, in relation to gas and oil supply.36 Article 122(2) TFEU was not drawn upon at all. But then the crisis hit.37 At first the members of the currency union still thought they could stem it by granting financial assistance to Greece, the first State that had fallen victim to the markets. On 2 May 2010 the Eurogroup decided to grant it 110 billion euro, of which 30 billion euro was provided by the International Monetary Fund (IMF) and 80 billion euro by euro area Member States through bilateral loans pooled and administered by the Commission.38 Within a matter of days, however, it became clear that the crisis would not stay confined to Greece but threatened to spread to other ‘peripheral’ states in the currency union. Less than a week later, on 7 May 2010, political leaders therefore gathered in Brussels to decide on a rescue package for the entire euro area.

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During the meeting there was no consensus on what to do. The French President Sarkozy argued in favour a fund under the steering of the Commission that would ‘not oblige any of us to seek parliamentary approval at home’.39 German Chancellor Merkel, however, insisted on such approval as she thought it was necessary to guarantee compliance with the German constitution.40 Some of the assistance could possibly come from a Union fund, yet most of it should be governed by national treasuries and parliaments.41 With no solution in sight, the leaders eventually decided their finance ministers should devise a specific strategy. They adopted a statement tasking the Commission to work on a proposal for ‘a European stabilization mechanism to preserve financial stability’ that had to be ‘submitted to an extraordinary ECOFIN meeting’ on Sunday 9 May.42 36 Council Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply [2004] OJ L127/92; Council Directive 2006/67/EC of 24 July 2006 imposing an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products [2006] OJ L217/8. 37 The following account of crisis events is based on the one in Borger, The Transformation of the Euro (n 2) 201– 30, 245–52, 254, 309–11. 38 Eurogroup, ‘Statement’ (Brussels, 2 May 2010). For a discussion of the legal nature of the bilateral loan package, called ‘Greek Loan Facility’, see Alberto De Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis: The Mechanisms of Financial Assistance’ (2012) 49 Common Market Law Review 1613, 1615–18 (hereafter De Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis’). 39 Quoted in Peter Ludlow, ‘In the Last Resort: The European Council and the Euro Crisis, Spring 2010’ (2010) Eurocomment Briefing Note vol 7, No 7/8, 31 (hereafter Ludlow, ‘In the Last Resort’). 40 Ludlow, ‘In the Last Resort’ (n 39) 32, 34; Carlo Bastasin, Saving Europe: Anatomy of a Dream (Brookings Institution Press 2015) 195 (hereafter Bastasin, Saving Europe). 41 Ludlow, ‘In the Last Resort’ (n 39) 32, 34; Bastasin, Saving Europe (n 40) 195, 197. 42 Heads of State of Government of the euro area, ‘Statement’ (Brussels, 7 May 2010).

The European Financial Stabilisation Mechanism (EFSM) 969 In the run-up to the meeting the Commission had already been preparing such a proposal. It had concentrated its efforts on Article 122(2) TFEU. Several weeks earlier its President Barroso had been asked about the possibility of financial assistance in the press and he had responded:

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I want to clarify this absolutely. We have checked this issue from a legal point of view and . . . no-bailout does not mean no help. On the contrary, there are many provisions in the Treaty; I could also quote Article 122 where there is a specific solidarity clause saying that where a Member State is in difficulties the Council may, on a proposal from the Commission, grant financial assistance. So, it’s completely wrong and misleading to say that because of the ‘no-bailout’ clause there cannot be help to some Member States. It’s quite the opposite. The Treaty design stipulates this.43

However, activating Article 122(2) TFEU was a politically delicate issue. Prior to the 32.17 meeting, on 6 May 2010, David Cameron had won the British parliamentary elections for his Conservative Party.44 Whilst the Labour government still led the negotiations, Finance Minister Alistair Darling made it very clear he did not have a mandate to agree to a full- blown support mechanism on the basis of Article 122(2) TFEU.45 As the Council decides with a qualified majority under the provision, he feared having to participate in large euro area bail-outs without ever having consented to it. The proposal for a Regulation establishing a ‘European Financial Stabilisation Mechanism’ (EFSM) that the Commission presented on Sunday 9 May 2010 tried to take into account British misgivings.46 It was based on Article 122(2) TFEU but it limited the involvement of the United Kingdom through a two-tier structure. The Union could give financial support to a member of the currency union and the Commission had the power to ‘contract borrowings on the capital markets’ to facilitate this.47 Yet, the Union could only grant around 60 billion euro in this way, as the total amount of assistance had to be ‘limited to the margin available under the own resources ceiling for payment appropriations’.48 Any support exceeding that ceiling would ‘benefit from the joint and pro-rate guarantee’ of the members of the currency union, thereby ensuring the United Kingdom would not have to participate in this part of assistance operations.49

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This two-tier construction is legally troublesome. It resembles the previous balance of payments assistance instrument, governed by Regulation (EC) 1969/88, which also relied on Member State support in addition to (then) Community assistance.50 But the Treaty

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43 Quoted in ‘Interview Transcript: José Manuel Barroso’ Financial Times (London, 23 March 2010). 44 Bastasin, Saving Europe (n 40) 189. 45 Tony Barber and Ben Hall, ‘EU to expand emergency fund by at least 60 billion euro’ Financial Times (London, 9 May 2010); Ben Hall, Quentin Peel, and Ralph Atkins, ‘Twelve hours that tested the limits of the Union’ Financial Times (London, 11 May 2010); Matthew Lynn, Bust: Greece, the Euro and the Sovereign Debt Crisis (Bloomberg Press 2011) 173 (hereafter Lynn, Bust: Greece, the Euro and the Sovereign Debt Crisis); Bastasin, Saving Europe (n 40) 197–98. 46 Commission, ‘Proposal of 9 May 2010 for a Council Regulation establishing a European Financial Stabilisation Mechanism’ COM (2010) 2010 final (hereafter EFSM Proposal). 47 Articles 1 and 2(1) EFSM Proposal. 48 Article 2(2) EFSM Proposal. 49 Article 3(1) EFSM Proposal. 50 Articles 1(3) and 3(3) Council Regulation (EEC) 1969/88 of 24 June 1988 establishing a single facility providing medium-term financial assistance for Member States’ balances of payments [1988] OJ L178/1. For an analysis of the current balance of payments facility, see Chapter 34 on non-euro area assistance.

970 EU FINANCIAL ASSISTANCE provision regulating this assistance, Article 143(2) TFEU (ex Article 119 EC), explicitly empowers the Council to prescribe Member States to participate. Article 122(2) TFEU, on the contrary, only talks about assistance by the Union, not by the Member States. To then use that provision to introduce an obligation for Member States to grant assistance seems to fall outside its scope. 32.20

On Sunday 9 May 2010, however, the Commission proposal met with fierce opposition in the Council for different reasons. Thomas de Mazière, who was replacing German Finance Minister Wolfgang Schäuble, announced he could not sign up to an extensive assistance facility fully operating under Union law.51 In line with the doubts she had voiced two days earlier, Merkel had let him know that the assistance provided by the Member States would have to be of a bilateral nature, just like the support provided to Greece.52 Deep into the night, just before markets in the Far East would resume trading, the ministers eventually reached a deal.53 The Union could use the proposed EFSM to grant support up to 60 billion euro, the amount available under its own recourses ceiling for payment appropriations. Euro area Member States would provide an additional 440 billion euro through the European Financial Stability Facility (EFSF), a Special Purpose Vehicle operating under Luxembourg law with the capacity to raise money in the markets on the back of government guarantees.54 Whereas this assistance would consequently not take the shape of bilateral loans, its set-up was such that the German government felt it would hold out before Germany’s constitutional court.55

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The EFSM has been established by Council Regulation (EU) 407/2010, which in turn finds its legal basis in Article 122(2) TFEU.56 The Regulation allows the Union to grant support to any Member State, including those outside the currency union, ‘which is experiencing, or is seriously threatened with, a severe economic or financial disturbance caused by exceptional occurrences beyond its control’.57 Assistance can be granted through a loan or credit line, up to the amount available under the Union’s own recourses ceiling for payment appropriations, and the Commission may ‘contract borrowings on the capital markets or with financial institutions’ to this end.58

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A Member State that wants to receive assistance from the EFSM has to discuss with the Commission, and in liaison with the ECB, its financing needs and prepare a draft economic adjustment programme.59 The decision to grant assistance is ultimately taken by the Council and has to contain the details of the loan or credit line, the general policy conditions attached to them as well as the approval of the adjustment programme.60 Together with 51 Tony Barber, ‘Dinner on the edge of the abyss’ Financial Times (London, 11 October 2010) (hereafter Barber, ‘Dinner on the edge of the abyss’); Lynn, Bust: Greece, the Euro and the Sovereign Debt Crisis (n 45) 166–67, 169. 52 Barber, ‘Dinner on the edge of the abyss’ (n 51); Ludlow, ‘In the last Resort’ (n 39) 36–37; Lynn, Bust: Greece, the Euro and the Sovereign Debt Crisis (n 45) 172; Bastasin, Saving Europe (n 40) 199–200. 53 Barber, ‘Dinner on the edge of the abyss’ (n 51); Neil Irwin, The Alchemists: Three Central Bankers and a World on Fire (Penguin Books 2014) 230; Lynn, Bust: Greece, the Euro and the Sovereign Debt Crisis (n 45) 172–74. 54 For an analysis of the EFSF, see Chapter 33 on euro area assistance. 55 Ludlow, ‘In the last Resort’ (n 39) 37; Barber, ‘Dinner on the edge of the abyss’ (n 51). 56 Council Regulation (EU) 407/2010 of 11 May 2010 establishing a European financial stabilization mechanism [2010] OJ L118/1, as last amended by Council Regulation (EU) 2015/1360 of 4 August 2015 [2015] OJ L210/1. 57 Article 1 Regulation (EU) 407/2010. 58 Article 2 Regulation (EU) 407/2010. 59 Article 3(1) Regulation (EU) 407/2010. 60 Article 3(2)–(4) Regulation (EU) 407/2010.

The European Financial Stabilisation Mechanism (EFSM) 971 the Commission the beneficiary Member State also needs to conclude a Memorandum of Understanding (MoU) specifying the general policy conditions in the Council decision.61 It is important to note that since the entry into force of the ‘Two-Pack’ in May 2013 matters involving conditionality are principally governed by Regulation (EU) 472/2013.62 As a result, Council decisions concerning adjustment programmes based on that Regulation contain a cross-reference to relevant decisions taken on the basis of Regulation (EU) 407/ 2010, the lex specialis.63 Assistance in the form of a loan is disbursed at intervals.64 Disbursements are dependent on periodic verifications by the Commission whether the beneficiary Member State complies with the adjustment programme and the general policy conditions in the Council decision. If the Commission comes to a positive judgment it shall decide on the release of instalments of the loan.65

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Following its establishment in May 2010 the EFSM soon got involved in two assistance operations. The first concerned Ireland. On 28 November 2010 ministers of finance decided to grant Ireland 85 billion euro, of which 22.5 billion euro came from the EFSM.66 Subsequently, on 17 May 2011, Portugal received 78 billion euro, with the EFSM providing 26 billion euro.67 By that time, however, work was already in progress to replace the temporary rescue facilities with a permanent successor, the European Stability Mechanism (ESM). At its summit of 16–17 December 2010 the European Council had decided to initiate the simplified revision procedure in Article 48(6) TEU to insert a third paragraph in Article 136 TFEU making clear that the States in the euro area could establish a permanent mechanism to safeguard the financial stability of the currency union.68 The mechanism itself would be established on the basis of a separate international treaty, replacing the EFSF and the EFSM as of June 2013.69

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The decision to launch the simplified revision procedure shows the unease of political leaders with the resort to Article 122(2) TFEU in May 2010. As the future ESM was specifically ‘designed to safeguard the financial stability of the euro area as a whole’, it read, ‘the

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61 Article 3(5) Regulation (EU) 407/2010. 62 See in particular Articles 6–7 of Regulation (EU) 472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability [2013] OJ L140/1. See further Chapters 27 and 28. 63 See eg, Article 1 Council Implementing Decision 2013/373/EU of 9 July 2013 approving the update of the macroeconomic adjustment programme of Ireland [2013] OJ L191/10 which contains a cross-reference to Council Implementing Decision of 7 December 2010 on granting Union financial assistance to Ireland [2011] OJ L30/34, as amended (at that time) by Council Implementing Decision 2013/372/EU of 9 July 2013 approving the update of the macroeconomic adjustment programme of Ireland [2013] OJ L191/9. 64 Article 4(1) Regulation (EU) 407/2010. 65 Article 4(2)–(3) Regulation (EU) 407/2010. 66 Eurogroup and ECOFIN ministers, ‘Statement’ (Brussels, 28 November 2010). The specific composition of the assistance was as follows: EFSM (22.5 billion Euro), EFSF (22.5 billion euro), IMF (22.5 billion euro), UK (3.8 billion euro), Sweden (0.6 billion euro), and Denmark (0.4 billion euro). Ireland itself provided 17.5 billion euro through a Treasury cash buffer and investments of the National Pension Reserve Fund. 67 Council, ‘Council approves aid to Portugal, sets conditions’ (10231/11, Brussels, 17 May 2011). The composition of the Portuguese assistance package was as follows: EFSM (26 billion euro), EFSF (26 billion euro), and IMF (26 billion euro). 68 European Council, ‘Conclusions’ (Brussels, 16–17 December 2010) paras 1–2. 69 European Council, ‘Conclusions’ (Brussels, 16–17 December 2010) para 2. The ESM would eventually already enter into force in September 2012. For an analysis of the ESM, see Chapter 33 on euro area assistance.

972 EU FINANCIAL ASSISTANCE European Council agreed that Article 122(2) TFEU will no longer be needed for such purposes’. The heads of state or government had even agreed that it ‘should not be used for such purposes’.70 These statements subsequently also featured in the Preamble to the European Council Decision amending Article 136 TFEU, which was adopted only months later, on 25 March 2011.71 32.26

This attention for Article 122(2) TFEU was the result of British political pressure. Whereas the outgoing Labour government had agreed to using Article 122(2) TFEU as a legal basis for the EFSM in the weekend of 7–9 May 2010, Prime Minister Cameron had a hard time defending it in Westminster.72 He had consequently seized on the establishment of the ESM as an opportunity to get rid of the arrangement. Days after the European Council meeting of 16–17 December he explained in the House of Commons: Britain is not in the euro and we are not going to join the euro, and that is why we should not have any liability for bailing out the Eurozone when the new permanent arrangements come into effect in 2013. In the current emergency arrangements established under article 122 of the treaty, we do have such a liability. That was a decision taken by the previous Government, and it is a decision that we disagreed with at the time. We are stuck with it for the duration of the emergency mechanism, but I have been determined to ensure that when the permanent mechanism starts, Britain’s liability should end, and that is exactly what we agreed at the European Council. . . .Both the Council conclusions and the decision that introduces the treaty change state in black and white the clear and unanimous agreement that from 2013 Britain will not be dragged into bailing out the eurozone.73

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But the arrangement was far less secure than Cameron made it seem. First of all, it had only been incorporated in the Preamble to the amending decision of the European Council, not in its operative part. It therefore lacked binding force. Second, there was a subtle, yet important difference between what the European Council and the heads of state or government had agreed. The latter had gone further than the European Council, not only indicating that Article 122(2) TFEU would no longer be needed for euro area assistance operations, but also that it should not be used for such purposes. This difference is due to the fact that Commission President Barroso had refused to rule out resort to Article 122(2) TFEU out of fear that future support initiatives would be completely intergovernmental with little or no say in the matter for his own institution.74

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The significance of Barroso’s move, which had kept the door open to Article 122(2) TFEU, became apparent in the summer of 2015, long after the ESM had entered into force. Greece’s second assistance package was nearing its end, yet it was obvious the State would not be able to tap the capital markets. On 16 July the Eurogroup consequently agreed that Greece should receive a third aid package from the ESM.75 But the negotiations on that package 70 European Council, ‘Conclusions’ (Brussels, 16–17 December 2010) para 1 (emphasis added). 71 Paragraph 4 of the Preamble to European Council Decision 2011/199/EU of 25 March 2011 amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for the Member States whose currency is the euro [2011] OJ L91/1. 72 Peter Ludlow, ‘Doing Whatever is Required? The European Council of 16–17 December 2010’ (2011) Eurocomment Briefing Note vol 8, No 4, 2, 15 (hereafter Ludlow, ‘Doing Whatever is Required?’). 73 House of Commons Debates of 20 December 2010, vol 520, cols 1187–88. 74 Ludlow, ‘Doing Whatever is Required?’ (n 72) 15, 19. 75 Eurogroup, ‘Statement on Greece’ (Brussels, 16 July 2015).

Questions Surrounding the Use of Article 122(2) TFEU 973 were extremely difficult. Less than two weeks before, on 5 July, the people of Greece had disapproved of the conditionality linked to the last instalment of the second assistance programme in a referendum organized at the initiative of Prime Minister Tsipras, who had entered office in January that year.76 As the relationship between the Greek government and its European partners had reached rock bottom, the negotiations on the third package only moved at a snail’s pace. Yet, Greece had to honour its financial commitments to the ECB at short notice, just as it also had to clear its arrears with the IMF. It was estimated the government would need a ‘bridge loan’ of 7 billion euro to respect its obligations.77 And the easiest way to make available these funds in the short term was through EFSM. When the British government got wind of the plan in the days prior to the Eurogroup meeting of 16 July it reacted angrily. ‘The idea that British taxpayers are going to be on the line for this Greek deal is a complete non starter’, Finance Minister George Osborne said.78 But he had a weak hand. Cameron’s deal of December 2010 had no binding force and he could not block resort to the EFSM as the Council decides on the basis of a qualified majority under Article 122(2) TFEU.79 A compromise was eventually reached that the EFSM could be used, provided an amendment would be inserted into Regulation (EU) 407/2010 preventing non-euro area Member States from incurring liability for support targeted at States in the currency union.80 Article 3(2)(a) of this Regulation now consequently states that the granting of financial support to euro area Member States:

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shall be conditional upon the enactment of legally binding provisions . . . guaranteeing that the Member States whose currency is not the euro are immediately and fully compensated for any liability they may incur as a result of any failure by the beneficiary Member State to repay the financial assistance in accordance with its terms.

IV. Questions Surrounding the Use of Article 122(2) TFEU When the Treaty of Maastricht was negotiated few imagined the currency union could be hit by a crisis in which investors abruptly and massively start withdrawing funds from certain Member States. Such ‘sudden stops’ are characteristic of balance of payments crises and the dominant view was that these could no longer happen in the currency union as any creditworthy borrower would have the capacity to attract capital, regardless of its place in

76 Henry Foy and Stefan Wagstyl, ‘Greece’s eurozone future in doubt after decisive No victory’ Financial Times (London, 6 July 2015). 77 ‘EU officials plan short term loans for Greece’ Financial Times (London, 14 July 2015). 78 Quoted in ‘EU officials plan short term loans for Greece’ Financial Times (London, 14 July 2015). 79 See also Article 3(2) Regulation (EU) 407/2010. It should be noted, however, that the legal relevance of the deal did increase because of Pringle. In its judgment the Court argued that the European Council had emphasized in the Preamble to Decision 2011/199 that ‘Article 122(2) TFEU does not constitute an appropriate legal basis’ for a mechanism like the ESM. The fact is, however, that only the heads of state or government had taken that stance. The European Council had not because of Commission President Barroso’s opposition, as a result of which it had only mentioned the agreement of the heads of state in the Decision. See Pringle (n 1) para 65 and text to n 70. 80 Commission and Council, ‘Joint declaration on the use of the EFSM’ (10994/15, Brussels, 16 July 2015). The amendment has been inserted by Council Regulation (EU) 2015/1360 of 4 August 2015 amending Regulation (EU) 407/2010 establishing a European financial stabilization mechanism [2015] OJ L210/1.

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974 EU FINANCIAL ASSISTANCE the euro area.81 Yet these sudden stops did materialize. What is more, they did not stay confined to a single State but threatened the financial stability of the euro area as a whole. 32.31

In May 2010 policy-makers consequently struggled to use Article 122(2) TFEU as a legal basis for the EFSM. It had been introduced to mitigate the application of the no-bailout clause in Article 125 TFEU, yet with the idea that financial assistance could be necessary to help out single states, not the currency union at large. The uncertainty surrounding the use of Article 122(2) TFEU was reinforced by the judgment of the Court of Justice in Pringle. Whereas this judgment principally concerned the legality of the ESM and its relation to Article 136(3) TFEU, especially in light of the no-bailout clause, it also touched on Article 122(2) TFEU.82 To gain a better understanding of the possibility to use the provision as a legal basis for the EFSM it serves to examine this part of the judgment in greater detail.83

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The Court’s reading of the relationship between the no-bailout clause and Article 122(2) TFEU may serve as a starting point. In its judgment the Court reached the conclusion that the no-bailout clause does not contain an all-encompassing prohibition on assistance, including that granted by Member States.84 If it had, the Court reasoned, Article 122(2) TFEU ‘would have to had to state that it derogated from Article 125 TFEU’.85 It is unclear, however, why this would have to be the case. Article 122(2) TFEU only states that the Union may grant assistance under certain conditions. It does not contain any information other than that, certainly not about the possibility for Member States to engage in financial rescue actions.

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How, then, to conceive of the relationship between the two provisions and define their respective scope of application? First of all, Articles 122(2) and 125 TFEU both constitute primary law. Systemic considerations therefore demand that the two to be reconciled with each other.86 As neither of them is worded as an exception, as a result of which a hierarchical structure is lacking, their scope of application can only be determined by balancing them against one another.87 Whilst Article 122(2) TFEU is not formulated as a derogation, it should nevertheless be considered one in this respect. The travaux préparatoires of the Treaty of Maastricht, after all, make clear that it was intended to serve as a ‘counterweight’ to the no-bailout clause.88 Each of the requirements in Article 122(2) TFEU should consequently be read in this light. 81 Silvia Merler and Jean Pisany-Ferry, ‘Sudden Stops in the Euro Area’ (2012) Bruegel Policy Contribution No 2012/06, 2–3. See also Benedicta Marzinoto, Jean Pisany-Ferry, and André Sapir, ‘Two Crises, Two Responses’ (March 2010) Bruegel Policy Brief No 1, 5. As the authors point out, it should therefore come as no surprise that only Member States outside the currency union still qualify for balance of payments assistance under Article 143 TFEU. 82 For an elaborate analysis of the judgment, see Chapter 41 on the legality of crisis responses. 83 The following analysis of Article 122(2) TFEU is based on the ones in Vestert Borger, ‘The ESM and the European Court’s Predicament in Pringle’ (2013) 14 German Law Review 113, 128–29, 133–34; and Borger, The Transformation of the Euro (n 2) 305–11. 84 Pringle (n 1) paras 130–32. 85 Pringle (n 1) para 131. 86 De Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis’ (n 38) 1633–34. The author also points in this respect to the Declaration on Article 100 of the Treaty establishing the European Community [2001] OJ C80/78: ‘The Conference recalls that decisions regarding financial assistance, such as a provided for in Article 100 and are compatible with the “no-bailout” rule laid down in Article 103, must comply with . . .’ (emphasis added). 87 Louis, ‘Guest Editorial: The No-Bailout Clause and Rescue Packages’ (n 30) 982–83; De Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis’ (n 38) 1633–34. 88 Louis, ‘Guest Editorial: The No-Bailout Clause and Rescue Packages’ (n 30) 983. See also text to n 25.

Questions Surrounding the Use of Article 122(2) TFEU 975 The first follows from the text of the provision and prescribes that the Union may only give financial support when it is accompanied by ‘conditions’. These have as their aim to diminish the risk of moral hazard: support, or the prospect of it, should not incentivize the beneficiary Member State to implement unsound budgetary policies and thereby act against one of the primary aims of the ban on bailout.89 Regulation (EU) 407/2010 shows that the EFSM satisfies that requirement as assistance can only be granted subject to conditions aimed at ‘preserving the sustainability of the public finances of the beneficiary Member State and restoring its capacity to finance itself on the markets’.90

32.34

The second requirement equally follows from the text of Article 122(2) TFEU and demands that only a Member State facing, or threatened with, difficulties ‘caused by exceptional occurrences beyond its control’ qualifies for assistance. As Jean-Victor Louis has indicated, difficulties to access the capital markets that are simply due to unsustainable fiscal policies do not constitute an exceptional occurrence.91 If they did, the prohibitions focusing on market discipline, including the no-bailout clause, would be devoid of purpose. Yet, things may be different when a Member State can no longer refinance its debt on the markets because of a systemic crisis putting at risk the financial stability of the euro area as a whole.

32.35

The Court seems to rule out resort to Article 122(2) TFEU even in situations like these. In Pringle it argued that one of the reasons why this provision did not provide a legal basis for the ESM was that the mechanism aimed to safeguard the financial stability of the entire currency union instead of focusing on single states.92 This also puts into question the legality of the EFSM whose aim is equally not to safeguard the financial stability of single states, nor even of the euro area, but of the Union.93 But should this focus on stability beyond the state really rule out the use of Article 122(2) TFEU? It rather seems the provision can be operationalized to target euro area or even Union-wide stability risks, provided the Council makes sure that each time it gives assistance the beneficiary state is (also) struggling with an exceptional occurrence beyond its control.94

32.36

89 Ibid, 985; De Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis’ (n 38) 1634. This requirement therefore resembles the one in Article 136(3) TFEU, which similarly demands that assistance is granted subject to conditionality. See also Pringle (n 1) paras 135–36 where the Court confirms that budgetary prudence is one of the primary aims of Article 125 TFEU. 90 Article 3(3) and point 7 of the Preamble to Regulation (EU) 407/2010. 91 Louis, ‘Guest Editorial: The No- Bailout Clause and Rescue Packages’ (n 30) 984. See also Häde, ‘Haushaltdisziplin und Solidarität im Zeichen der Finanzkrise’ (n 30) 401; Lothar Knopp, ‘Griechenland Nothilfe auf dem verfassungsrechtlichen Prüfstand’ (2010) 63 NJW 1777, 1780; De Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis’ (n 38) 1634. 92 Pringle (n 1) para 65. 93 Article 1 EFSM Regulation. Whereas the EFSM can grant assistance to any Member State, Bruno de Witte and Thomas Beukers wonder whether Article 122(2) TFEU could be used for a stability mechanism that specifically concerns the currency union. They take the view it can, provided it is used in combination with Article 326 TFEU on enhanced cooperation. See Bruno de Witte and Thomas Beukers, ‘The Court of Justice approves the creation of the European Stability Mechanism outside the Union legal order: Pringle’ (2013) 50 Common Market Law Review 805, 833–34. However, one may question the necessity of enhanced cooperation. It seems Article 122(2) TFEU alone may serve as a legal basis for an assistance mechanism that focuses on a specific group of Member States affected by an economic shock, such as those in the currency union, instead of all Member States across the board. The establishment of such a mechanism would also not rule out resort to Article 122(2) TFEU by Member States not covered by the mechanism in question. 94 Article 122(2) TFEU is consequently more demanding than Article 136(3) TFEU. The latter does not require that in addition to risks for euro area financial stability the beneficiary Member State needs to face difficulties caused by an exceptional occurrence beyond its control. Assistance to a Member State that is in financial distress simply because of budgetary negligence therefore still falls within the scope of that provision.

976 EU FINANCIAL ASSISTANCE 32.37

Certain scholars have sought to distinguish in this respect between those Member States whose predicament is predominantly due to financial contagion and those whose difficulties largely originate from budgetary imprudence. Only the former, they argue, should be able to benefit from Union assistance as budgetary policy can be steered by the government and problems resulting from its mismanagement consequently do not qualify as ‘beyond control’.95 Especially Greece, the first Member State that lost access to the capital markets early 2010 after it became apparent its government had implemented irresponsible budgetary policies for years, should therefore not be able to rely on the EFSM.96 The problem of this particular reading of Article 122(2) TFEU is that it associates the lack of control with past instead of current events. There is no denying that Greece’s financing difficulties resulted from ill-informed budgetary policy. Yet, they were also intimately connected to the banking crisis that spread to Europe after the fall of Lehman Brothers in September 2008, and beyond control when this crisis started to affect states over the course of 2009.97

32.38

The third requirement concerns the duration of the assistance. A further reason why in Pringle the Court considered that Article 122(2) TFEU could not serve as a legal basis for the ESM concerned the permanency of the mechanism. Article 122(2) TFEU, it reasoned, ‘confers on the Union the power to grant ad hoc financial assistance’ but does not allow it to create a permanent rescue mechanism.98 This may also have implications for the EFSM. Formally, this mechanism is not intended to be permanent. Regulation (EU) 407/2010 demands that within six months following its entry into force ‘and where appropriate every six months thereafter’ the Commission reports on the continuation of the exceptional occurrence that necessitated its adoption.99 But the Commission has written only one such report, when it had to in November 2010.100 In the years that followed it has never re-examined the necessity of the EFSM, as a result of which the mechanism continues to exist up until this day. Contrary to the Court’s reasoning, however, what matters from the perspective of Article 122(2) TFEU is the permanency of the assistance, not the mechanism itself. As Louis has argued, ‘exceptional means temporary’.101 A continuous provision of capital to certain Member States, effectively turning the euro area or the Union into a transfer enterprise, would consequently violate Article 122(2) TFEU. The EFSM, however, can only grant

95 See eg Ulrich Häde, ‘Die europäische Währungsunion in der internationalen Finanzkrise—An den Grenzen europäischer Solidarität?’ (2010) 45 Europarecht 854, 857–58; Matthias Ruffert, ‘The European Debt Crisis and European Union Law’ (2011) 48 Common Market Law Review 1777, 1787 (hereafter Ruffert, ‘The European Debt Crisis and European Union Law’); Rainer Palmstorfer, ‘To Bail Out or Not to Bail Out? The Current Framework of Financial Assistance for Euro Area Member States Measured Against the Requirements of EU Primary Law’ (2012) 37 European Law Review 771, 780–81 (hereafter Palmstorfer, ‘To Bail Out or Not to Bail Out?’). For a different reading see Phoebus Athanassiou, ‘Of Past Measures and Future Plans for Europe’s Exit From the Sovereign Debt Crisis: What is Legally Possible (and What is Not)’ (2011) 36 European Law Review 558, 565. 96 Ruffert, ‘The European Debt Crisis and European Union Law’ (n 95) 1787; Palmstorfer, ‘To Bail Out or Not to Bail Out?’ (n 95) 781. 97 See in this respect also points 1–5 of the Preamble EFSM Regulation. 98 Pringle (n 1) para 65. 99 Article 9(1) EFSM Regulation. See in this respect also De Gregorio Merino, ‘Legal Developments in the Economic and Monetary Union During the Debt Crisis’ (n 38) 1634–35 (n 55). 100 Commission, ‘Communication on the European Financial Stabilisation Mechanism’ COM (2010) 713 final. The report argues that ‘the exceptional events and circumstances that justified the adoption of Regulation 407/ 2010 establishing a European financial stabilization mechanism still exist and that the Mechanism should, therefore, be maintained’. 101 Louis, ‘Guest Editorial: The No-Bailout Clause and Rescue Packages’ (n 30) 985.

Conclusion 977 assistance to Member States coping with financial disturbances caused by an exceptional occurrence, which means this has to stop when these disturbances are no longer present.102 The Court has never had the opportunity to take away the uncertainty about Article 122(2) TFEU. In 2011 the EFSM became the target of an annulment action, yet this was declared inadmissible as the complainants could not show to be directly concerned.103 Pringle is therefore the sole case on the matter. And even though renewed use of the EFSM seems increasingly unlikely, the judgment continues to influence the legal set-up of the currency union. In December 2017 the Commission presented a proposal for a European Monetary Fund (EMF).104 Even though this proposal is no longer on the table, as reform efforts now concentrate on amending the existing ESM Treaty, it does merit attention.105 The proposal sought to strengthen the ESM whilst at the same time ‘repatriating’ this mechanism into the Union legal order, using Article 352 TFEU as its legal basis. One of the conditions for the use of this ‘flexibility clause’ is that it does not widen the scope of Union powers beyond the ‘general’ Treaty framework.106 If the Court had ruled in Pringle that Article 122(2) TFEU constitutes an exception to the no-bailout clause, this would have complicated the use of Article 352 TFEU as one could argue in that case that the EMF indeed broadens Union power beyond the present framework.107 But the Court did not adopt this reading, instead saying that Article 122(2) TFEU does not constitute a derogation to Article 125 TFEU,108 and thereby kept open the door to the flexibility clause.109

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V. Conclusion Back in 2010, when the debt crisis was at its height, the options for granting financial assistance to states in the currency union were thin on the ground. The only instrument explicitly provided for by the Union Treaties was the one in Article 122 TFEU. This chapter has examined that assistance provision, discussing its legislative history, activation and scope of application. Introduced by the Treaty of Maastricht as a counterweight to the ban on bailout, it played a key role in the early response to the crisis, even though it only served as a legal basis for the European Financial Stabilisation Mechanism with its ‘modest’ firepower of 60 billion euro. The EFSM was activated in the context of the Irish and Portuguese rescue operations in 2010 and 2011 and again in the summer of 2015 in relation to Greece. By that 102 See also Chris Koedooder, ‘The Pringle Judgment: Economic and/or Monetary Policy?’ (2013–14) 37 Fordham International Law Journal 111, 141. 103 Case T-259/10 Thomas Ax v Council [2011] ECR II-176, paras 17–25. 104 Commission, ‘Proposal for a Council Regulation on the establishment of the European Monetary Fund’ COM (2017) 827 final. 105 Mario Centeno, ‘Deepening the EMU: President Centeno's report to the President of the Euro Summit’ (Letter of the President of the Eurogroup to the President of the Euro Summit, 5 December 2019) accessed 5 February 2020. 106 Declaration on Article 352 of the Treaty on the Functioning of the European Union [2016] OJ C202/351. 107 It should be noted in this regard that in Pringle the Court refrained from pronouncing on the use of Article 352 TFEU as a legal basis for the ESM. It confined itself to stating that ‘the Union has not used its powers under that article and that, in any event, that provision does not impose on the Union any obligation to act’. See Pringle (n 1) para 67. 108 See text to n 85. 109 This is not to say there are no other problematic aspects to the use of Article 352 TFEU as a legal basis for the EMF. See Chapter 42 on future reforms of EMU.

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978 EU FINANCIAL ASSISTANCE time, however, the states in the currency union had already put in place its permanent successor, the European Stability Mechanism. What is more, the Court had already assessed the legality of this mechanism in Pringle. The Court’s reading of Article 122(2) TFEU in that case unnecessarily casts doubt on the legality of the EFSM. That same reading, however, also ensures the assistance provision does not bar the possible future use of the flexibility clause for initiative like a European Monetary Fund.

33

FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF AND ESM) Ulrich Forsthoff and Jasper Aerts*

I. Introduction

33.1

A. Legal basis for the financial assistance operations of the ESM B. Legal basis for the financial assistance operations of the EFSF

II. Financial Assistance Instruments of the ESM

33.3 33.13

A. Macroeconomic adjustment loans B. Precautionary financial assistance; PCCL and ECCL facility C. Financial institution recapitalization facility D. Primary market support facility E. Secondary market support facility F. Direct bank recapitalization loans G. Side note: The ‘SRB bridge financing arrangement’ H. Outlook: revised ESM Treaty—changes to precautionary financial assistance; introduction of the backstop facility

33.20 33.21 33.26 33.37 33.44 33.54 33.61 33.75

III. Structure and Overview of the Legal Documentation

A. Financial assistance documentation B. The disbursement documents

IV. Financial Terms A. Introduction B. Funding C. Pricing

V. Financial Assistance Granted by the EFSF and the ESM A. General B. Greece C. Ireland D. Portugal E. Spain F. Cyprus

33.88 33.88 33.115 33.122 33.122 33.125 33.137 33.145 33.145 33.146 33.198 33.208 33.216 33.238

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I. Introduction This chapter sets out the operational rules, financial instruments, and financial assistance documentation of the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) in the context of granting stability support within the European Union (EU). Following a short overview of the governance of the ESM and the EFSF when granting financial assistance, the scope and functioning of the financial instruments of the ESM are described in more detail as well as the contractual documentation governing the relation between the ESM and the beneficiary ESM Member. This chapter concludes with an overview of the EFSF/ESM country cases.

* The views expressed in this chapter are those of the authors and do not necessarily represent the views of the institutions to which the authors are affiliated. Ulrich Forsthoff and Jasper Aerts, 33 Financial Assistance to Euro Area Members (EFSF and ESM) In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0040

33.1

980 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) 33.2

The dynamic environment in which the ESM operates, brings with it that the ESM has seen some evolution since its inception. Most recently, a revision of the ESM Treaty was politically agreed and it may enter into force in a not too far future.1 The recent revision to the Treaty Establishing the European Stability Mechanism (ESM Treaty) follows the agreement on the reform of the ESM as concluded in December 2018.2 This contribution is generally based on the initial ESM Treaty. The envisaged changes are however contemplated, wherever relevant, and described in Section II.H.

A. Legal basis for the financial assistance operations of the ESM 33.3

It is important to recall that the ESM is an intergovernmental organization with legal personality under international public law. The ESM was established by the ESM Treaty. The mandate for the ESM to provide financial assistance derives directly from this treaty.

33.4

According to Articles 3 and 12 ESM Treaty, it is the ESM’s mandate to provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members3 which 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.

33.5

The operational procedure for granting stability support is set out in Article 13 ESM Treaty. This procedure is a straightforward steps-based approach.4 It starts with a written request by the ESM Member5 seeking financial assistance. This request for financial support needs to be addressed to the Chairperson of the ESM Board of Governors6 and requires an indication of the financial assistance instrument(s) to be considered.7 In practice, the request also contains the required amount in financial needs as assessed by the ESM Member itself.

1 The text of the revised ESM Treaty including two new Annexes as agreed by the Eurogroup is available at

accessed 5 February 2020. 2 On 14 December 2018, the Euro Summit endorsed the term sheet on the ESM reform; Euro Summit, ‘Statement’ (EURO 503/18 EUROSUMMIT 3 TSGC 10, Brussels, 14 December 2018) accessed 5 February 2020. Previously, the term sheet on the European Stability Mechanism reform was agreed by the Eurogroup on 4 December 2018 accessed 5 February  2020. 3 In draft Article 3 of the revised ESM Treaty, the option to provide a ‘backstop facility’ to the Single Resolution Board is added. 4 The various financial assistance instrument guidelines may provide for additional steps or modalities in addition to the generic procedure as described in Article 13 ESM Treaty. 5 In case of the ‘backstop facility’ to the Single Resolution Board, as envisaged in the revised ESM Treaty, the request is to be made by the Single Resolution Board. 6 This is either the President of the Eurogroup, an informal coordination body comprising the euro area finance ministers (cf Protocol No 14 on the Euro Group [2012] OJ C326/283), or a person elected from among the Board of Governors itself. The first Chairperson of the Board of Governors of the ESM was Jean-Claude Juncker, former President of the European Commission. Jeroen Dijsselbloem, the former Dutch Finance Minister was the second Chairperson. The current Chairperson is Mario Centeno, the Portuguese Finance Minister, and currently the President of the Eurogroup. 7 It is noted that out of the current three ESM programmes, the precise procedure described in Article 13 ESM Treaty was only followed in case of the ESM programme for Greece in August 2015. The two earlier ESM programmes were established through slightly different processes. See, for further details, Section V.E regarding the facility for Spain, and Section V.F regarding the facility for Cyprus.

INTRODUCTION 981 On receipt of the request by the ESM Member, the Chairperson of the Board of Governors entrusts8 the European Commission, in liaison with the ECB, to assess:

33.6

(i) the existence of a risk to the financial stability of the euro area as a whole or of its Member States; (ii) whether public debt is sustainable (wherever appropriate and possible, such an assessment is expected to be conducted together with the International Monetary Fund (IMF)); and (iii) the actual or potential financing needs of the ESM Member concerned. Based on the request of the ESM Member and the assessments by the European Commission,9 in liaison with the European Central Bank (ECB), the ESM Board of Governors can decide to grant, in principle, stability support to the ESM Member concerned.10 At this stage, this is a decision to provide financial assistance in principle only, and not yet the approval for an actual financial assistance agreement, which comes later and a subsequent step in the process.

33.7

In case the ESM Board of Governors has decided to grant stability support in principle, it entrusts11 the European Commission (in liaison with the ECB and, wherever possible, together with the IMF) with the task of negotiating with the ESM Member concerned a memorandum of understanding (MoU) detailing the conditionality attached to the financial assistance facility.12 In practice, and since the MoU is an ESM document, the ESM is also involved in the establishment of the MoU. Chapter 30 in Section III deals more explicitly with the concept of the MoU.

33.8

The European Commission13 signs the MoU on behalf of the ESM, subject to approval by the ESM Board of Governors. This led the ESM to establish the practice that it prepares and provides the required execution pages to the MoU to the relevant parties (being the European Commission on behalf of the ESM, the relevant ESM Member and its Central Bank), and assists in the overall logistics of the actual signing of the document. The ESM keeps the originally signed MoU in its records (including any further supplements to the MoU, known as ‘Supplemental MoU’).

33.9

In parallel to the establishment of the MoU and the policy conditionality to the financial assistance, the ESM Board of Governors mandates the Managing Director of the ESM to prepare a proposal for a financial assistance facility agreement, including the relevant financial terms and conditions and the choice of financial instruments. This proposal by the Managing Director needs to be approved by the ESM Board of Governors.

33.10

8 According to draft Article 13(1) revised ESM Treaty, the ESM Managing Director will be entrusted alongside the European Commission. 9 See preceding footnote. 10 As a practical comment, it is noted that the various financial instrument guidelines prescribe the Managing Director of the ESM to propose to the Board of Governors whether in principle stability support should be granted (based on the assessments by the European Commission). 11 According to draft Article 13(3) revised ESM Treaty, the ESM Managing Director will be entrusted alongside the European Commission. 12 According to draft Article 14(2) revised ESM Treaty, the conditionality attached to a precautionary conditioned credit line will be expressed in a Letter of Intent. According to draft Article 18A revised ESM Treaty, no MoU is foreseen for the ‘backstop facility’ to the Single Resolution Board (SRB). 13 Together with the ESM Managing Director, according to draft Article 13(4) revised ESM Treaty.

982 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) Application for stability support ESM Member makes a formal request for stability support to the Chairperson of the ESM Board of Governors (‘BoG’) Assessments Chairperson of the BoG shall entrust the European Commission (‘EC’), in liaison with the ECB, with the required assessments. The European Commission (‘EC’), in liaison with the ECB, assesses: (i) the risk to the ESM Member’s financial stability; (ii) whether the ESM Member’s public debt is sustainable (wherever appropriate and possible, this assessment is done together with the IMF); and (iii) the actual or potential financing needs of the ESM Member. Granting of support in principle Based on the assessments and the request, the ESM Managing Director (‘MD’) shall prepare a proposal for financial assistance, thereby taking into account the financial situation of the ESM. Based on the proposal, the BoG may decide to grant, in principle, financial assistance (and its amount and duration). Approval of support terms Following the decision by the BoG to grant principle support, the BoG shall entrust (i) the EC with the task of negotiating an Memorandum of Understanding (‘MoU’) setting out the appropriate policy conditionality to the stability support and (ii) the MD with the task of preparing a proposal for a Financial Assistance Facility Agreement (‘FFA’), to be adopted by the BoG. The FFA establishes the financial terms and conditions of the stability support in compliance with the policy conditions (the actual FFA is adopted by the ESM Board of Directors (‘BoD’) and signed by the MD). The EC signs the MoU on behalf of the ESM, after approval by the BoG. Financial support After ensuring compliance with policy conditions, ESM makes support available to the ESM Member, upon approval by the BoD.

Figure 33.1 Schematic overview of the approval process for stability support by the ESM 33.11

Following the approval of the ESM Board of Governors of the Managing Director’s proposal for the financial assistance facility agreement, the actual agreement detailing all the financial aspects of the stability support to be granted is negotiated directly by the ESM with the beneficiary ESM Member and subsequently approved by the ESM Board of Directors.14 Where applicable, the Board of Directors approves the disbursement of the first tranche of the assistance under the lending arrangement.

33.12

The Managing Director of the ESM is the only person authorized to sign the actual financial assistance facility agreement on behalf of the ESM. This follows directly from Articles 14–18 ESM Treaty. A schematic overview of the approval process for providing stability support [see Figure 33.1] helps to better grasp its different steps.

B. Legal basis for the financial assistance operations of the EFSF 33.13

Unlike the ESM, the EFSF is a company governed by private law. The EFSF is a Luxembourg public limited liability company (société anonyme) incorporated in Luxembourg on 7 June 2010 and governed by the laws of the Grand-Duchy of Luxembourg and by its Articles of Incorporation (lastly updated in 23 April 2014). Its registered seat is Luxembourg-City. The capital is fixed at 28.5 million euro and is held by all the euro area countries (but excluding

14

Article 13(5) ESM Treaty.

INTRODUCTION 983 Latvia and Lithuania).15 A Board of Directors (to which the rule ‘one director per shareholder’ applies) manages the EFSF, and a CEO is appointed as its daily manager.16 The EFSF was created by the euro area Member States following the decisions taken on 9 May 2010 within the framework of the Ecofin Council.

33.14

Where the ESM Treaty forms the basis for financial assistance operations for the ESM, the Articles of Incorporation together with the so-called ‘EFSF Framework Agreement’ form the basis for the EFSF to execute these operations. The corporate object clause in the Articles of Incorporation stipulates among other things:

33.15

to facilitate or provide financing to Member States of the European Union in financial difficulties whose currency is the Euro and which have entered into a memorandum of understanding with the European Commission containing policy conditionality . . .17

The EFSF Framework Agreement regulates the financial assistance operations of the EFSF and is an agreement between the shareholders of the EFSF. The Framework Agreement sets out the relevant terms and conditions on which the EFSF is authorized to provide financial assistance or stability support to its members.

33.16

Under the Framework Agreement, the EFSF is authorized to issue debt instruments in order to provide loans to beneficiary Member States, intervene in the primary and secondary debt markets, and to provide precautionary credit lines and financing for the recapitalization and/or resolution of financial institutions.

33.17

More in particular, Article 2(1) Framework Agreement stipulates that the EFSF must negotiate the detailed, technical terms of the financial assistance (substantially in the form of template agreements, each adapted to the particular form of financial assistance) to be made available to the relevant beneficiary Member State, provided that such financial assistance is approved by the euro area Member States. The financial assistance is further subject to any other procedures, terms and conditions pursuant to the relevant guidelines for the various financial assistance instruments as adopted by the Board of Directors of the EFSF.

33.18

The EFSF was politically always intended to be a temporary rescue mechanism—the ESM is designed to be the permanent successor to the EFSF. To this end, and although the Articles of Incorporation of the EFSF stipulate that the EFSF is formed for an unlimited duration, it mentions that it will be dissolved and liquidated when its purpose is fulfilled (ie when the EFSF has received full payment of the financing it has provided to the various Member States and has repaid its liabilities under its funding instruments). The Articles of Incorporation furthermore stipulate that the EFSF cannot enter into new loans or programmes after 30 June 2013 and as a result it is no longer authorized to provide any new financial assistance programmes or loans.18

33.19

15 Latvia and Lithuania joined the ESM, but not also the EFSF. 16 Currently the CEO of the EFSF is the same person as the ESM Managing Director. 17 Article 3 Articles of Incorporation of the EFSF. 18 The Articles of Incorporation clarify that financings granted prior to this date could well have longer maturity dates than 30 June 2013 and that the availability period of financings granted prior this date might also be longer. In fact, since the weighted average maturity for the Greek EFSF loans stands at 42.5 years, the current latest date for repayment of the longest loan to the EFSF is 2070 (without prejudice to possible additional maturity extensions in the context of further debt relief measures for Greece). In other words, the EFSF may well be designed as a temporary institution; it remains active in the financial markets for a very long period.

984 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM)

II. Financial Assistance Instruments of the ESM 33.20

Without prejudice to Articles 19 and 5(6)(i) ESM Treaty, stability support by the ESM can solely be granted through the instruments provided for in Articles 14–18 ESM Treaty.19 Each financial instrument has its own detailed guideline, which set out specific terms, conditions and modalities in respect of the financial instrument, as adopted and approved by the ESM Board of Directors.20 In the following, the rules governing the ESM’s financial assistance instruments are described in detail.21

A. Macroeconomic adjustment loans 33.21

The basis for the ESM macroeconomic adjustment loans is Article 16 of the ESM Treaty. As set out in Article 1 of the relevant ESM Guideline on Loans, the objective of this financial instrument is, to assist ESM Members that have significant financing needs but have (to a large extent) lost access to market financing, either because they cannot find lenders or because lenders will provide financing only at excessive prices that would adversely impact the sustainability of public finances. In order to ensure a return to full market financing and a sustainable economic and financial situation, all ESM loans are subject to a macroeconomic adjustment programme that includes appropriate conditionality prepared in agreement with the European Commission, in liaison with the ECB and, where appropriate, the IMF.

33.22

Loans could be made available in one or more tranches, which may in turn each consist of one or more disbursements (Article 3(1) ESM Guideline on Loans). The disbursement of the first tranche is decided by the Board of Directors together with the approval of the financial assistance facility agreement, in line with Article 13(5) ESM Treaty and Article 3(2) ESM Guideline on Loans. It decides by mutual agreement the disbursement of the tranches of the loan subsequent to the first tranche, based on a proposal from the Managing Director and after having received a report from the European Commission in accordance with Articles 13(7) and 16(5) ESM Treaty. The proposal of the Managing Director must be consistent with the report from the European Commission and take into account the financial situation of the ESM.

33.23

This financial instrument could also be used for the purpose of bank recapitalization if so required. If a portion of the loan is intended to be used for these specific purposes, the loan facility agreement will contain additional provisions specifically addressing relevant financial sector related issues (cf Article 2(3) lit (a) ESM Guideline on Loans). For example, issues such as bank monitoring, general principles of state aid and involvement of the relevant 19 The ‘backstop facility’ to the Single Resolution Board is added in draft Article 18A revised ESM Treaty. 20 See all financial instrument guidelines accessed 5 February 2020. The ESM guidelines on financial instruments foreseen under Articles 14–18 ESM Treaty were approved on 9 October 2012. The ESM Guideline on Financial Assistance for the Direct Recapitalisation of Institutions was adopted on 8 December 2014 by the Board of Directors. 21 The EFSF has the same set of financial instruments as the ESM (except for the DRI Instrument), but since it can no longer provide any further financial assistance, and has only used the macroeconomic adjustment programme loans whilst being active, the applicable instruments for the EFSF will not be further specified in this chapter.

Financial Assistance Instruments of the ESM 985 stakeholders (as is stipulated in the financial instrument for the recapitalization of financial institutions and its relevant guideline, as further detailed in Section II.C). According to Article 3(4) ESM Guideline on Loans, disbursements under ESM loans could furthermore be used for primary market purchases in line with the primary market support facility and guideline. This financial instrument is further detailed in Section II.D.

33.24

To date, the ESM has granted loans to Cyprus (2013) and Greece (2015). The loan facility agreements for these countries both include the possibility to use disbursements for the purpose of bank recapitalization. The EFSF provided loans to Ireland, Greece, and Portugal. More on the financial programmes for Greece and Cyprus in Sections V.B and V.F respectively.

33.25

B. Precautionary financial assistance; PCCL and ECCL facility Article 14 ESM Treaty is the basis for granting precautionary financial assistance. As Article 14 ESM Treaty will be changed considerably once the revised ESM Treaty will enter into force, the following describes exclusively the situation de lege lata. The new legal situation that the revised ESM Treaty will bring about, is described in Section II.H.

33.26

Article 1 ESM Guideline on Precautionary Financial Assistance sets out the objective of precautionary financial assistance which is to support sound policies and prevent crisis situations by allowing ESM Members to secure the possibility to access ESM assistance before they face major difficulties raising funds in the capital markets. Precautionary financial assistance aims at helping ESM Members whose economic conditions are still sound to maintain continuous access to market financing by reinforcing the credibility of their macroeconomic performance while ensuring an adequate safety net.

33.27

The ESM established two types of precautionary financial assistance (cf Article 2(1) ESM Guideline on Precautionary Financial Assistance); the so- called ‘Precautionary Conditioned Credit Line’ (PCCL) and an ‘Enhanced Conditions Credit Line’ (ECCL).22 Both types of credit line have an initial availability period of one year and can be renewed twice; each time for a period of six months. A PCCL and an ECCL credit line can be drawn via a loan or a primary market purchase. In the latter case, this would again be aligned with the primary market support facility and guideline.

33.28

Access to a PCCL facility is based, according to Article 2(2) Guideline on Precautionary Financial Assistance, on pre-established conditions and limited to ESM Members whose economic and financial situation is still fundamentally sound. A global assessment must be made by the Commission in liaison with the ECB on whether a potential beneficiary ESM Member qualifies for a PCCL, using the following criteria:

33.29

a. Respect of the commitments under the stability and growth pact (‘SGP’). An ESM Member under excessive deficit procedure may still access a PCCL, provided it fully abides by the Council decisions and recommendations aimed at ensuring a smooth and accelerated correction of its excessive deficit. 22 It is noted that the Standard Facility Specific Terms for ESM Financial Assistance Facility Agreements (‘Facility Specific Terms’) in Section 3 refers to Enhanced Conditioned Credit Line to align it with the PCCL.

986 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) b. A sustainable general government debt. c. Respect of the commitments under the excessive imbalance procedure (EIP). An ESM Member under EIP may still access a PCCL, provided it is established that it remains committed to addressing the imbalances identified by the Council. d. A track record of access to international capital markets on reasonable terms. e. A sustainable external position. f. The absence of bank solvency problems that would pose systemic threats to the stability of the euro area banking system. 33.30

According to Article 2(4) ESM Guideline on Precautionary Financial Assistance, access to an ECCL facility is open to ESM Members that do not comply with some of the eligibility criteria required for accessing a PCCL, but whose general economic and financial situation remains sound. In liaison with the European Commission and the ECB, the beneficiary ESM Member must adopt corrective measures aimed at addressing the above-mentioned weaknesses and avoiding any future problems in respect of access to market financing, while ensuring a continuous respect of the eligibility criteria, which were considered met when the credit line was granted.

33.31

The European Commission, in liaison with the ECB, must monitor the respect of the eligibility criteria and of any corrective measures. This is set out in Article 2(3) and (4) ESM Guideline on Precautionary Financial Assistance.

33.32

In line with Article 4 ESM Guideline on Precautionary Financial Assistance, it is at the beneficiary ESM Member’s discretion to activate the credit line. It has the flexibility to request the drawdown of funds at any time during the availability period of the credit line according to the agreed terms. It however must inform the ESM at least a week in advance of its intention to draw funds, depending on the intended size.

33.33

As an operational matter and to assure the ESM to be able to fund itself in the financial markets, the specific terms and conditions of the credit lines (cf section 2, Clause 4.1 and section 3, Clause 4.1 Facility Specific Terms), stipulate that in case the intended drawdown amount by the ESM Member is less than three billion euro, there is a five business days’ notice period. In case the requested amount under the credit lines is three billion euro or more, a notice period of ten business days in advance is applicable. The maximum size of a single tranche is set in the initial decision to grant the credit line.

33.34

Where an ECCL is granted or a PCCL drawn, the ESM Member is subject to enhanced surveillance by the European Commission for the availability period of the credit line.23 It is subject to various detailed information undertakings as stipulated in Article 5(2) ESM Guideline on Precautionary Financial Assistance.

33.35

According to Article 7 ESM Guideline on Precautionary Financial Assistance, the ESM re- examines the adequacy of granting precautionary financial assistance.

33.36

The ESM has not yet granted precautionary financial assistance.

23

Article 5(1) ESM Guideline on Precautionary Financial Assistance.

Financial Assistance Instruments of the ESM 987

C. Financial institution recapitalization facility The ESM is mandated to provide financial assistance for the recapitalization of financial institutions, in accordance with the provisions set out in Article 15 ESM Treaty. Although formally defined as the financial assistance for the recapitalization of financial institutions, this form of assistance is commonly referred to as ‘indirect bank recapitalization’ to distinguish it from the ‘direct bank recapitalization’, as addressed in Section II.F.

33.37

Indirect bank recapitalization assistance is provided by the ESM in the form of a loan to an ESM Member, in accordance with Article 15(1) ESM Treaty. In other words, ESM funds are disbursed to the government, which in turn will channel it to the beneficiary financial institution(s).24 The relevant funds may be transferred to a dedicated national bank recapitalization (or resolution) fund before being injected in the relevant financial institutions. This has been done in the Greek and Spanish bank recapitalization operations, where in fact the relevant national bank recapitalization funds (the Hellenic Financial Stability Fund (‘HFSF’) in Greece and the Fondo de Reestructuración Ordenada Bancaria (‘FROB’) in Spain) recapitalized the relevant banks with the ESM funds.

33.38

The loan granted to an ESM Member under this form of stability support is restricted for the specific purpose of supporting financial institutions, including through schemes to support asset separation and disposal, while requiring fulfilment of appropriate conditionality, focused on the enhancement and viability of the financial sector as well as the institution(s) in question (cf Article 2(1) ESM Guideline on Financial Assistance for the recapitalization of Financial Institutions).

33.39

As stipulated in Article 1(3) of the Guideline, this particular tool is intended to address cases where financial or economic distress is anchored in the financial sector and not directly related to fiscal or structural policies. As such, financial assistance for recapitalising financial institutions is granted to an ESM Member outside the confines of a macroeconomic adjustment programme. This assistance seeks, in line with Article 2(2) of the aforementioned Guideline, to limit the contagion of financial stress by ensuring the capacity of a beneficiary ESM Member’s government to finance recapitalization at sustainable borrowing costs and facilitate financial sector repair in order to eliminate vulnerabilities.

33.40

However, the granting of this form of financial assistance is without prejudice to the possibility that an ESM Member can use funds provided by the ESM under a standard loan (which is subject to a full macroeconomic adjustment programme) for recapitalising financial institutions. In such a case, as discussed in Section II.A, an ESM Member shall continue to be subject to appropriate financial sector conditionality but under the terms and conditions established by the Guideline on Loans and the relevant loan documentation (cf Article 1(4) ESM Guideline on Financial Assistance for the recapitalization of Financial Institutions).

33.41

24 Usually there is a separate loan or subscription agreement between the relevant state and the recapitalized banks and/or national bank recapitalization fund.

988 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) 33.42

Pursuant to Article 3 ESM Guideline on Financial Assistance for the recapitalization of Financial Institutions, the following eligibility criteria and hierarchy of prior actions must be met in order to obtain financial assistance for recapitalising financial institutions: (a) The beneficiary ESM Member must demonstrate the existence of a lack of alternatives for recapitalising the financial institution(s) concerned: this should first reveal an inability to meet capital shortfalls via private sector solutions (eg tapping new market investors or existing shareholders) and, second, an inability of the beneficiary ESM Member to recapitalize said institution(s) without incurring very adverse effects on its own financial stability and fiscal sustainability. (b) The financial institution(s) concerned should have a systemic relevance or pose a serious threat to the financial stability of the euro area as a whole or of its Member States.25 Their systemic dimension will be assessed taking into account, primarily, their size, interconnectedness, complexity, and substitutability. c) The beneficiary ESM Member must demonstrate its ability to reimburse the loan granted, even in cases in which it would not be able to recover the capital injected in the beneficiary institution(s) according to the timing agreed in relevant state-aid decisions. The beneficiary ESM Member must also demonstrate the existence of a sound fiscal and macroeconomic policy record. The size and duration of the loan to be decided upon by the ESM Board of Governors shall not jeopardize the fiscal sustainability of the beneficiary ESM Member.

33.43

The ESM provided this form of dedicated financial assistance to the Kingdom of Spain in the context of its (initial) 100 billion euro facility. More on the financial programme for Spain in Section V.E.

D. Primary market support facility 33.44

A special form of financial assistance is not the straightforward provision of ESM funds to a beneficiary Member State itself, but instead a form of intervening in the capital markets in respect of the relevant country’s government bonds. The ESM distinguishes two kind of operations in this context: intervening in the primary markets and in the secondary markets (cf Section II.E). Both instruments have to date not been used by the ESM.

33.45

The primary market support facility has its basis in Article 17 ESM Treaty. In line with Article 1 ESM of the Guideline on the Primary Market Support Facility, the ESM may engage in primary market purchases of bonds or other debt securities issued by ESM Members under the primary market support facility as a complement to (a) regular loans; or (b) to drawdowns of funds under precautionary financial assistance.26 The main objective of the

25 For the purpose of the guideline for indirect bank recapitalisation, systemic relevance can refer to: (i) systemically important financial institutions that fall into the main criteria enclosed in the guideline; or (ii) other financial institutions, not necessarily cross-border, whose insolvency could have a significant negative impact on the financial system because of adverse market circumstances or financial stress. 26 Primary market purchases are usually referred to as ‘PMP operations’, or simply ‘PMP’. The actual primary market support facility (formally labelled as Primary Market Bond Purchase Facility) is usually referred to as ‘PMP facility’.

Financial Assistance Instruments of the ESM 989 primary market support facility is to allow the ESM Members to maintain or restore their market access. As set out in Article 2(1) ESM Guideline on the Primary Market Support Facility, an ESM Member may request the use of a primary market support facility under the loan facility and precautionary financial assistance27 either:

33.46

(a) when requesting a loan or credit line according to the relevant procedures for the loan facility and precautionary facilities (see Sections II.A and II.B); or (b) after having already entered into a loan facility or precautionary financial assistance, in which case the procedures for granting support shall have already been completed in accordance with its relevant procedures. If this is the case, the Managing Director of the ESM must prepare a proposal within the overall financial limit of the loan or credit line facility for the adoption by the ESM Board of Governors whether to grant the PMP facility. If agreed, the Managing Director shall subsequently be entrusted with the task of preparing a proposal for a revised financial assistance facility agreement, covering the financial terms and conditions of the PMP facility, to be adopted by the Board of Directors. An ESM Member to which a PMP facility has been granted must inform the Managing Director of its intention to have one or several tranches under a loan facility disbursed via PMP (cf Article 2(2) ESM Guideline on the Primary Market Support Facility). An ESM Member to which a stability support in the form of a credit line has been granted pursuant to the relevant ESM guideline is required to inform at least a week in advance (or as otherwise agreed in the relevant facility agreement) the ESM Board of Directors of its intention to drawdown funds via PMP facility (cf Article 3(2) ESM Guideline on the Primary Market Support Facility).

33.47

The Managing Director is required to agree with the beneficiary ESM Member the detailed modalities for carrying out the PMP, which must be updated regularly with a view to take into account the evolution of the market situation of the beneficiary ESM Member (cf Article 3(3) ESM Guideline on the Primary Market Support Facility). As a rule, primary market purchases are required to be conducted at market price, as set out in Article 4 ESM Guideline on the Primary Market Support Facility.

33.48

The Managing Director shall implement PMP in view of the issuance approach taken by the relevant ESM Member: either via a participation in auctions or via participation in syndicated transactions.28

33.49

Pursuant to Article 3(4) ESM Guideline on the Primary Market Support Facility, PMP cannot be conducted if the Managing Director concludes that the participation of private investors would be insufficient (less than 50 per cent) or that the rate would be excessively above the ESM funding rate.29 The purchase of bonds must then be replaced by a regular

33.50

27 The use of primary market purchases triggers a reassessment of the adequacy of the precautionary assistance and the policy conditions attached to it. 28 For more details on the actual buying modalities, please refer to Article 4 of the ESM Guideline on the Primary Market Support Facility. 29 The ESM funding rate is currently 0.81 per cent and published at accessed on 5 February 2020.

990 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) disbursement of the loan or credit line, whenever needed to cover the financing gap of the beneficiary Member State. 33.51

The rules governing the management of the purchased bonds are set out in Article 5 ESM Guideline on the Primary Market Support Facility.

33.52

In accordance with Article 2.6 Facility Specific Terms for the PMP Facility (Section 5), the ESM Member is liable to reimburse the ESM under any PMP operation a principal amount of: – the aggregate purchase price paid by the ESM; less – the principal amount received or realized by the ESM in respect of the purchased bonds at maturity or on re-sale.

33.53

Upon realization of a loss, this shortfall would be treated as if it were a loan by the ESM to the ESM Member.

E. Secondary market support facility 33.54

The legal basis for the secondary market support facility30 is Article 18 ESM Treaty. As the ESM Guideline on the Secondary Market Support Facility states, it aims to support the good functioning of the government debt markets of ESM Members in exceptional circumstances where the lack of market liquidity threatens financial stability with a risk of pushing sovereign interest rates towards unsustainable levels and creating refinancing problems for the banking system of the ESM Member concerned. An ESM secondary market intervention is intended to enable market making that would ensure some debt market liquidity and incentivize investors to further participate in the financing of ESM Members.

33.55

In accordance with Article 2(1) ESM Guideline on the Secondary Market Support Facility, an ESM Member under a macroeconomic adjustment programme under which an ESM loan has been granted, may make use of the SMP as long as it continues to comply with the policy conditionality attached to the stability support.

33.56

Pursuant to Article 2(2) of the aforementioned Guideline, access to a SMP facility is also open to an ESM Member outside of a macroeconomic adjustment programme, but subject to financial market disruptions, as long as the Member’s economic and financial situation remains sound and on the basis of a global assessment, conducted by the European Commission in liaison with the ECB, of the following criteria (as well as continuous respect of the policy conditionality and eligibility conditions attached to the stability support): ( a) Respect of the commitments under the SGP. An ESM Member under excessive deficit procedure could still access a SMP facility, provided it fully abides by the Council decisions and recommendations aimed at ensuring a smooth and accelerated correction of its excessive deficit. 30 This is the second ESM bond-buying facility in accordance with Article 18 ESM Treaty. Secondary market purchases are usually referred to as ‘SMP operations’, or simply ‘SMP’. The actual secondary market support facility (again, formally labelled as Secondary Market Bond Purchase Facility) is usually referred to as ‘SMP facility’.

Financial Assistance Instruments of the ESM 991 ( b) A sustainable general government debt. (c) Respect of the commitments under the EIP. An ESM Member under EIP may still access a SMP facility, provided it is established that it remains committed to addressing the imbalances identified by the Council. (d) A track record of access to international capital markets on reasonable terms. (e) A sustainable external position. (f) The absence of bank solvency problems that would pose systemic threats to the stability of the euro area banking system. When implementing SMP operations under the facility agreement, the Board of Directors must, according to Article 5(1) ESM Guideline on the Secondary Market Support Facility, establish so-called ‘pro-tempore intervention caps’ for the implementation of the facility. A technical sub-committee, consisting of members of the Board of Directors, will have to be established to decide on the means of implementation of secondary market interventions under the SMP facility. Its composition and operating rules must be approved by the Board of Directors, acting on a proposal from the Managing Director. Market sensitive decisions are taken in secrecy.

33.57

Similar to the PMP facility, Article 7 ESM Guideline on the Secondary Market Support Facility provides rules for the management of the purchased bonds.

33.58

Similar to the PMP facility, the ESM Member is liable to reimburse the ESM under any SMP operation a principal amount of:

33.59

– the aggregate purchase price paid by the ESM; less – the principal amount received or realized by the ESM in respect of the purchased bonds at maturity or on re-sale. Upon realization of a loss, this shortfall would be treated as if it were a loan by the ESM to the ESM Member. This is set out in Article 2.6 Facility Specific Terms for the SMP Facility (Section 6).

33.60

F. Direct bank recapitalization loans The ESM was initially only able to recapitalize a financial institution indirectly. In such a case, the ESM provides a loan to the state, which uses it to recapitalize the financial institution (see Section II.C regarding the indirect bank recapitalization instrument). Such financial assistance adds public debt to the beneficiary country, which could have negative impact on market sentiment. This link between governments and its banking sector (often described as the ‘vicious circle’) has been widely regarded as a crucial destabilising factor for some euro area countries. As a result, the leaders of euro area countries decided already in June 2012 to develop an instrument that would allow to strengthen the capital position of banks without placing a large burden on the country where the bank is incorporated.31 31 Euro Area Summit, ‘Statement’ (Brussels, 29 June 2012) accessed 5 February  2020.

33.61

992 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) 33.62

Shortly after the inception of the ESM in October 2012, work started to establish, based on Article 19 ESM Treaty, the so-called ‘ESM direct bank recapitalization instrument’ (DRI)— an instrument under which the ESM would have the possibility to directly inject the required funds into the relevant financial institution.

33.63

Pursuant to Article 19 ESM Treaty, the Board of Governors may review the list of financial assistance instruments provided for in Articles 14–18 and decide to make changes to it. Accordingly, whilst Article 19 is an opening clause allowing to make changes to the list of financial assistance instruments and thus, also establishing new instruments, Article 19 does not allow to derogate from other provisions of the ESM Treaty. As the direct injection of funds into financial institutions entails specific demands, which are not present in sovereign lending, the challenge was to establish an instrument, which respects all provisions of the ESM Treaty and, at the same time, is able to respond to the specific demands that come with direct injection of capital into the relevant financial institution.

33.64

On 8 December 2014, the Board of Governors and the Board of Directors took the necessary decisions to establish the DRI. These decisions include, inter alia, the adoption of the Board of Governors’ resolution to establish the DRI32 and the Board of Directors’ decision to adopt the corresponding guideline.

33.65

As for the other ESM financial instruments, the procedure for granting financial assistance under this instrument is governed by Article 13 ESM Treaty. The Board of Governors’ Resolution and in particular the instrument specific guideline complement this procedure by additional steps.

33.66

Following the adoption of the new financial instrument through Article 19 of the ESM Treaty, the ESM necessarily had to update its standard financial assistance documentation. It did so by incorporating the labelled ‘DRI Facility’ into the set of available ESM facilities and the drafting of the ‘Institution Specific Agreement’, which is the specific agreement between the ESM and the relevant recapitalized financial institution that serves as a form of subscription agreement.

33.67

The ESM Members politically endorsed the updated financial assistance documents incorporating the DRI Facility and the Institution Specific Agreement in October 2014. The ESM Board of Directors provided subsequently formal approval in December 2014.

33.68

As stated in Article 2(1) ESM Guideline on Financial Assistance for the Direct Recapitalisation of Institutions, the aim of the direct financial assistance to institutions33 is to preserve the financial stability of the euro area as a whole and of its Member States by catering for those specific cases in which an ESM Member experiences acute difficulties with

32 The ESM Board of Governors resolution establishing new financial instrument under Article 19 ESM Treaty accessed 5 February 2020. The ESM uses the term ‘DRI’ which stands for the Direct Recapitalisation Instrument or the term Direct Recapitalization of Institutions. 33 For the purpose of this financial instrument, ‘institutions’ refers to institutions as defined in Article 2(3)– (5) Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63.

Financial Assistance Instruments of the ESM 993 its financial sector that cannot be remedied without significantly endangering its fiscal sustainability due to a severe risk of contagion from the financial sector to the sovereign. The use of this instrument could also be considered if other alternatives would have the effect of endangering the continuous market access of an ESM Member. As far as the use of the instrument of an ESM loan for the recapitalization of financial institutions is not possible, such financial assistance shall thus seek to help remove the risk of contagion from the financial sector to the sovereign by allowing the recapitalization of institutions directly, thereby reducing the effect of a vicious circle between a fragile financial sector and a deteriorating creditworthiness of the sovereign. In accordance with Article 2(2) and (3) of the aforementioned Guideline, the direct financial assistance granted under this instrument is restricted to the specific purpose of recapitalising institutions, while requiring fulfilment of appropriate conditionality, addressing both the sources of difficulties in the financial sector and, where appropriate, the general economic situation of the requesting ESM Member. The instrument cannot be used for the winding-up of institutions.

33.69

ESM Members may request the direct financial assistance to institutions within or outside the confines of a macroeconomic adjustment programme. The assistance is, as always, subject to specific conditionality relevant to this instrument; the conditionality for this instrument must be of an institution-specific, sector-specific and/or macroeconomic nature.

33.70

The relevant eligibility criteria for this form of financial assistance are set out in Article 3 ESM Guideline on Financial Assistance for the Direct Recapitalization of Institutions and are broken down in two parts: criteria regarding the relevant institution and criteria for the relevant ESM Member.

33.71

The following criteria related to the relevant institution must be met in order for a request to be considered eligible:

33.72

(a) The institution is, or is likely to be in the near future, in breach of the capital requirements established by the ECB in its capacity as supervisor,34 and is unable to attract sufficient capital from private sector sources to resolve its capital problems and the bail-in to be conducted in accordance with this instrument is not expected to address fully the capital shortfall.35 (b) The institution concerned should have a systemic relevance or pose a serious threat to the financial stability of the euro area as a whole or of the requesting ESM Member.36 The systemic dimension of these institutions shall be assessed taking into account, primarily, their size, interconnectedness, complexity, and substitutability. In relation to the requesting ESM Member, the following criteria are relevant: (a) The requesting ESM Member is unable to provide financial assistance to the institutions in full without very adverse effects on its own fiscal sustainability, including

34 If the ECB was not already the competent supervisor of the institution at the time of request, the new capital requirements set by the ECB after the transfer of supervision shall be the ones taken into account. 35 Private sector sources shall include tapping new market investors or existing shareholders. 36 Systemic relevance refers to the concept under the financial instrument for the indirect bank recapitalisation.

33.73

994 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) via the instrument of an ESM loan for the recapitalization of financial institutions. The use of the instrument can also be considered if it is established that other alternatives would have the effect of endangering the continuous market access of the requesting ESM Member and consequently require the financing of its sovereign needs via the ESM. (b) Providing financial assistance to the benefit of the requesting ESM Member is indispensable to safeguard the financial stability of the euro area as a whole or of its Member States. 33.74

The procedure for granting assistance under the DRI-instrument is specified in Article 4 ESM Guideline on Financial Assistance for the Direct Recapitalisation of Institutions. Given the specificities of this instrument, this procedure includes significant additional steps in comparison to the standard procedure according to Article 13 ESM Treaty.

G. Side note: The ‘SRB bridge financing arrangement’ 33.75

At the end of 2015, the ESM established an alternative facility under its standard loan, precautionary assistance and indirect bank recapitalization instruments. This is the so- called ‘SRB bridge financing arrangement’. The SRB bridge financing arrangement forms an alternative, separate and specialized variant of the existing financial instruments and not an additional financial instrument (such as the DRI Facility as mentioned in Section II.F).

33.76

In the context of the financing of the Single Resolution Board (SRB), the banking resolution authority in Europe, the euro area Member States devised a bridge financing arrangement to ensure sufficient funding for the Single Resolution Fund, which is managed by the SRB during the transitional period starting 1 January 2016. This commitment was formalized in the SRB Loan Facility Agreement, a loan agreement between the SRB and all participating Banking Union Member States.

33.77

If a euro area Member State would not have the relevant funds to provide financing to the SRB under the loan agreement, it can request backstop assistance (bridge financing) from the ESM. To ensure compatibility of existing ESM financial instruments with the SRB Loan Facility Agreement of the SRB, the ESM made the relevant technical amendments to the template ESM financial assistance documents by incorporating the SRB bridge financing arrangement.

33.78

The revised template financial assistance documents, incorporating this SRB bridge financing arrangement, were adopted by the ESM Board of Directors in February 2016.

33.79

This form of financial assistance may still be of use for ESM Members despite the fact that political agreement has been reached that the ESM will provide the common backstop to the SRB, as explained next. The principle assumption is that the ESM will provide this backstop at the end of the transitional period (2024). During this period, ESM Members could still make use of this alternative facility to backstop the SRB Loan Facility Agreement, if so required.

Financial Assistance Instruments of the ESM 995

H. Outlook: revised ESM Treaty—changes to precautionary financial assistance; introduction of the backstop facility 1. Changes to Precautionary Financial Assistance The changes to the instrument for precautionary financial assistance aim at making this instrument more attractive. Experience suggests that this instrument has not yet been used due to a perceived lack of transparency relating to both the eligibility criteria for accessing ESM precautionary financial assistance and the conditionality, which could be attached to precautionary financial assistance.

33.80

Draft Article 14 revised ESM Treaty (including a new Annex III) addresses these issues in detailing the eligibility criteria and the conditionality to be met. As of today, precautionary financial assistance can be granted via a Precautionary Conditioned Credit Line (PCCL) and via an Enhanced Conditions Credit Line (ECCL). The ESM Treaty revision focussed on the PCCL.

33.81

Access to a PCCL will be based on eligibility criteria and limited to ESM Members where the economic and financial situation is fundamentally strong and whose government debt is sustainable. As a rule, ESM Members need to meet quantitative benchmarks and comply with qualitative conditions related to EU surveillance. The eligibility criteria include a track record of two years preceding the request for a PCCL with a general government deficit not exceeding 3 per cent of Gross Domestic Product (GDP), a general government structural budget balance at or above the country specific minimum benchmark, a debt/GDP ratio below 60 per cent or a reduction in the differential with respect to 60 per cent over the previous two years at an average rate of 1/20 per year. In addition, the requesting country should have access to international capital markets on reasonable terms and a sustainable external position. It should also not be experiencing excessive imbalances or severe financial sector vulnerabilities.

33.82

Most importantly, in the case of PCCL, the requesting Member State does not need to sign a Memorandum of Understanding (MoU). Instead, the country will sign a Letter of Intent (LoI) committing to continue to comply with all eligibility criteria. Continuous respect of the eligibility criteria will be assessed at least every six months.

33.83

2. Introduction of the backstop facility Draft Article 18A revised ESM Treaty (including a new Annex IV) provides for a new financial instrument: the backstop facility.

33.84

The backstop facility, a revolving credit line to the Single Resolution Board, differs significantly from the financial assistance instruments with which the ESM was endowed so far.

33.85

In contrast to the current financial assistant instruments, the ESM supports via the backstop facility not a sovereign (directly or indirectly as in the case of DRI) but an entity of the EU, the Single Resolution Board, by providing credit to the Single Resolution Fund. This difference in scope is reflected in draft Article 3 revised ESM Treaty in which the granting of backstop financing is explicitly added to the purposes of the ESM and in draft Article 18A revised ESM Treaty which provides for a specific procedure to be followed for the approval of the backstop facility and the drawing of funds.

33.86

996 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) 33.87

On the basis of a request by the Single Resolution Board and of a proposal by the ESM Managing Director, the ESM Board of Governors may decide to grant the backstop facility covering all possible uses of the Single Resolution Fund. Naturally, no MoU needs to be signed and no country specific conditionality is applied. Decisions on loans and disbursements will be taken by the ESM Board of Directors by mutual agreement and on a case-by-case  basis.

III. Structure and Overview of the Legal Documentation A. Financial assistance documentation37 33.88

1. Introduction In the context of the provision of stability support, the ESM established its own financial assistance documentation. The ESM financial assistance documentation serves as the template and model documentation for any stability support provided by the ESM. The initial documents were formally approved and endorsed by the ESM Board of Directors in November 2012, precisely one month after the inaugural meeting of the ESM. They have been updated in December 2014 following the establishment of the DRI instrument, as described in Section II.F, and in February 2016 after the incorporation of the SRB bridge financing arrangement, as described in Section II.G. The ESM financial assistance documentation (also referred to as ‘the ESM lending documents’) is published on the ESM website to create full transparency.

33.89

Leveraging from the experience of working with the EFSF financial assistance documentation, the rationale behind the ESM financial assistance documentation was to make the documents compact and brief, to have more standardization and to simplify the process of drafting and negotiating facilities between the ESM and the beneficiary ESM Member. At the same time though, no major amendments or changes to the commercial terms of the existing EFSF documentation were implemented by the ESM, other than those that reflect the different institutional structure of the ESM and its pricing policy.

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The ESM developed and negotiated the documents with representatives of all ESM Members, the European Commission, the Council and the ECB at a technical level.38 The overall objective was to balance the interests of the borrower countries with those of the ESM as lender through the involvement of all relevant stakeholders. As a result, the ESM financial assistance documentation contains several rights and obligations for the beneficiary Member State in the context of ESM’s financial assistance operations. 37 Following the entry into force of the revised ESM Treaty and the introduction of the updates to the PCCL and the ‘backstop facility’, the ESM financial assistance documentation will have to be revised. The paragraphs here describe however the initial structure of the financial assistance documents. 38 The negotiations took place in an organized forum known as the ‘Task Force on Coordinated Action’ (or simply ‘TFCA’), which is the technical expert level group just below the Eurogroup Working Group. The EWG itself is composed of high-level representatives from Finance Ministries of the euro area Member States and is tasked to keep under review the economic and financial situation of the euro area Member States and to contribute to the preparation of the Eurogroup meetings. The TFCA in turn consists of representatives of the euro area countries, the European Commission, the ECB, the Council, and the ESM (and is led by a TFCA chair and administered by the EWG Secretariat). The TFCA usually meets in Brussels for its meetings.

Structure and Overview of the Legal Documentation 997 Because of the above parameters, the ESM financial assistance documentation differs significantly from ordinary bank lending documents. The documents established by the ESM for its lending operations are generally more balanced and more nuanced in comparison to the—in principle—more creditor friendly documents commercial banks tend to use in their international finance operations.

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The ESM is not authorized to provide any financial assistance under a facility other than in accordance with and upon the terms of the financial assistance documentation.

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2. Contracting parties The contracting parties to the ESM financial assistance documentation are the ESM, the relevant beneficiary ESM Member, and the respective national central bank of the beneficiary ESM Member. Depending on the financial instrument or structure and scope of the financial assistance provided, other (legal) entities could be a party to the agreement as well. These could for instance entail a national bank recapitalization or resolution fund, a directly recapitalized financial institution or national privatization fund. 3. Structure The ESM financial assistance documentation consists of three separate documents, which together form the integral agreement between the contracting parties. These documents are:

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( a) The template Financial Assistance Facility Agreement (or ‘FFA’); (b) The Standard Facility Specific Terms (or ‘Facility Specific Terms’, covering the specific terms, conditions and modalities which apply to the relevant ESM financial assistance instruments); and (c) The General Terms (or ‘General Terms’), being the general terms and conditions applicable to all ESM stability support operations regardless of the relevant financial instrument. The term ‘financial assistance facility agreement’ or ‘agreement’ as defined in the ESM financial assistance documentation incorporates the FFA, the Facility Specific Terms and the General Terms as well as each Request for Funds, Acceptance Notice, Confirmation Notice, and all other schedules to the FFA, the Facility Specific Terms and the General Terms.

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The FFA is the only document that needs to be formally signed and negotiated by the relevant parties. Once the FFA is signed, the General Terms and the specific and relevant section of the Facility Specific Terms become applicable and are automatically incorporated into the agreement between the ESM and the beneficiary Member State.

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When the ESM enters into a FFA with the beneficiary ESM Member, the FFA needs to be specifically negotiated and tailored to the specific situation, financial needs and condition of the beneficiary country. It has to specify the financial terms of the facility or facilities to be made available and which section or sections of the Facility Specific Terms apply (depending on which financial instrument is granted by the ESM). It would furthermore set out any specific terms or conditions applicable to the facility between ESM and the relevant beneficiary Member State that derogate, vary, or supplement the General Terms or the applicable Facility Specific Terms, for instance due to local law obligations or restrictions.

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998 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) 33.98

In practice, the contracting parties will also sign the Facility Specific Terms and the General Terms solely for identifying which version was in force at the date of signing of the FFA. In this manner, it is always clear which terms and conditions are applicable to the financial assistance to a beneficiary Member State. This is referred to as ‘signing for the purpose of authentication’.

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The Facility Specific Terms contain all applicable ESM financial instruments and their specific terms, conditions and procedures and are based on the relevant detailed ESM guidelines for each financial instrument.39 The Facility Specific Terms consist of seven separate and individual sections; each financial instrument has its own specific section.40

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The overall set-up and structure of the Facility Specific Terms follow the General Terms. Out of the ESM financial assistance documentation, the General Terms are the most elaborated and substantial document. The General Terms set out the terms, conditions and procedures generally applicable to all ESM financial assistance facility agreements, regardless of the financial instrument used.

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The Facility Specific Terms and the General Terms are pre-agreed and endorsed by all ESM Members. As a practical matter, if the parties desire any changes to the Facility Specific Terms and/or the General Terms, these changes would be made by the insertion of additional clauses into the FFA which would refer to the relevant clause of the Facility Specific Terms or the General Terms and set out the text of the variation, supplement or replacement to that clause or simply state whether the relevant clause is in-applicable.41 The Facility Specific Terms and General Terms specifically mention that they may be varied, supplemented or replaced by specific terms and conditions as set out in the actual FFA.

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In fact, all current ESM FFAs (for Spain, Cyprus, and Greece) contain deviations to the Facility Specific Terms and/or General Terms.

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Any change to the ESM Investment Policy, ESM Pricing Policy, and the ESM Borrowing Guidelines as approved by the relevant ESM governing body is automatically incorporated in the ESM financial assistance documentation and any executed FFAs. This automatism is however not applicable to the ESM financial instrument guidelines; before an updated guideline is applicable to a form of stability support, the parties to the FFA need to agree by an amendment to the FFA (or otherwise in writing) that the new terms of the updated guideline apply.

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This concept is also applicable to any change to the Facility Specific Terms and General Terms. If the Board of Directors of the ESM adopts new Facility Specific Terms or General Terms or adopts any amendments to these terms, these adaptations are not automatically incorporated into the existing financial assistance facility agreements. In case the ESM and each of the parties to the FFA intend to incorporate into their existing FFA the new or amended Facility Specific Terms or General Terms, this can only be effected by an amendment in writing to the relevant FFA. 39 These ESM Facility Guidelines are approved by the ESM Board of Directors. 40 These are: (1) ESM loans; (2) PCCL facility; (3) ECCL facility; (4) indirect bank recapitalisation loan; (5) PMP facility; (6) SMP facility; and (7) the DRI facility. 41 Please refer to Clause 3 of the template financial assistance facility agreement (‘variations, supplements or replacements to the general terms and/or to facility specific terms’).

Structure and Overview of the Legal Documentation 999

4. Hierarchy In the event of an inconsistency or conflict between the terms and conditions of the FFA, the Facility Specific Terms and the General Terms, the terms and conditions set out in the FFA prevail over the terms and conditions set out in the General Terms and any applicable Facility Specific Terms. Subsequently, the terms and conditions set out in any applicable Facility Specific Terms prevail over the terms and conditions set out in the General Terms (cf Clause 1.2 of the General Terms). In this context, the General Terms stipulate explicitly that the ESM makes financial assistance available under the FFA subject to the terms of the ESM Treaty and that any obligations of ESM to make available this financial assistance are subject to the terms of and constitute an application of the ESM Treaty (cf Clause 2.2.2 of the General Terms).

5. Governing law and dispute resolution Pursuant to Clause 16.1 of the General Terms, the financial assistance facility agreement and any non-contractual obligations arising out of or in connection with the agreement are governed by and construed in accordance with public international law, the sources of which shall be taken for these purposes to include: (a) ESM Treaty and any other relevant treaty obligations that are binding reciprocally on the Parties; (b) the provisions of any international conventions and treaties (whether or not binding directly as such on the parties) generally recognized as having codified or ripened into binding rules of law applicable to states and to international financial institutions, as appropriate; and (c) applicable general principles of law.

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The choice for public international law deviates from the EFSF lending documents42 and is explained by the fact that ESM is an international financial institution with its basis in an intergovernmental treaty. While negotiating the ESM financial assistance documentation in November 2012, the ESM Members showed great interest in having public international law as the governing law. Other international financial institutions (for instance the EBRD, the World Bank, the Asian Development Bank, and the African Development Bank) follow the same public international law approach.

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In line with Clause 16.3 of the General Terms, any dispute between the ESM and the beneficiary ESM Member is settled in accordance with Article 37 ESM Treaty. The dispute is first submitted for decision to the Board of Governors, and then, if its decision is contested, to the Court of Justice of the European Union.43

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According to Clause 16.4 of the General Terms, the aforementioned dispute resolution mechanism is exclusive and prevents the exercise of any other right a party may have in connection with the resolution of a dispute. Since the contracting parties to the financial assistance facility agreement are not limited to the sovereign and the ESM but may comprise private sector or independent parties (such as the national bank recapitalization fund or a national central bank as mentioned above), the dispute resolution mechanism provided for by Article 37 ESM Treaty may not operate automatically in respect of these parties.

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42 English law governs the EFSF financial assistance documentation. 43 See Case C-370/12 Thomas Pringle v Government of Ireland [2012] ECLI:EU:C:2012:756, paras 70-77 confirming that the conferral of jurisdiction to the ECJ is in keeping with Article 273 TFEU.

1000 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) Accordingly, Clause 16.3 of the General Terms specifies that the beneficiary Member State assumes the responsibility for these parties for the purposes of the dispute resolution mechanism under the FFA when referring to Article 37 ESM Treaty.44

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6. Default clauses Clauses 4, 6, 10, 11, 12, and 14 of the General Terms together form what is generally referred to as the ‘Credit Protection’ clauses. This category of clauses contains rights, discretions and protection for the ESM and its operations as a lender of last resort. It also contains many of the important representations, warranties, obligations and (information) undertakings for the beneficiary Member State towards the ESM.

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This category also sets out the events of default and acceleration clauses. Clause 10 General Terms deals with events, acts, omissions, behaviours, situations and facts that are characterized as ‘events of default’ by the beneficiary ESM Member. Once qualified as such, these events of default may be used by the ESM to cancel and/or to declare all amounts immediately due and payable under the FFA and/or to use any other discretion, rights, remedies or powers under the FFA or under the applicable law.

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In other words, if any of the events of default occur, the ESM is in principle entitled to demand immediate repayment of disbursed funds from the beneficiary Member State, cancel any undisbursed funds and terminate the further lending relationship with the beneficiary.45 The ESM could furthermore charge default interest to the beneficiary Member State (and such other costs and expenses in connection with the default situation).

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The General Terms identifies several separate events of default and these are specified and described in Clause 10. They include: (i) non-payment; (ii) breach of obligation; (iii) illegality, fraud, corruption, breach of representation/warranty, or any other detrimental actions; (iv) cross-default; (v) cross-acceleration; (vi) default on IMF; and (vii) non-payment indebtedness and imposition of a moratorium.

B. The disbursement documents 33.115

The most important and obvious right the beneficiary ESM Member is entitled to under the FFA with the ESM is to request the required funds under it, subject to the terms and conditions of the FFA and the MoU.

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It is important to note though that the beneficiary ESM Member does not have unrestricted access to the total funds under the facility. Aside from compliance with policy conditionality attached to the financial assistance granted, several contractual conditions and obligations have to be fulfilled before the ESM is authorized to disburse the requested funds to the sovereign. These conditions and the more precise procedure for a disbursement are set out in Clause 5 of the General Terms. 44 No disputes between the ESM Members and the ESM have been raised to date. 45 Generally referred to as ‘acceleration’ of the loan facility. There is no requirement for the ESM to accelerate; the ESM could also waive or reserve its rights in respect of the relevant event of default (without prejudice to the future exercise of the right to accelerate). The decision on whether and which action to take upon an event of default is left to ESM’s discretion.

Financial Terms 1001 The beneficiary Member State can request funds under the FFA by delivering to the ESM a duly completed and valid Request for Funds. This request sets out the amount requested, the (envisaged) disbursement date, and any other specific matters in the context of the disbursement. In practice, the Request for Funds is drawn up in concert between the ESM and the beneficiary Member State.

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Upon receipt of the Request for Funds, and after the fulfilment of several conditions including the approval of the ESM Board of Directors to make the disbursement, the ESM will issue an Acceptance Notice setting out the provisional terms on which the ESM is willing to disburse to the beneficiary Member State. The Acceptance Notice may include additional conditions for a disbursement and complements the General Terms.

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The Acceptance Notice needs to be countersigned by the beneficiary ESM Member within one business day after receipt (and if not received back by the ESM within this period, the Acceptance Notice by the ESM is automatically cancelled and of no further effect). Upon countersignature of the Acceptance Notice, the beneficiary Member State agrees to be bound by the final terms and conditions of the disbursement as set out in the Confirmation Notice.

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The Confirmation Notice is sent by the ESM right before or after the actual disbursement is made to the beneficiary country and includes the final terms of the disbursement (eg computation of interest, term, principal repayment dates, fees, etc).

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The General Terms include a template form for each of the Request for Funds, Acceptance Notice and Confirmation Notice. These three documents are together commonly referred to as the ‘disbursement documents’.

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IV. Financial Terms A. Introduction46 The most important financial terms of the financial assistance provided by the ESM are the loan amount, the maturity and the interest payable on the loan amount.

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The loan amount is set out in the FFA as the Aggregate Financial Assistance Amount. The maturity is expressed in the FFA as the Maximum Average Maturity. The ESM operates relatively long maturities on its loans to its members. This allows the ESM to smoothen the repayment profile of the debt for the countries and making it more sustainable in the end. The determination of the interest to be paid is not directly specified in the FFA; it is to be determined by application of the ESM’s Pricing Policy. The computation of the rate on the loan itself is specified in the Confirmation Notice as mentioned in Section III.B.

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46 Similar to the ESM financial assistance documents, following the entry into force of the revised ESM Treaty and the introduction of the updates to the PCCL and the ‘backstop facility’, the ESM financial terms and its pricing (and guidelines) will have to be revised to accommodate the respective changes.

1002 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) 33.124

The maturity and the interest to be paid are both closely linked to the ESM’s funding operations. Accordingly, in the following the funding side will be explained in some detail before addressing the pricing of the financial assistance by the ESM.

B. Funding 33.125

Whilst the public interest usually focuses mostly on the granting of financial assistance and the conditionality attached to it, the funding side of the operations of the EFSF and the ESM draws less attention. Nonetheless, it is of crucial importance for fulfilling their mandate. Unlike the IMF, which relies on its pool of so-called ‘quota resources’ from its members, the EFSF and the ESM must raise the necessary funds in the international capital markets. Furthermore, the importance of the funding stems from the fact that it has immediate consequences for one crucial parameter of financial assistance: the interest payable by the beneficiary country. The interest payable by the beneficiary Member State has, in turn, consequences for both rescue mechanisms. Even though the EFSF and the ESM ‘pass through’ the interest rate to the beneficiary Member State and thus the interest rate risk, this has a bearing on their own credit risk.

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It is inherent in their role as ‘lenders of last resort’ to sovereigns in the euro area, that the two lenders must do their utmost to minimize liquidity risk, ie the risk that the EFSF or the ESM cannot provide the necessary funds upon request by a beneficiary Member State. It was a guiding principle for the design of the EFSF and the ESM to limit this liquidity risk. This is achieved for the EFSF through the granting of guarantees by the EFSF shareholders and, for the ESM through its robust capital structure with the unique mechanism for capital calls, allowing the Managing Director to make a binding capital call, according to Article 9(3) ESM Treaty so as ‘to avoid the ESM being in default of any scheduled or other payment obligation due to ESM creditors’.

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The guarantee structure for the EFSF and the ESM’s capital structure have allowed them to obtain excellent credit ratings.47 However, since the EFSF and the ESM must be able to raise significant amounts of funds on short notice (at affordable rates), further measures to limit liquidity risk have been taken. To that end, the EFSF and the ESM have implemented various strategies and techniques, arising from the ‘ESM Borrowing Guidelines’.

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The ESM Borrowing Guidelines identify three major challenges and principles for the ESM’s borrowing activities (cf Section 1). Firstly, the market environment under which the ESM operates may be volatile during crisis periods. The general borrowing strategy must therefore offer the possibility to react rapidly to unexpected market developments, including through the building up of liquidity buffers during periods of systemic risk, and ensure market access even in a difficult market environment with a high degree of uncertainty. Secondly, the demand for ESM financing over time is highly variable. Some instruments available to the ESM may imply that large amounts of financing be required at relatively short notice, whilst on-going standard macroeconomic adjustment programmes more 47 Currently long-term rating ESM: Moody’s Aa1; Fitch AAA; long-term rating EFSF: Moody’s Aa1; Fitch AA; Standard and Poor’s AA accessed 5 February 2020.

Financial Terms 1003 often entail a relatively steady flow of limited amounts, but with uncertain disbursement profiles. The ESM borrowing strategy has therefore to offer the flexibility to raise predictable amounts over a longer period covering varying disbursement schedules as well as unexpected amounts at relative short notice, including prior to the entry into of a financing programme. Thirdly, the ESM engages in efficient funding in order to offer financing at reasonable conditions to the beneficiary ESM Members, with a priority given to, first, mitigation of liquidity risk and, second, appropriate balance between costs and interest rate risk. In addition, Section 1 of the ESM Borrowing Guidelines prescribes that the ESM shall foster its role in the market as a reliable issuer of reference and maintain a regular presence. Since investors prefer to buy liquid products with an easy, plain vanilla structure in a difficult market environment, the ESM’s basic funding instruments should fulfil these criteria.

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Furthermore, establishing the ESM as a major issuer has required promoting the ESM through many presentations to investors around the world. In recent time, the ESM has further broadened its investor base by issuing in US Dollars and entering the US market.

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The ESM uses three funding techniques: (1) ‘matched funding’; (2) ‘diversified funding’; and (3) ‘disbursement in kind’.

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Under a matched funding approach, and according to Section 3 of the ESM Borrowing Guidelines, the funding instruments and the loan have generally the same financial profile as regards the amount, time of issue, currency, repayment profile, final maturity and interest index. The very first issuances under the EFSF followed this matched funding approach. However, it turned out that this approach suffered from some inconveniences. For instance, with a view to the long maturities of EFSF/ESM loans, it became apparent that there was no or not enough sufficient investor appetite for corresponding long maturities and the investor universe is rather limited. Conversely, issuing in maturities on the entire curve allows broadening the investor base and raising more funds at better rates. In addition, issuing when markets are in turmoil could drive up the yields, which in turn is not in the interest of the beneficiary Member States.

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Accordingly, the diversified funding strategy has become the preferred funding approach for both the EFSF and the ESM. Under this strategy, the EFSF/ESM can raise funds, independent from the disbursement of a specific tranche of financial assistance. According to Section 3 of the ESM Borrowing Guidelines, the characteristics of the funding instruments are extended to a wide range of techniques and can deviate from the parameters of the loan. A variety of funding instruments, maturities and, where appropriate, currencies can be used to ensure the efficiency and continuous market access. The funds raised following the diversified funding strategy are pooled together and form the source of the disbursements made to the beneficiary countries.

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The disbursement in kind through EFSF/ESM notes is a technique which is used in particular if very high amounts must be made available on very short notice, for instance in the context of bank recapitalizations,48 or as it was done in the context of the Greek PSI.49 In the case of an in-kind disbursement, the beneficiary country receives EFSF/ESM notes instead

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48 49

See Section V.E. See Section V.B.5.

1004 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) of cash. The sovereign transfers these notes to the national bank recapitalization fund in case of bank recapitalization operations, which then provides the notes to the financial institutions to be recapitalized or, as it was done in 2012 in the case of the Greek PSI, to the holders of restructured Greek bonds. Once the notes mature, the EFSF and ESM generally settle the notes through a cash-payment, which is generally sourced from the pools funded under the diversified funding strategy. 33.135

Independent of the use of any of these three techniques, EFSF/ESM ‘pass through’ their interest costs. Accordingly, the financing strategy of the EFSF/ESM is decisive for the interest payable by the beneficiary ESM Member.

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Thus, the calibration of the funding strategy of the EFSF/ESM is a demanding balancing act, in which various parameters have to be taken into account. The inherent flexibility allows for solutions tailored to the specific needs of the beneficiary ESM Member. In this context, the so-called ‘Short Term Debt Measures for Greece’, adopted in December 2016 provide a good example. These measures are using various instruments of the toolbox available to the EFSF/ESM in the context of their re-financing strategy.50

C. Pricing 33.137

The pricing for the financial assistance granted by the ESM is determined by the ESM Pricing Policy and not negotiated or determined individually for each ESM financial assistance programme. The ESM Pricing Policy was first adopted on 8 October 2012 based on Article 20(2) ESM Treaty and amended on 8 December 2014 in the context of the adoption of the DRI. The importance of ‘pricing’ is highlighted by the fact that, according to Article 20 in conjunction with Article 5(6)(h) ESM Treaty, the adoption and any amendment to the ESM Pricing Policy requires a decision by mutual agreement of the Board of Governors.

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According to Article 20(1) ESM Treaty, the ESM aims to recover fully its financing and operating costs. The ESM Pricing Policy establishes six components constituting the pricing attached to the granting of financial assistance: (1) the ‘Base Rate’; (2) the ‘Commitment Fee’; (3) the ‘Service Fee’; (4) the ‘Margin’; (5) where relevant, ‘Penalty Interest’; and (6) the coverage of ‘Issuances Costs and other Costs and Expenses’. In addition, the ESM Pricing Policy provides specific rules relating to the PMP Facility, the SMP Facility, the DRI and some aspects in the context of the indirect bank recapitalization loan.

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The Base Rate corresponds, in principle, to the interest (or coupon) payable by the ESM on its funding instruments and is payable by the beneficiary Member State as interest on the financial assistance received. The principle, enshrined in the ESM Pricing Policy is to ‘pass through’ the ESM’s cost of funding, along with any costs and commissions (cf Section 1 of the ESM Pricing Policy).

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The computation of the Base Rate differs in accordance with the funding strategy used, as explained in Section IV.B. Since its inception, the ESM generally pursues the diversified

50

See Section V.B.6.

Financial Terms 1005 funding strategy. One consequence of the diversified funding strategy is that funds raised are no longer attributed to a particular beneficiary Member State or to a particular disbursement. The funds are instead pooled and disbursements to programme countries are sourced from there. The interest rate of the funding pools is a blended rate.51 Accordingly, the rules for the computation of the Base Rate, enshrined in the ESM Pricing Policy (cf Section 1, steps 1 to 3) ensure that the disbursed amounts by the ESM, funded in application of the diversified funding strategy, have the same rate at the same date, independent from the beneficiary Member State and the disbursement date. The interest to be paid is calculated on a daily basis. If the amounts disbursed are funded through a matched funding approach or a disbursement is made in ESM notes in lieu of cash, the principle of ‘passing through of the costs of funding’ stays the same, however the technique of computation is different. In order not to distort the computation of the Base Rate for the other beneficiary countries, the funding related to a matched funding approach is carved out from the funds raised in application of the diversified funding strategy by creating a ‘silo’ or separate ‘compartment’. Similarly, if disbursements are made through the delivery of ESM notes, the beneficiary Member State must pay the interest rate of the notes received plus any associated costs (cf ESM Pricing Policy, Section 1, under the heading ‘exceptional cases: back-to-back silos—example of disbursement in specie’).

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The Commitment Fee is meant to cover the potential negative cost of carry of the 33.142 ESM’s funding in the case that at a given moment the amounts raised by the ESM are higher than the disbursement amounts (eg through pre-f unding or through pre- refinancing of maturing instruments) and that the interest rate at which the ESM raises the funds is higher than the return on investment of these funds (cf ESM Pricing Policy, Section 2). The Service Fee is the source of general revenues for the ESM and is intended to cover its 33.143 operational (overhead) costs. The Service Fee has two components: the Up-front Service Fee component of 50 basis points of the disbursement amount, generally deducted at draw- down, and the Annual Service component of 0.5 basis points of the outstanding principal amount per year (cf ESM Pricing Policy, Section 3). Section 4 of the ESM Pricing Policy deals with the Margin, the Penalty Interest and the 33.144 Issuances Costs and other Costs and Expenses. The Margin is paid at the same time as the interest payments and differs across the financial assistance instruments (from 5 to 75 basis points) to reflect the varying risk profiles of each instrument. Penalty Interest of 200 basis points may be applicable on overdue amounts. Issuances Costs and other Costs and Expenses are generally already taken into account into the calculation of the Base Rate as so far the ESM pursues the diversified funding approach. Otherwise (under back-to-back/ matched funding or in case of in-kind disbursements), they are payed directly by the beneficiary Member State.

51 Technically, the interest is calculated on the basis of the actual (cash) interest payments; an interest rate can be calculated for illustration purposes; cf Section 1 (first step) of the ESM Pricing Policy.

1006 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM)

V. Financial Assistance Granted by the EFSF and the ESM A. General 33.145

The country cases (Greece, Ireland, Portugal, Spain, and Cyprus) comprise countries to which the EFSF or the ESM (or both) have granted financial assistance. Since the assistance to Greece is in many aspects particular and the largest in volume, it is described in more detail.

B. Greece52 33.146

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Whereas many of the debt crisis in the euro area countries stem from the overall global financial crisis initiated by collapses in the banking sector which in turn resulted in a sovereign debt crisis for the particular countries (Ireland, Cyprus and Spain), this may not have been the actual trigger of the Greek sovereign debt crisis.

1. First programme—the Greek Loan Facility When the Greek government in 2009 announced higher than expected budget deficits (in the end it turned out to be 15.6 per cent from the projected 7 per cent53), it sent shockwaves through the international financial and capital markets. Investors lost confidence in Greece and yields on Greek sovereign bonds spiked. In December of the same year, Fitch downgraded Greece to BBB+ with a negative outlook, shortly followed by downgrades by S&P and Moody’s. Greek sovereign bonds yields continued to rise, until spreads over German bunds shot up from 300 to almost 900 basis points during April (effectively excluding Greece from access to the capital markets).54 It led to speculations in the markets that the euro area could even break up. The EU had not foreseen a possible default of a euro area country. At this point in time, there were no dedicated and specialized European institutions to deal with such a crisis.

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Although these events were unprecedented, quick decision-making in the euro area, in conjunction with the IMF, finally resulted in Greece’s first bail-out programme, comprising a total financing package of 80 billion euro of (pooled) bilateral loans from the euro area Member States: the so-called ‘Greek Loan Facility agreement’. The facility was signed on 8 May 2010.55 The IMF offered an additional 30 billion euro stand-by arrangement.

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Out of the Greek Loan Facility, an amount of 52.9 billion euro was lent to Greece on a bilateral basis.

52 All available information regarding the programme for the Hellenic Republic on the dedicated ESM webpages accessed 5 February 2020. 53 Jeromin Zettelmeyer, Christoph Trebesch, and Mitu Gulati, ‘The Greek Debt Restructuring: An Autopsy’ (2013) 28 Economic Policy 513, 518. 54 Ibid. 55 KfW provided the bilateral loan to Greece on behalf of Germany (acting in the public interest, subject to the instructions of and with the benefit of the guarantee of the Federal Republic of Germany). The European Commission manages and coordinates the Greek Loan Facility on behalf of the euro area Member States.

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2. Second programme—the EFSF This first financing package did not alleviate Greek’s financial problems and consequently a second financing programme had to be agreed. By then, Europe had responded to the financial crisis and the EFSF had been established.

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On 21 February 2012, the Eurogroup agreed the political principles of this second financial assistance programme,56 subsequently followed by a formal EFSF Board of Directors’ decision. The overall programme amount was set at 164.4 billion euro out of which the EFSF committed up to 144.6 billion euro. Out of this total financing envelope, 35.5 billion euro was allocated to the Private Sector Involvement (PSI) facility for the voluntary Greek debt restructuring in March 2012,57 and the remaining 109.1 billion euro to the rest of the EFSF financial assistance programme.

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The amount of 109.1 billion euro was built up from three components, being a ‘fresh’ loan amount (61.7 billion euro), parts of unused funds under the Greek Loan Facility (GLF) and a dedicated bank recapitalization part.58 The financial assistance package was labelled as a Loan Facility (being a full macroeconomic adjustment loan) and included in the EFSF Master Financial Assistance Facility Agreement, or Master FFA. The Master FFA was approved by the EFSF Board of Directors in the beginning of March 2012 and subsequently signed by the relevant parties on 15 March 2012. The EFSF funds under the Master FFA covered Greece’s financial needs related to debt servicing, banking sector recapitalization and resolution, arrears clearance, and budget financing.

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On 27 November 2012, the Eurogroup politically agreed to assist and support Greece even further by changing the lending terms of the European support programmes for Greece.59 An amendment agreement to the Master FFA to cater for (part of) these changes was signed on 12 December 2012. This was the first amendment to the Greek Master FFA.60

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During the course of 2014, the effects of the extensive reform package implemented by the Greek authorities under its EFSF programme started yielding results. The Greek economy returned to growth, it achieved GDP growth of 0.7 per cent in 2014 after six years of recession, and unemployment began to drop. As a result, yields on Greek bonds came down to levels, which enabled the Greek government to return to market financing. The Greek PDMA successfully issued two bonds in that year: a five-year bond in April (at a rate of 4.95 per cent), and a three-year bond in July (at a rate of 3.5 per cent).

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At the end of 2014, the political situation in Greece changed this positive economic upswing: following the change in government the reform programme was effectively suspended, thereby bringing the country back into a recession.

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56 Eurogroup, ‘Statement on Greece’ (21 February 2012) accessed 5 February  2020. 57 Please refer to Section V.B.5 for a description of all voluntary liability management exercises undertaken by Greece and supported by the EFSF/ESM. 58 Clause 2(1) Master Financial Assistance Facility Agreement. 59 Eurogroup, ‘Statement on Greece’ (27 November 2012) accessed 5 February 2020. Please refer to Section V.B.6 for a further description of the various debt relief measures granted to Greece by the EFSF/ESM. 60 The consolidated Master FFA (being the initial Master FFA including the first amendment) is available on the ESM website accessed 5 February 2020.

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On 19 December 2014, the EFSF Board of Directors granted Greece a two-month technical extension on its second economic adjustment programme from 31 December 2014 to 28 February 2015. This was executed in the form of a second amendment to the Master FFA.

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Following the January 2015 Greek elections, a new government was sworn into office on 26 January 2015. After intense negotiations between the newly elected government and euro area Member States, the Greek government requested on 18 February 2015 another technical extension of the Master FFA. Following the Eurogroup statement of 20 February 2015,61 the EFSF Board of Directors formally decided on 27 February 2015 to indeed extend the programme a second time, until 30 June 2015, for technical reasons only and to provide time and opportunity for the parties to overcome the deadlock in the political negotiations on the pending reform programme. To implement this decision, the EFSF executed a third amendment agreement to the Master FFA.

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The new Greek government could eventually not come to terms with the institutional creditors about the reforms the previous government had promised. Despite the two technical extensions in order to provide all parties time to properly negotiate the terms and conditions of a further financial assistance programme, the EFSF programme for Greece simply lapsed on 30 June 2015 without a follow-up programme.

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As part of the second economic adjustment programme, the EFSF disbursed a total of 141.8 billion euro in financial assistance to Greece.

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3. Third programme—the ESM Following the expiry of the EFSF programme at the end of June 2015, the country found itself quickly in financial difficulties again. This resulted among other things in missed repayments to the IMF on 30 June as well as 13 July 2015.62 In order to stop a run at the Greek banks, the Greek authorities had to impose capital controls by limiting the amount of cash people could take out of their bank accounts (following the earlier withdrawal of deposits by private sector deposit holders in a staggering amount of 30.6 billion euro in April 2015). The Athens stock exchange was closed. Greek sovereign bonds yields increased to a peak of 19.4 per cent (ten-year maturity) and 35.86 per cent (five-year maturity). Eventually, the Greek government submitted on 8 July 2015 a new request for financial assistance to the Chairperson of the ESM Board of Governors. On 13 July 2015, the euro area Ministers of Finance agreed with Greece a set of urgent prior actions in order to start negotiations for a new programme under the ESM. The ESM Board of Governors formally approved a new programme on 19 August 2015 in a maximum amount of up to 86 billion euro.63 On the same day, the ESM Board of Directors approved the FFA with Greece.64

61 Eurogroup, ‘Statement on Greece’ (20 February 2015) accessed 5 February  2020. 62 In addition to the defaults under its IMF arrangement, Greece also missed a payment under a domestic, bilateral loan with the Bank of Greece. 63 The precise amount of the total ESM financial assistance was subject to the IMF’s participation in the programme and to the success of the reform measures by Greece under the programme. 64 It is noted that the procedure for stability support to Greece followed exactly the required steps and process as prescribed for in the relevant ESM Treaty provision (Article 13); the two earlier ESM programmes (Spain and Cyprus) had a different origination as described in their relevant paragraphs.

Financial Assistance Granted by the EFSF and the ESM 1009 The programme and policies in the MoU with Greece focussed on four key areas: restoring fiscal sustainability, safeguarding financial stability, boosting growth, competitiveness and investment, and building a modern state and reforming the public administration. The funds available under the ESM FFA were consequently earmarked to cover needs related to debt servicing, banking sector recapitalization and resolution, arrears clearance, and budget financing.

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Following the aforementioned two non-payments to the IMF by Greece on 30 June and 13 July 2015, the EFSF decided to issue ‘reservation of rights’ letters in respect of its loans to Greece. The reason for this was the fact that the default situation of Greece towards the IMF (automatically) triggered an event of default under the EFSF loans. Although legally permitted, the EFSF decided not to accelerate the outstanding loans but instead to reserve all its rights under those loans. Greece cleared the arrears with the IMF on 20 July 2015 with funds it received from an ‘over-the-weekend’ arranged bridge loan. As a result, also taking into account that the new ESM financial assistance programme entered into force in August 2015, the EFSF specifically waived its rights to accelerate the EFSF facilities by a board decision on 6 October 2015.

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Greece exited its financial assistance programme with the ESM on 20 August 2018. With this successful exit by Greece and expiry of the ESM programme, the ESM disbursed a total of 61.9 billion euro to Greece over a period of three years.

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With a total of nearly 290 billion euro in European and international rescue loans (out of which 204 billion euro from the ESM and the EFSF), Greece received one of the biggest financial aid packages in global financial history.

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4. Bank recapitalization operations The EFSF and the ESM have provided loans to Greece worth a total of 42.7 billion euro for it to recapitalize and resolve certain Greek banks. These dedicated bank recapitalization and resolution loans were not disbursed in cash, as any other disbursement, but in the form of either EFSF or ESM floating-rate notes. Greece used these notes under the disbursements to recapitalize or resolve the relevant banks. Under the EFSF and ESM programmes, funds were used to recapitalize the four systemic Greek banks (Piraeus Bank, National Bank of Greece, Alpha Bank, and Eurobank) and to resolve some smaller, non-systemic banks. Operationally, Greece would transfer the relevant notes to the Hellenic Financial Stability Fund (HFSF), the specific Greek bank recapitalization fund, which would in turn use it to inject the notes into the relevant bank. The EFSF and the ESM would agree with the relevant bank and the HFSF how the bank could use the EFSF/ESM notes through the execution of so-called ‘subscription agreements’ (essentially the EFSF/ESM notes can only be used for liquidity operations with the ECB and for repurchase operations with commercial parties). Following the Eurogroup statement on Greece of 20 February 2015,65 and the subsequent EFSF Board of Directors’ decision the week thereafter, Greece redelivered an amount of

65

See further n 61.

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1010 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) 10.9 billion euro of unused EFSF bonds dedicated to bank recapitalization purposes under the loan facility to the EFSF.66 The Greek facility was reduced by that same amount.

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5. Liability Management Exercise operations by Greece Aside from providing Greece with ‘generic’ financial assistance to cater for fiscal needs, budgetary purposes, arrears clearance, bank recapitalization requirements and other forms of stability support under the loan facilities, the EFSF and ESM have both assisted and supported Greece during the life of the programmes in several voluntary liability management exercises involving the private sector. a) Private Sector Involvement (PSI) Next to the granting of the Master FFA of 109.1 billion euro, the EFSF contributed in March 2012 to the very first voluntary liability management exercise by Greece. Under the so- called ‘Private Sector Involvement’ (PSI) operation,67 commercial banks and other private investors contributed to a bond exchange by writing down part of the value of their Greek debt holdings. The debt exchange offer included sovereign bonds issued by Greece as well as bonds issued by Hellenic Railways, Athens Urban Transport and Hellenic Defence Systems and guaranteed by the Greek state. The debt exchange significantly reduced outstanding principal amount of Greek debt held by private creditors. The EFSF provided an amount of 29.7 billion euro in EFSF notes to the private bondholders as part of the debt exchange under the PSI and an amount of 4.9 billion euro in six-month bills to cover interest due under outstanding Greek bonds. The exchange bonds are governed by English law (as opposed to Greek law, eliminating the possibility for Greece to unilaterally change the terms of its sovereign bonds through legislation) and are benefiting furthermore from a co-financing agreement to which the EFSF is party, effectively bringing the private bondholders to a level similar to that of an official sector creditor. b) Debt Buy Back operation The EFSF assisted Greece with another sovereign debt management exercise at the end of 2012. The EFSF provided Greece with the required funding to buy back parts of its outstanding sovereign bonds in the capital markets through a so-called ‘Debt Buy Back’ operation. The Debt Buy Back operation is part of a number of political decisions endorsed in the Eurogroup meeting on 27 November 2012 to support Greece on its path to debt sustainability. On 3 December 2012, Greece announced an invitation to eligible holders of national Greek Government Bonds (nGGBs) maturing from 2023 to 2042 to submit, in a separate modified Dutch auction for each series of bonds, offers to exchange such bonds. The outstanding amount of nGGBs eligible for the total buy back operation amounted to 61.4 billion euro, equivalent to about 31.5 per cent of 2012 GDP and 20.2 per cent of all outstanding Greek debt.

66 ESM, ‘EFSF Board of Directors extends MFFA for Greece until 30 June 2015’ (Press Release, Luxembourg, 27 February 2015) accessed 5 February 2020. 67 See the contributions in Rosa M Lastra and Lee Buchheit, Sovereign Debt Management (OUP 2014).

Financial Assistance Granted by the EFSF and the ESM 1011 The bids submitted by investors reached a total of 31.9 billion euro (52 per cent of notional outstanding) and Greece managed to buy-back a total of 20.6 billion euro of bonds at nominal value in the markets, resulting in a nominal debt reduction for Greece of 20.6 billion euro (or 9.5 per cent of GDP in gross terms).

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The EFSF disbursed 11.3 billion euro out of the Loan Facility under the Master FFA in order to facilitate the Debt Buy Back operation.

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c) Bond Exchange As part of the short-term debt relief measures in the context of the ESM programme,68 the ESM executed a voluntary bond exchange with Greece between February 2017 and January 2018. It involved exchanging all of the outstanding floating rate notes (FRNs) with the relevant Greek banks, issued by the ESM and the EFSF to recapitalize the Greek banks into fixed rate bonds and their redemption into cash within the same month (‘Bond Exchange’). The primary objective of the Bond Exchange was to reduce the long-term interest rate risk of Greece’s outstanding loans with the ESM and the EFSF, as well as reduce the country’s debt burden over the longer term by locking in the low-interest rates in 2017.

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The Bond Exchange operation totalled eventually 29.6 billion euro, representing 17 per cent of ESM and EFSF’s outstanding loans to Greece. The overall benefit of the short-term measures is envisaged to reduce Greece’s debt to GDP ratio by 10.0 per cent by 2060, thereby contributing substantially to the debt relief for Greece. It makes for one of the biggest voluntary bond exchanges in global financial history to date.

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The ESM completed the Bond Exchange with the Greek banks in the shortest expected time by itself and the Greek counterparties, without the contribution from external parties. The Bond Exchange as designed by the ESM was a simple concept, but required a series of highly complex operations to complete the transaction. It involved exchanging around three billion euro of FRNs into fixed rate bonds on a monthly basis for eleven months and purchasing the fixed rate bonds back from the participating Greek banks intra-month for cash.

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The structure was designed to provide the maximum flexibility to respond to the market’s appetite for ESM/EFSF’s long term fixed rate bonds. It took advantage of market depth when available and ensured ESM/EFSF was not over-committed when market capacity was limited.

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6. Debt relief measures for Greece On several occasions, the Eurogroup politically committed itself to assist and support Greece in its efforts to ease Greece’s debt burden and bring its public debt back to a sustainable path, in addition to providing programme money to the country by the euro area crisis lenders. Between 2012 and 2016, a compressive package of debt relief measures was politically agreed and (predominantly) implemented by the EFSF and the ESM through their financial assistance operations. The debt relief measures seek to address a general concern that future debt payments will pose an undue burden on public finances and thus stifle the Greek economy. Gross

68

As explained in more detail Section V.B.6 below.

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1012 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) Financing Needs (GFN), the total amount of money a country spends in one year on interest rates payments and repaying maturing debt, is the benchmark used to measure this burden. The Eurogroup has agreed that, under a baseline economic scenario, Greece’s GFN should remain below 15 per cent of GDP during the post-programme period for the medium term, and below 20 per cent of GDP after that. 33.180

The first debt relief measures and operations were undertaken in 2012 during the second Greek programme. Greece’s debt was significantly reduced with the PSI operation in March 2012. In November 2012, the Eurogroup endorsed another set of debt relief measures.69 These 2012 debt relief measures included: – reducing the interest rate charged to Greece on the bilateral loans in the context of the Greek Loan Facility (GLF) by 100 basis points; – cancelling the EFSF guarantee commitment fee of ten basis points (it is estimated that this will save a total of 2.7 billion euro over the entire period of EFSF loans to Greece); – extending the maturity of the Greek Loan Facility and EFSF loans by fifteen years (to an average loan maturity of over thirty years—in case of the EFSF this led to a weighted average maturity of 32.5 years), thereby significantly improving the country’s debt repayment profile; – deferring interest rate payments on the EFSF Master FFA loans by ten years (it is estimated that this will lower the country’s financing needs by 12.9 billion euro by 2022); and – passing on to Greece an amount equivalent to the income of the ECB’s Securities Markets Programme (SMP) portfolio accruing to the national central banks of the euro area countries (‘SMP profits’). To implement this initiative, participating Member States transfer an equivalent amount to the SMP portfolio to the ESM, which acts as an agency for the Member States, which will only pass on the relevant funds to Greece following the compliance with certain terms and conditions and after the approval by the Member States.

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During the third programme for Greece, more debt relief measures were agreed. These additional debt relief measures for Greece were an important consideration of the political agreement reached with Greece as part of its third programme with the ESM during the summer of 2015. In this context, the Euro Summit statement on Greece of 12 July 2015 read as follows: Against this background, in the context of a possible future ESM programme, and in line with the spirit of the Eurogroup statement of November 2012, the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme and will be considered after the first positive completion of a review. The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken.70 69 Eurogroup, ‘Statement on Greece’ (27 November 2012) accessed 5 February  2020. 70 Euro Summit, ‘Statement on Greece’ (SN 4070/15, Brussels, 12 July 2015) accessed 5 February  2020.

Financial Assistance Granted by the EFSF and the ESM 1013 In its statement of 25 May 2016, the Eurogroup laid down the guiding principles for further debt relief. In line with the above Euro Summit statement of 12 July 2015, it excluded any nominal haircuts, and decided that the measures must facilitate market access for Greece to replace publicly financed debt with private debt, smooth the repayment profile, incentivize the country’s adjustment process, and ensure flexibility to accommodate uncertain economic growth and interest rate developments in the future.71

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Within the above principles, the Eurogroup mandated the ESM to work on a set of debt relief measures, referred to as the short-term debt relief measures as they were aimed to be implemented after the successful closure of the first review under the ESM programme.

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On 5 December 2016, the ESM presented the detailed and technical plans for the implementation of the short-term measures to the Eurogroup, which fully endorsed them.72 The governing bodies of the ESM and of the EFSF completed the formal approval process of the measures on 23 January 2017.73 The various measures were subsequently successfully implemented by the ESM and the EFSF over the course of 2017.

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The complete 2017 debt relief package consists of the following measures:

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a) Smoothing of repayment profile The smoothing of the repayment profile refers to Greece’s second programme with the 33.186 EFSF. The maximum weighted average maturity of the EFSF loans was set to thirty-two- and-a-half years following the initial increase in the context of the 2012 debt relief measures. Due to several factors, such as the return of the unused bank recapitalization bonds for 10.9 billion euro by Greece to the EFSF in February 2015, it factually dropped to a weighted average maturity of approximately twenty-eight years. In 2017, the average maturity of the loans was brought back up to the maximum of thirty-two-and-a-half years, and the repayment schedule of the loans subsequently re-profiled to avoid a number of repayment humps in the 2030s and 2040s. b) Waiver of the step-up interest rate margin The waiver of the step-up interest rate margin applies to the 11.3 billion euro instalment of the EFSF programme used by Greece to finance the Debt Buy Back operation. A margin of 2 per cent on this instalment had originally been foreseen for the year 2017 onwards to incentivize Greece to early repay this specific tranche under its loans. As part of the 2017 debt relief measures, this margin was waived, and not charged for the year 2017. c) Reducing interest rate risk Reducing the interest rate risk for Greece on its long outstanding loans was envisaged under three different schemes as part of the 2017 debt relief package.

71 Eurogroup, ‘Statement on Greece’ (Press Release, 25 May 2016) accessed 5 February  2020. 72 Eurogroup, ‘Statement on Greece’ (Press Release, 5 December 2016) accessed 5 February  2020. 73 ESM, ‘ESM and EFSF approve short-term debt relief measures for Greece’ (Press Release, Luxembourg, 23 January 2017) accessed 5 February 2020.

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The first scheme to reduce interest rate risk is the Bond Exchange measure, as explained in Section V.B.5 above, by utilising the low interest rate environment in 2017 and 2018 by locking in these low rates for Greece by swapping floating rate bonds with fixed rate bonds and exchanging these with cash.

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The second scheme foresees the ESM entering into interest rate swap arrangements. This scheme aims at stabilising the ESM’s overall cost of funding pertaining to the refinancing of its disbursements to Greece and reducing the risk that Greece would have to pay a higher interest rate on its loans when market rates start rising. A swap is a derivative/financial contract that enables two counterparties to exchange the cash flow on two different financial instruments, for instance, fixed-rate payments for floating-rate payments. The ESM has put a swap programme in place, and will continue to be active in the derivatives markets to maintain it.

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The third scheme, known as ‘matched funding’, uses the flexibility of the ESM’s funding toolbox. It foresees that the ESM issues long-term bonds that closely match the maturity of the Greek loans and charges accordingly a fixed rate on part of future disbursements to Greece. This scheme was scheduled to be implemented in 2018.

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As with all debt relief measures and financial operations by the EFSF and the ESM, market conditions may influence the degree to which these lenders can actually and effectively implement any of these three schemes. The EFSF/ESM and the Greek authorities entered into specific liability management exercise agreements to implement these short-term debt relief measures.

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As foreseen in its statement of 25 May 2016,74 and as further confirmed in the statement of 22 June 2018, the Eurogroup politically approved a further package of debt relief measures for Greece, following the successful implementation of the third programme by Greece.75 These are called the ‘medium-term debt relief measures’.

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In addition to and complementing the short-term debt measures already in place, the Eurogroup endorsed the implementation of the medium-term measures in order to ensure that the agreed GFN objectives kept being respected also under cautious assumptions: – following the earlier waiver, the first medium-term measure is the actual abolition of the step-up interest rate margin applicable to the 11.3 billion euro instalment of the EFSF loan to finance the Debt Buy Back operation; – the further (renewed) use of 2014 SMP profits from the ESM segregated account and the restoration of the transfer of ANFA (Agreement on Net Financial Assets) and SMP income equivalent amounts to Greece (as of budget year 2017). The available income equivalent amounts are envisaged to be transferred to Greece in equal amounts on a semi-annual basis in December and June, following the compliance with certain terms and conditions and after the approval by the Member States, via the ESM segregated account. The funds should be used to reduce gross financing needs or to finance other agreed investments; and 74 Ibid. 75 Eurogroup, ‘Statement on Greece’ (22 June 2018) accessed 5 February  2020.

Financial Assistance Granted by the EFSF and the ESM 1015 – a further deferral of EFSF interest and amortization by ten years (totalling twenty years of deferral) and an additional extension of the maximum weighted average maturity by ten years (from the previous thirty-two-and-a-half years following the change at the end of 2012 to currently forty-two-and-a-half years), thereby respecting the EFSF programme authorized amount. To manage these changes to the lending terms, including the total maturity extension by twenty-five years under the loans (the initial increase by fifteen years in 2012 and the additional increase by another ten years in 2018, leading to a weighted average maturity of forty-two-and-a-half years), the EFSF was required to allow repayments after 2048 (the initial latest repayment year under the loans). To finance these extended loans under the Master FFA, the EFSF was forced to also amend the relevant EFSF funding documentation to allow for the issuance of EFSF funding instruments in the capital markets after 2048. It therefore had to make the required amendments to its funding documentation both in 2013 and in 2018. It also introduced similar amendments to the relevant Deeds of Guarantee by the EFSF shareholders, extending the end year for the Deeds of Guarantee to 2070.

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Following the formal approvals for these medium-term measures by the relevant EFSF governing bodies (where required), the EFSF is expected to implement the medium-term measures in 2018 after the successful completion of the third programme and in 2019 onwards following the further proper implementation of (post-programme) reform measures by Greece (subject to potential changes).

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For the long term, the Eurogroup endorsed, according to its statement of 25 May 2016, in principle a ‘contingency mechanism’ to ensure long-term debt sustainability in case a more adverse economic scenario materializes in the country.

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C. Ireland76 One of Western Europe’s poorest countries in the 1970s, Ireland saw decades of growth, transforming it into one of the countries with the highest per-capita income in the EU in the 1990s.

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Towards the end of this era of rapid growth, the economy started to overheat. Government spending increased rapidly and tax revenues became less reliable. Wages were climbing too rapidly, making products expensive for buyers abroad. The booming economy was fed largely by aggressive bank lending. Real estate prices had increased almost fourfold from 1997. Credit and real estate bubbles were building up.

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Ireland’s problems started to become apparent when real estate prices collapsed in 2007. Though the country took decisive action in the midst of the financial crisis, investors worried that the losses at the banks were too big for the government to fund. They started asking for higher returns, making it too expensive for Ireland to borrow money on financial markets.

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76 All available information regarding the programme for Ireland on the dedicated EFSF webpages accessed 5 February 2020.

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On 21 November 2010, Ireland asked for financial support. A programme worth 85 billion euro (out of which 67.5 billion euro financial assistance) was negotiated and agreed.

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The amount of 85 billion euro is composed of a contribution of 22.5 billion euro by the IMF, 22.5 billion euro by the EFSM, 4.8 billion euro by bilateral loans of the UK, Sweden, and Denmark, 17.7 billion euro by the EFSF and the use of available Irish financial buffers in an amount of 17.5 billion euro.

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On 22 December 2010, Ireland and the Central Bank of Ireland entered into a loan facility agreement with the EFSF.

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Ireland became the second country during the euro crisis to enter an assistance programme. It was the first time that the EFSF, which had been established months earlier, provided financial assistance.

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The conditionality in the MoU was centred on: – A financial sector strategy comprising fundamental downsizing and reorganization of the banking sector (including recapitalization and deleveraging). – A strategy to restore fiscal sustainability (reducing expenditure, tax system reform, generation of additional revenue). – A structural reform package to underpin growth, focusing on competitiveness and job creation.

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EFSF has disbursed 17.7 billion euro to Ireland. The weighted average maturity of the loans is 20.8 years. Ireland will repay the principal of the loan tranches starting from 2029, and the repayment is scheduled to end in 2042.

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In December 2013, the country successfully exited its EFSF programme without the need for any further assistance. Shortly following its exit, Ireland started early repaying its IMF arrangement. On 20 March 2015, the NTMA (the Irish debt management office) completed the third and final early repayment of Ireland’s IMF loan facility bringing cumulative repayments to approximately SDR 15.7 billion. This represents a repayment of just over 18 billion euro, or 81 per cent of Ireland’s original 22.5 billion euro IMF loan facility. These repayments discharge IMF principal repayment obligations that were originally to fall due from July 2015 to January 2021. With this, Ireland has fully repaid the more expensive portion of the IMF facility.77 The EFSF approved these early repayments to the IMF, by waiving certain rights and undertakings under the EFSF loan agreement with Ireland to support Ireland in the early repayment of the more expensive IMF loan facility.

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Unlike some other programme countries, Portugal had suffered a long period of weak economic growth before the crisis. Low interest rates created an illusion of prosperity, 77 accessed 5 February 2020. 78 All available information regarding the programme for Portugal on the dedicated EFSF webpages accessed 5 February 2020.

Financial Assistance Granted by the EFSF and the ESM 1017 because credit was easily available. This contributed to high debt levels for companies, households, and the government. Wage growth persistently above productivity gains contributed to Portuguese products becoming expensive abroad, which accelerated a drop in exports. There were also problems with the country’s banks. Investors were worried that they were overly exposed to the weak economy, and had stopped funding them. Another problem was that the country did not seize the low financing costs to keep debt under control—instead, debt spiralled. When the global crisis hit Europe in 2010, the country had little scope to support the economy, or the banks.

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Early in 2011, it became too expensive for the country to borrow money on financial markets. There was a risk it would default. On 7 April, Portugal requested assistance from the EFSF, the EU, and the IMF. On 27 May 2011, the Portuguese Republic and the Central Bank of the Portuguese Republic entered into a loan facility agreement with the EFSF.

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Portugal was the third country to receive assistance during the euro crisis and the second programme country for the EFSF.

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The creditors made 78 billion euro available for Portugal over a period of three years. The EFSF, the EU, and the IMF each pledged a third of the total amount (26 billion euro each).

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The financial assistance provided was conditional upon the implementation of a macroeconomic adjustment programme, with reforms in three main areas:

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– A fiscal consolidation strategy, supported by structural-fiscal measures, aimed at setting the debt/GDP ratio on a downward path in the medium term. – Structural reforms to boost potential growth, create jobs, and improve competitiveness. – Stabilization of the financial sector strategy based on recapitalization and deleveraging, with efforts to safeguard the financial sector against disorderly deleveraging through market-based mechanisms supported by backstop facilities. EFSF has disbursed 26 billion euro to Portugal. The weighted average maturity of the loans is 20.8 years. Portugal will repay the principal of the loan tranches starting from 2025, and the repayment is scheduled to end in 2040.

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In spring 2014, the country successfully exited its EFSF programme without the need for any further assistance. Similar to Ireland, Portugal also engaged in early repayments of its IMF loans. As of May 2018, Portugal repaid early 83 per cent of its total IMF loan in a total amount of SDR 19.1 billion or 23.8 billion euro and further repayments are anticipated.79 The EFSF provided the necessary support for these early repayments by allowing the country to undertake these early repayments to the IMF despite certain restrictions in the EFSF loan agreements.

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79 IGCP, ‘Portugal Economics & State Funding’ (25 May 2018) 39 accessed 5 February  2020.

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E. Spain80 33.216

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After a series of continuous political meetings during the summer of 2012, ranging from several Eurogroup meetings to actual Euro Area summits between the Heads of State or Government, the Finance Ministers of the Euro Area finally reached political agreement on 20 July 2012 to grant financial assistance to the Kingdom of Spain to be provided by the EFSF/ESM.81 The Spanish authorities officially requested such stability support on 25 June 2012.82 Technical discussions between the authorities and the institutions took place between 27 June and 4 July and included the EFSF/ESM, the European Commission, the ECB, the IMF, as well as the European Banking Authority. A high-level staff level agreement between all parties was reached on 4 July, and comprised an envisaged financing envelope of 100 billion euro for the recapitalization and restructuring of the Spanish banking sector. The relevant Memorandum of Understanding setting out the appropriate conditions for the financing was agreed and signed on 24 July 2012. The Eurogroup agreed that the financial assistance was to be provided by the EFSF, to be subsequently transferred to the ESM once it was fully established and operational. This Eurogroup statement confirmed the earlier Heads of State or Government decision of 29 June 2012 regarding Spain.

1. Cause of the financial distress in Spain It is widely assumed that the true origin of the financial crisis in Spain stems from the housing market. In the years before the global financial crisis, Spain’s economy was flourishing, and was in fact outperforming many other economies in Europe. Unemployment was very low. There was also an excessive construction boom; house prices nearly tripled between 1997 and 2008. This ‘housing bubble’ was made possible partly due to ‘cheap’ and ‘easy’ bank lending operations. When the financial crisis hit the world eventually the real estate market in Spain collapsed and banks were stuck with huge losses on their lending portfolio, as customers struggled to repay mortgage loans.

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A recession hit the economy in 2011 and the budget deficit rose to 11 per cent of GDP. Due to the large accumulated stock of problematic, real estate-related assets, and poor capitalization of some banks, the Spanish banking sector encountered great difficulties in borrowing money and gradually lost market access. The weakest financial institutions were the smaller regional saving banks, or cajas. But this in turn impacted the Spanish banking sector overall and also the bigger lenders suffered from the financial crisis. The Spanish authorities responded with a series of reforms and measures aimed at recapitalising and restructuring its banking sector, but severe challenges remained.

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Although Spain as a sovereign issuer never lost market access, borrowing costs increased dramatically to near unsustainable levels. In order to come to an attempt to calm the markets, the authorities decided to request financial assistance in the summer of 2012. To 80 All available information regarding the programme for the Kingdom of Spain on the dedicated ESM webpages accessed 5 February 2020. 81 Formal Eurogroup meetings took place on 9, 25, and 27 June 2012, and there was a subsequent Euro Area Summit between the Heads of State or Government on 29 June 2012. A final Eurogroup meeting approving the political support was held on 20 July 2012; Eurogroup, ‘Statement by the Eurogroup’ (20 July 2012) accessed 5 February  2020. 82 Incidentally, on this day the Republic of Cyprus also formally requested financial assistance.

Financial Assistance Granted by the EFSF and the ESM 1019 restore the (long-term) viability and resilience of the banking sector, Spain aimed for a sufficiently large and credible backstop by requesting support from the EFSF/ESM.

2. Procedure for stability support As politically agreed, the EFSF initially arranged the financial assistance with Spain for 100 billion euro. To this end, the EFSF Board of directors formally approved on 24 July 2012 the stability support package in the form of an indirect bank recapitalization loan. The loan was documented in the Master Financial Assistance Facility Agreement and was signed between the EFSF, the Kingdom of Spain, the Bank of Spain and the Spanish bank recapitalization fund called FROB (Fondo de Restructuración Ordenada Bancaria) on 24 July 2012 (the EFSF MFFA).

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Under the EFSF MFFA, an amount of 30 billion euro was pre-funded by the EFSF (through the creation of dedicated EFSF notes) and kept in reserve in order to create a credible backstop which could be mobilized and used in any contingency to cover the costs of unexpected interventions required to restore the confidence in the Spanish banking sector. The EFSF facility was however never used; following the explicit political guidance stemming from the Eurogroup and the Euro Area Summit, this agreement was transferred to the ESM on 29 November 2012 following its formal establishment and operationalization. Due to the transfer to the ESM, the EFSF subsequently cancelled the already pre-funded EFSF notes for 30 billion euro under the EFSF MFFA.

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The ESM Treaty includes an enabling clause for a transfer between the EFSF and the ESM. Article 40 of the ESM Treaty facilitates any transfer of EFSF support to the ESM, and the subsequent assumption of liabilities by the ESM. On 28 November 2012, the ESM Board of Governors decided that the ESM would assume all liabilities and commitments from the EFSF—in line with Article 40(1) and (2) ESM Treaty and with Clause 14(5) EFSF MFFA.

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In order to operationalize the transfer and assumption of liability from the EFSF to the ESM regarding the committed assistance to Spain, the contracting parties agreed and executed on 29 November 2012 a so-called ‘Transfer and Assumption Agreement’. In addition, the ESM signed its Financial Assistance Facility Agreement (the ESM FFA) with Spain on the same date.83

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The ESM FFA for Spain was therefore ESM’s first financial assistance programme, immediately following its formal establishment and operationalization. At the same time though, it was very much a carry-over from the already established EFSF programme, taking into account a different pricing and institutional and procedural differences. The procedure for the granting of the ESM financial assistance was based on Article 40 ESM Treaty by way of derogation from the usual process as prescribed for in Article 13.

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3. Spanish Memorandum of Understanding ESM’s financial assistance was provided in the form of an indirect bank recapitalization loan. This was therefore not a full macroeconomic adjustment programme such as in Cyprus or Greece. Spain’s financial concerns lay very much in its banking sector. The

83

Contracting parties to the ESM FFA were the same as the EFSF MFFA contracting parties.

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1020 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) financing envelop agreed between the various institutions and the ESM was aimed to cover the estimated capital requirements along an additional safety margin. Conditions were strictly directed to the banking sector. 33.226

There were three main conditions to the ESM’s stability support: – Identifying individual bank capital needs through an asset quality review of the entire financial sector and a bank-by-bank stress test. – Recapitalising and restructuring of weak banks based on plans to address any capital shortfalls identified in the stress tests. – Problematic assets in those banks receiving public support (without a credible plan to address their capital shortfalls by private means) to be segregated and transferred to an external Asset Management Company (AMC: for Spain this was SAREB: Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria).

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In addition, conditionality was also horizontally applied in order to strengthen the banking sector as a whole. This included among other things updating regulatory capital targets, bank governance rules, an upgrade of reporting requirements, and improved supervisory procedures.

4. The ESM FFA for Spain Shortly after the execution of the ESM FFA for Spain, the authorities requested actual financial support. On 3 December 2012, Spain requested a disbursement in the amount of 39.47 billion euro from the ESM. In the midst of the various Greek stability support operations of December 2012,84 the ESM disbursed the total amount, in the form of ESM notes,85 on 11 December 2012. Spain in turn transferred the notes to FROB, which used the ESM notes for the recapitalization operations in the Spanish banks.

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Out of the first disbursement, Spain and FROB recapitalized for an amount of approximately 37 billion euro the so-called ‘Group 1’ banks, being: BFA-Bankia, Catalyuna-Caixa, NCG Banco, and Banco de Valencia.

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In addition, an amount of 2.5 billion euro was used to capitalize SAREB in order for it to acquire assets arising from bank restructuring.

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In order to effectuate the various recapitalization operations, the ESM executed the relevant and required subscription agreements with Spain, FROB, and the relevant Spanish recapitalized banks in addition to the normal disbursement documents under the ESM FFA.

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After the successful bank recapitalization operations for the Group 1 banks, the Spanish authorities requested at the end of January 2013 a second disbursement for 1.86 billion euro. The ESM disbursed the required funds to Spain and FROB on 5 February 2012, again in the form of ESM notes. This time these funds were used for the recapitalization of a second set of banks, being Group 2: Banco Mare Nostrum, Banco Ceiss, Caja3; and Liberbank.

84 See Section V.B. 85 The ESM issued and transferred to Spain dedicated ESM bills and floating rate notes with maturities ranging from ten months to three years to fund the total disbursement of 39.47 billion euro.

Financial Assistance Granted by the EFSF and the ESM 1021 All ESM funds were disbursed subject to strict conditions. This included among many other things formal approval from the European Commission/DG Comp from a state aid perspective.

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In total, Spain and FROB recapitalized with ESM funds eight Spanish banks and established an AMC/bad bank. Spain did not request any further disbursements under its loan. The availability of programme funds from the ESM expired on 31 December 2013 and with that the remaining funds under the ESM FFA were automatically cancelled. The ESM therefore disbursed an amount of 41.33 billion euro out of the total 100 billion euro committed. The weighted average maturity of the loans to Spain is twelve-and-a-half years. The ESM FFA is scheduled to be repaid by Spain between 2022 and 2027. The ESM is currently operating its Early Warning System to ensure it receives repayments due by Spain in line with Article 13(6) ESM Treaty.

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The Spanish bank recapitalization loan was completely financed by the ESM; there was no financial involvement of the IMF in the Spanish programme. The IMF only provided technical advice to Spain.

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5. Exit and early repayments by Spain As a consequence of the successful reforms taken by Spain, and the fact that the situation of the Spanish banks improved significantly, Spain only needed to use approximately 40 per cent of its total financing envelope. Following the clean and successful exit at the end of 2013, Spain managed to date to early repay its ESM loan seven times in a total amount of nearly 15 billion euro. Spain outstanding loan to the ESM has therefore already been lowered to approximately 26 billion euro. A continuation of early loan repayments is expected as this has been communicated by Spain.

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F. Cyprus86 Following the request for financial assistance by the Cypriot authorities on 25 June 2012,87 and subsequent protracted political discussions and negotiations, the ESM approved on 24 April 2013 a stability support package for the Republic of Cyprus in a total amount of up to ten billion euro, out of which the ESM would contribute a maximum amount of up to approximately nine billion euro. The IMF committed the remaining one billion euro under the programme envelope.88

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This was ESM’s first macroeconomic adjustment programme following the Spanish indirect bank recapitalization loan. The funds under the financial assistance programme were used

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86 All available information regarding the programme for the Republic of Cyprus on the dedicated ESM webpages accessed 5 February 2020. 87 Incidentally, on this date the Kingdom of Spain also requested financial assistance. 88 At the time the ESM approved the stability support package for Cyprus, the IMF Executive Board meeting still had to take place. As such, the actual FFA for Cyprus dated 8 May 2013 refers in Recital E to the amount of assistance still to be provided for by the IMF. The IMF eventually decided on 15 May 2013 to provide assistance to Cyprus in the amount of SDR 891 million (at the exchange rate per 15 May 2013 this SDR amount represents an amount just over one billion euro). The ESM subsequently confirmed its exact total financial assistance amount (being 8.968 billion euro) to Cyprus accordingly.

1022 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) by Cyprus to cover fiscal needs, to redeem its medium and long-term debt, and to recapitalize financial institutions apart from the country’s two largest banks (Bank of Cyprus and Cyprus Popular Bank).

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1. Origins of the crisis in Cyprus The origins of the financial crisis in Cyprus stem from a rapid expansion of its financial sector and huge increase in bank lending after the EU accession in 2004 and the adoption of the euro in 2008. The banking sector in Cyprus became oversized, with poor lending practices, credit policies and risk management, combined with weak supervision and a concentrated exposure to Greece. At its height in 2009, the Cypriot banking sector was equivalent to nine times the country’s GDP, compared to the current ratio of 3.5 times GDP (close to the EU average). In addition, high current account deficits were recorded, and exports dropped due to Cyprus’s falling competitiveness. Furthermore, macro and fiscal imbalances led to loss of market access, whereas the banking sector was increasingly cut off from international market funding and Cyprus’s largest banks recorded substantial capital shortfalls against the backdrop of the exposure to the Greek economy and deteriorating loan quality. The excessive budget deficit limited Cyprus’s ability to help when the banks were on the verge of collapse. By mid-2011, Cyprus was no longer able to borrow money from the markets. This prompted the Cypriot authorities to ask for financial assistance from the euro area and the IMF.

2. Procedure for stability support On 25 June 2012, the Republic of Cyprus made an official request for financial assistance from the EFSF or ESM to the President of the Eurogroup (at this time being Jean-Claude Juncker). In its statement on 27 June 2012, the Eurogroup subsequently welcomed the request by the Cypriot authorities for financial assistance from euro area Member States in view of the challenges Cyprus is facing. The Eurogroup also mentioned that the financial assistance package would be provided by the EFSF or the ESM.89 For prudency reasons, since the request by Cyprus was addressed to the President of the Eurogroup and not, as foreseen by Article 13(1) ESM Treaty, ‘to the Chairperson of the Board of Governors’, the ESM Board of Governors, when approving the support package for Cyprus in March 2013, explicitly confirmed and acknowledged that the request by Cyprus was addressed to the ESM as the only dedicated and permanent financial support mechanism for the euro area. By way of a deviation from Article 13 ESM Treaty, the resolution of the ESM Board of Governors ratified the already conducted operations in the context of the Cypriot request for financial assistance. By this ratification through the Board of Governors’ resolutions, the historical actions already undertaken due to the request for financial assistance by Cyprus to the President of the Eurogroup on 25 June 2012 were formally brought under the legal ESM framework.90

89 Eurogroup, ‘Statement on Cyprus’ (27 June 2012) accessed 5 February 2020. 90 Aside addressing the request to a different person than the Chairperson of the Board of Governors, these operations also included the negotiations of the macroeconomic adjustment programme and the MoU and the required assessments in line with Article 13(1) ESM Treaty by the Commission, together with the ECB and the IMF.

Financial Assistance Granted by the EFSF and the ESM 1023 The euro area was supportive of providing financial assistance to Cyprus when Cyprus made the request thereto, but demanded that Cyprus restructured its banking sector before any financing package from the euro area could be agreed, in addition to the restructuring of a bilateral loan in the amount of 2.5 billion euro with the Russian Federation (resulting in a re-profiling of the Russian loan).

3. ESM programme The key conditions of the ESM programme were:

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– to restore the soundness of the Cypriot banking sector and rebuild depositors’ and market confidence by thoroughly restructuring and downsizing financial institutions; – to continue the process of fiscal consolidation to correct the excessive general government deficit, in particular through measures to reduce current primary expenditure and to increase the efficiency of public spending; and – to implement structural reforms to support competitiveness and sustainable and balanced growth, allowing for the unwinding of macroeconomic imbalances. The total amount of financial assistance agreed in support of Cyprus’s macroeconomic adjustment programme was up to ten billion euro. However, thanks to the rapid economic recovery made by Cyprus, the full amount of the loan was not needed. The ESM eventually disbursed only 6.3 billion euro between May 2013 and October 2015, and the IMF disbursed a further one billion euro. The weighted average maturity of the ESM loans to Cyprus is 14.9 years. Cyprus needs to repay its loan to the ESM between 2025 and 2031, with the largest repayment amounts targeted in 2029.

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Upon request by Cyprus, the ESM also provided technical assistance and other advisory services to the Ministry of Finance and the public debt management office.

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4. Bank recapitalization operations As part of the total financial assistance of 6.3 billion euro, an amount of 1.5 billion euro was disbursed for the recapitalization of the Cooperative Central Bank. This bank acts as the central bank for the cooperative banking sector in Cyprus. The ESM agreed directly with Cyprus and the Cooperative Central Bank a subscription agreement in advance of injecting the required funds into the bank. ESM’s funds were therefore only used to recapitalize the cooperative banking sector in Cyprus. The ESM closely monitors the developments in the cooperative as well as general banking sector in Cyprus.

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The other systemic banks in Cyprus were capitalized with private funds through bail-in operations sanctioned by the Cypriot authorities prior to the financial assistance by the ESM. To do so, the Cypriot authorities implemented decisive bank resolution, restructuring and recapitalization measures to address the fragile and unique situation of Cyprus’ financial sector. Capital controls were put in place as a necessity to secure the liquidity of the banks. These controls were gradually relaxed and fully lifted in April 2015.

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The bail-in operations by the Cypriot authorities in 2013 marked the first time that private creditors were bailed-in in order to recapitalize financial institutions whilst avoiding using public money. These operations have become the blueprint for further bank rescues

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1024 FINANCIAL ASSISTANCE TO EURO AREA MEMBERS (EFSF and ESM) in Europe (nowadays codified in several Banking Union regulations and directives, such as the Bank Recovery and Resolution Directive (BRRD)).

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5. Exit and early repayment to IMF The country exited its ESM programme without the need for any further assistance in March 2016. The ESM is now operating its Early Warning System until the loans to Cyprus are fully repaid. On 30 May 2017, Cyprus requested a waiver of the ESM to allow it to early repay the IMF loan in an amount of approximately 280 million euro.91 The waiver request was subsequently approved by the ESM Board of Directors subject to certain conditions. Following the satisfaction of these conditions, Cyprus repaid the IMF on 18 July 2017. With the early repayment, the IMF bail-out loan was cut back to approximately 700 million euro.

91 The waiver request from Cyprus to the ESM dated 30 May 2017 describes a proposed prepayment by Cyprus on or before 30 September 2017 of part of the financing granted to the Republic of Cyprus under its IMF arrangement, in a single tranche in the amount of SDR 222,375,000 and which, immediately prior to the prepayment, represents 28.08 per cent of the aggregate principal amount outstanding under such IMF arrangement.

35

FINANCIAL MARKET INTEGRATION AND EMU Kern Alexander

I. Introduction II. EU Banking Market Structure III. Financial Market Integration in the EU and Eurozone IV. Strengthening Banking Integration and ECB Banking Supervision A. SSM governance structure

35.1 35.2 35.10 35.15 35.19

B. ECB monetary policy and banking supervision35.23 C. ECB’s macroprudential tools 35.29 D. Remaining challenges: mergers 35.32 E. Market structures 35.39

V. Strengthening Capital Market Integration and Capital Markets Union 35.47 VI. Conclusion 35.55

I. Introduction This chapter discusses the evolution of the market structure in European banking and the level of financial integration in the Eurozone and the interaction with financial regulatory developments. The chapter will address how the creation of the Banking Union’s Single Supervisory Mechanism (SSM) has affected banking market integration in the Eurozone. The chapter also raises related issues concerning monetary policy and banking supervision and some of the challenges in discharging these responsibilities within the Banking Union. This chapter also analyses the Capital Markets Union (CMU) proposal in respect of its important objective to increase the supply of credit from non-bank financial intermediaries to the economy of the European Union (EU) while also raising important prudential regulatory concerns concerning the risks raised by the shadow banking sector.

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II. EU Banking Market Structure It has been asserted that increased financial market integration in the European Union leads to a more efficient allocation of capital and enhanced credit intermediation within the Single Market, and to a more effective transmission of monetary policy in the European Monetary Union (EMU).1 Other commentators emphasize the power of EU legal and institutional 1 See ECB, ‘Financial Integration in Europe’ (Frankfurt, April 2010) 1–2 (hereafter ECB, ‘Financial Integration in Europe’). Commission, ‘Report on Financial Integration’ (Brussels, 2009) 2–3 (hereafter Commission, ‘Report on Financial Integration’). Kern Alexander, 35 Financial Market Integration and EMU In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0043

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1050 FINANCIAL MARKET INTEGRATION AND EMU factors to shape the development of banking markets while influencing the organizational structure and strategy of banking groups,2 whilst others have analysed the effectiveness of the SSM in terms of whether the right balance has been struck in determining whether the European Central Bank (ECB) should have more influence over prudential rule-making.3 35.3

The aftermath of the crisis has posed a host of new questions on the relationship between financial market integration and financial stability, as well as between competition policy and banking regulation. In general, as in other jurisdictions, regulation has lagged behind the process of liberalization of the financial sector. Financial market integration has become an important objective of EU policy-makers and has become linked to other post-crisis policy developments, such as promoting a level regulatory playing field in the design of harmonized bank regulatory standards across the Union.

35.4

After the creation of the European Monetary Union, there was a substantial increase in the growth of the European banking sector as measured by banking sector assets, which grew to 3.5 times the Gross Domestic Product (GDP) of the euro area.4 Despite the growth of banking sector assets relative to GDP, the share of monetary and financial instruments in the formal banking sector relative to the total assets of financial intermediaries has declined steadily, reflecting the growing competition from nonbank financial firms. The crisis, however, had the effect of curtailing the expansion of banking assets relative to GDP, in particular in countries more affected by the crisis.5

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Nevertheless, some studies suggest that Europe may be overbanked6 and the European banking sector displays overcapacity, even more so after the crisis. As a result, the sector has undergone restructuring with reduced employment and falling branch numbers. For instance, between 2008 and 2016, the number of branches in the euro area dropped by 17 per cent, while employment fell by 12 per cent.7 Moreover, deregulation and increased competition have led banks to consolidate their operations in order to achieve economies of scale and scope and to try to maintain market power. Although consolidation can lead to larger and more diversified banking groups, it often results in reduced capacity in the branch network—especially when banking networks overlap.

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In addition, market concentration in the banking sector has increased in most EU countries and in all Eurozone countries between 2005 and 2016 (see Figure 35.1). In particular, the banking sectors of the economies which suffered the most post-crisis all underwent major restructurings, which have resulted in greater concentration in the banking industry.

2 See Eddy Wymeersch, ‘The Single Supervisory Mechanism: Institutional Aspects’ in Danny Busch and Guido Ferrarini (eds), European Banking Union (OUP 2015) 93–94, 111–12 (hereafter Wymeersch, ‘The Single Supervisory Mechanism’). 3 See Guido Ferrarini and Fabio Recine, ‘The Single Rulebook and the SSM: Should the ECB Have More Say in Prudential Rulemaking?’ in Danny Busch and Guido Ferrarini (eds), European Banking Union (OUP 2015) 118– 54, 143–51. 4 This is measured as the value of monetary and financial instruments relative to GDP. See Xavier Vives, Competition and Stability in Banking: The role of regulation and Competition Policy (Princeton UP 2016). 5 Joaquín Maudos and Xavier Vives, ‘Competition policy in banking in the European Union’ (2019) 54 Review of Industrial Organization 4. 6 European Systemic Risk Board, ‘Is Europe Overbanked?’ (2014) Reports of the Advisory Scientific Committee No 4 accessed 10 February  2020. 7 See ECB, ‘Report on Financial Structures’ (2017) 81 accessed 10 February 2020 (hereafter Report on Financial Structures).

EU Banking Market Structure 1051 Market concentration 50

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euro area-share of the 5 largest Cls in total assets (left-hand scale) EU-share of the 5 largest Cls in total assets (left-hand scale) euro area-Herfindahl index (right-hand scale) EU-Herfindahl index (right-hand scale)

Figure 35.1 European banking market concentration: the Herfindahl index1 1 See Report on Financial Structures (n 7) 31.

Share of the five largest credit institutions in total assets 100 90 80 70 60 50 40 30 20 10 0

GR EE LT NL MT FI PT SK CY BE LV ES SI euro FR IE IT AT LU DE area 2008

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Figure 35.2 Market share of credit institutions by country1 1 Report on Financial Structures (n 7) 32.

Figure 35.1 uses the Herfindahl index to measure market concentration in the EU and euro area banking industry.8 If the Herfindahl index’s market concentration measure is applied to the banking markets in Greece and Spain (see Figure 35.2), it will demonstrate a highly concentrated banking market. Based on ECB measures of the Herfindahl index in the EU banking sector, as of 2016 there are significant differences in the degree of concentration in the banking sectors of different EU Member States. Figure 35.2 also shows that market concentration (measured 8 See Commission, ‘European Financial Stability and Integration Review (Commission Staff Working Document)’ SWD (2015) 98 final, 166–67.

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1052 FINANCIAL MARKET INTEGRATION AND EMU by share of assets held by the five largest banks) ranged from 97 per cent in Greece to about 31 per cent in Germany and 28 per cent in Luxembourg.9 This data depicts structural factors in EU banking markets, including that banking sectors in some of the larger countries are more fragmented because they include competitive savings and cooperatives banks, thereby reducing concentration levels. In contrast, banking sectors in smaller Eurozone economies tend to be more concentrated and less fragmented with the exception of Austria and Luxembourg.10 In Austria, the less concentration in structure of the banking sector is due to its similarity with some larger EU countries, such as Germany, while the lesser concentration in structure of Luxembourg’s sector is due to the presence of a large number of foreign banks.11 35.8

As a matter of competition policy, it should be mentioned that measuring an appropriate concentration for the European banking industry involves a determination of the relevant market for banking services, but determining the relevant market in banking presents a number of challenges, as the market for banking services consists of a number of multiple products and geographical markets. Aggregate measures provide an imperfect indication of the concentration in the relevant markets.

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As discussed below, the financial crisis has inhibited further cross-border mergers in the Eurozone. In comparison, although bank mergers in the United States increased dramatically in the late 1990s because of the Inter-State Banking Act of 1994, they fell sharply after the 2007–08 crisis.12 The long period of low interest rates in the Eurozone, as a response to the crisis and the subsequent sovereign debt crisis, has put further pressure on bank margins and profitability, and has provided further incentives for banks to consolidate. If economic recovery in the Eurozone returns to pre-crisis levels, the number of bank mergers and acquisitions—both on a domestic and cross-border basis—may increase again to pre- crisis levels.

III. Financial Market Integration in the EU and Eurozone 35.10

A widespread view holds that the level and evolution of the degree of financial integration is relevant since the more integrated a market is, the lower the barriers to entry and the greater capital formation and enhanced credit intermediation.13 A vast literature has documented the level of integration in European financial markets.14 Following adoption of the euro, the Eurozone experienced significant convergence between 2001 and 2008 in interest rate differentials in the wholesale banking and inter-bank markets.15 Wholesale markets have a higher level of financial integration than retail. Up until the crisis in 2008, there was 9 See Report on Financial Structures (n 7) 32. 10 Report on Financial Structures (n 7) 31. 11 Report on Financial Structures (n 7) 32. 12 See Robert Armstrong and Laura Noonan, ‘$66 bn US bank merger ups ante on others to consolidate’ Financial Times (New York, 8 February 2019), citing chart showing US bank mergers and acquisitions from 1980 to 2018. 13 ECB, ‘Financial Integration in Europe’ (n 1). See also Commission, ‘Report on Financial Integration’ (n 1) 3. 14 See Tullio Jappelli and Marco Pagano, ‘Financial Market Integration Under EMU’ (2009) CEPR Discussion Paper No DP7091. 15 Ibid.

FINANCIAL MARKET INTEGRATION 1053 increasing integration in both interbank (wholesale) and non-interbank (retail) markets, with greater integration occurring in interbank (wholesale) markets. This pattern was also shown when monitoring the evolution of the differences in interest rates of bank loans between Eurozone countries. ECB data show that from 2003 to 2008, there was increased convergence in interest rates on bank loans between countries, which suggests an increase in integration in the interbank loan market. Moreover, the cost of capital for equity and debt issuance underwent significant convergence pre-crisis across EU states, while the composition of asset classes in most regulated investment funds became less home-biased towards the domestic market.16 Notwithstanding, the impact of the crisis led to a reversal of cross-border bank lending and investment flows between countries.17 The outbreak of the crisis in 2007 and 2008 and its intensification by the Eurozone sovereign debt crisis between 2010 and 2013 also resulted in sharp increases in the differences in interest rates between Eurozone countries, which is largely explained by the impact of the different sovereign risk premiums. The ECB observed that post-crisis ‘[f]‌oreign branches lost market share to domestic institutions, and there was a pronounced decline in cross-border M&As as banks shifted their focus from pursuing growth opportunities to repairing their balance sheets’.18 Moreover, the market segments that had experienced the highest degree of integration pre-crisis were most heavily impacted by the crisis, and in many cases saw a sharp reversal of the integration trend. For example, this occurred in the unsecured wholesale money markets, government bond markets and equity markets.19

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The ECB’s proposals for a Banking Union in 2012 had the effect of reversing this trend by leading in 2013 to a significant reduction in the difference in interest rates between Eurozone countries, returning in some cases to pre-crisis levels. Despite reduced differences in interest rates generally between Eurozone countries, differences remain much higher for consumer loans than for other loans (loans to companies and home mortgage loans). In fact, the high differences in interest rates for consumer loans between Eurozone and EU countries are much higher than the differences that existed before the crisis.20

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EU policy-makers and regulators had expressed concerns well before the 2007–08 crisis as 35.13 to whether the banking liberalization process was adequate to promote integration of the EU banking sector. Of particular concern is that retail banking remains regional despite the inroads made by online banking. Retail banking remains fragmented essentially because local banks have proximity to clients, soft information, and long-term relationships, all of which remain important factors in a successful retail banking strategy. Regarding cross- border banking, European banks continue to rely more on using subsidiaries in other EU jurisdictions to establish more retail and wholesale business. This approach has been reinforced by the crisis. 16 Ibid. 17 ECB, ‘EU Banking Structures’ (September 2010) 21–22. 18 Ibid, 22. 19 Commission, ‘European Financial Integration Report 2009 (Commission Staff Working Document)’ (2009) SEC (2009) 1702 final. 20 ECB, ‘Financial Integration in Europe’ (May 2017) 101 accessed 10 February 2020 (hereafter ECB, ‘Financial integration in Europe 2017’).

1054 FINANCIAL MARKET INTEGRATION AND EMU 35.14

In some EU countries almost 100 per cent of the banking business is in the hands of foreign banks and that this co-exists with other EU countries where the market share of foreign EU- based banks is less than 10 per cent. Since 2008, the market share of foreign banks has been reduced in many countries.21 Another measure of banking sector integration is the market share of EU-based banks in the markets of other Member States. Based on this measure, the market share has fallen since 2008 in many countries, which is evidence of the negative impact that the crisis has had on financial integration.22 The financial crisis has produced a negative effect on financial integration, particularly in the euro area, which has suffered more deeply from the effects of the sovereign debt crisis that started with Greece in May 2010 and spread to other Eurozone states. Most retail and wholesale banking indicators show deterioration in financial integration post-crisis.

IV. Strengthening Banking Integration and ECB Banking Supervision 35.15

The European Banking Union (EBU) was designed to restore the financial health and stability of the European banking system and to sever as a link between weak euro area banking systems and fragile sovereign debt finances.23 The Banking Union consists of three pillars: the Single Supervisory Mechanism (SSM), Single Resolution Mechanism (SRM), and the European Deposit Insurance System (EDIS). The SSM was implemented first, taking effect in 2014, with a view to enhancing the supervision of the European banking sector and to promoting banking stability following the financial crisis of 2007–09 and the euro area sovereign debt crisis of 2010–12. The SSM forms the supervisory pillar of the European Banking Union and empowers the ECB to carry out prudential supervision of credit institutions and certain financial holding companies that are established in participating Member States. In addition, the SSM allocates supervisory responsibilities to the national competent authorities of participating Member States for less significant institutions.24

35.16

The other two pillars of the EBU consist of the Single Resolution Mechanism (SRM) and the European Deposit Insurance System (EDIS). The SRM applies the Bank Recovery and Resolution Directive 2014 (BRRD)25 in the Banking Union jurisdictions. The SRM took effect in 2016 and operates through the Single Resolution Board, which has authority to take a bank or systemically important investment firms into resolution and to utilize resolution tools to restructure or recapitalize the institution, if necessary, to prevent a crisis and to 21 ECB, ‘Financial Integration in Europe’ (n 1) 9. 22 Ibid. 23 Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63 (hereafter SSM Regulation); European Parliament and Council Regulation (EU) 806/2014 of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) 1093/ 2010 [2014] OJ L225/1 (hereafter SRM Regulation). 24 Article 6 SSM Regulation. 25 European Parliament and Council Directive 2014/59/EU of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) 1093/2010 and (EU) 648/2012 of the European Parliament and of the Council [2014] OJ L173/190.

STRENGTHENING BANKING INTEGRATION 1055 avoid a taxpayer funded bailout. The SRB can draw on a Single Resolution Fund, which can be tapped to help wind down a systemically important institution. The third pillar, known as EDIS, represents a common scheme to insure bank deposits across the Banking Union, but is still under negotiation as it faces strong political opposition in Germany and other countries.26 The SSM provides the main pillar of the Banking Union and consists of the ECB and the national competent authorities of participating Member States. Its overriding objectives are to ensure safety and soundness of the European banking system and to ensure the unity and integrity of the EU internal market. All euro area Member States are automatically members, while non-euro area members can decide to participate in the SSM through a procedure involving the national competent authority entering into a ‘close co-operation’ with the ECB.27 For the other non-participating Member States, the ECB has adopted a memorandum of understanding with the relevant national competent authority that explains how the ECB will cooperate with the NCA in performing their respective supervisory tasks.28 The ECB will also conclude memoranda of understanding with each competent authority of a systemically important financial institution in EU Member States.29 The ECB’s bank supervisory powers are conducted through an executive board—the Supervisory Board (SB)—that is responsible for supervising ‘significant’ banks (ie large cross-border euro area banks), which constitute about 85 per cent of banking assets in the euro area30—and indirectly responsible for overseeing the supervisory actions of national competent authorities responsible for supervising small and medium sized (less systemically important) banks in participating Member States.31 The ECB has ultimate discretionary authority to decide whether to intervene and to take supervisory decisions that could supersede the decisions of national competent authorities with respect to smaller credit institutions which the ECB does not directly supervise.

35.17

The SSM acting through the ECB only has jurisdiction to apply and enforce EU prudential banking law and regulatory requirements against ‘credit institutions’ under EU law.32 For instance, financial institutions that do not accept retail deposits are not defined as ‘credit institutions’ under EU law and therefore are not subject to SSM jurisdiction. Similarly, a

35.18

26 The EDIS would eventually mean customer bank deposits under 100,000 euro guaranteed by Eurozone taxpayer money. 27 Article 7(1) and (2)(a)–(c) SSM Regulation providing the legal requirements for ECB cooperation with national competent authorities that enter ‘close co-operation’ with the SSM, including rules that apply directly to banks established in participating countries. 28 Article 8 SSM Regulation. 29 Article 6(7)(b) SSM Regulation. 30 The criteria used to define a bank as significant are: total value of assets, whether it is one of the top three largest banks in its home Member State; its importance to the economy of its home state or the EU as a whole; and whether it has requested or received direct public financial assistance from the European Stability Mechanism (ESM) or the European Financial Stability Facility (ESFS). See also Article 6(4)(i)–(iii) SSM Regulation. 31 Article 4(1) SSM Regulation. 32 ‘Credit institution’ is defined as a firm which accepts deposits from the public that are insured by the EU Deposit Guarantee Scheme Directive. See Capital Requirements Directive IV (CRD IV Package): European Parliament and Council Directive 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC [2013] OJ L176/338 (including the Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR)), entered into force 1 January 2014. The Capital Requirements Directive IV transposes into European law the prudential capital requirements for credit institutions and investment firms which are based on the internationally-agreed Basel Capital Accord (Basel III agreement).

1056 FINANCIAL MARKET INTEGRATION AND EMU ‘credit institution’ subject to SSM jurisdiction for carrying on activities governed by EU prudential banking law is not subject to SSM jurisdiction for activities not subject to EU prudential banking law, such as brokering and dealing securities or the marketing and sale of retail financial products. For such non-prudential activities, the bank would be subject to other EU banking and financial law requirements, such as conduct of business rules, which are the sole responsibility of national competent authorities to monitor and enforce.33 As discussed below, another limitation of the SSM framework is that it applies only to banking institutions that are legally defined as ‘credit institutions’ under EU law—that is, banks that perform traditional intermediary functions of taking retail deposits and providing credit through commercial and retail lending.34

A. SSM governance structure 35.19

The ECB acts through the Supervisory Board,35 which is responsible for supervising the euro area’s largest cross-border banks and the top three banks by size in each participating Member State. The SB is also responsible for overseeing the supervisory actions of participating national competent authorities who directly supervise small-and medium- sized credit institutions in the SSM regime.36 The ECB/SB has ultimate discretion to decide whether to intervene and take direct oversight of small and medium sized institutions that are ordinarily subject to direct supervisory control by national competent authorities.37

35.20

The ECB/SB is primarily responsible for the licensing of all banks in the Eurozone or participating Member States, as well as for the monitoring and enforcing of various prudential regulations, such as capital adequacy requirements, liquidity buffers and leverage limits, against certain significant Eurozone/participating banks under its direct supervision.38 Among those tasks, the ECB/SB is empowered to approve bank recovery plans39 or make use of supervisory measures that aim to address systemic risks at the level of individual banks.40 For banks not significant enough to fall under the direct supervision of the ECB, these tasks will be exercised by national competent authorities (NCAs), nonetheless

33 The SSM does not apply to most conduct of business rules that govern a credit institution’s capital market activity—such as prospectus requirements, insider dealing and market abuse rules, or mis-selling of retail financial products. These are subject to other areas of EU and national law and are regulated by that country’s national competent authority (not the ECB). 34 See Article 4.1(1) of European Parliament and Council Regulation (EU) 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 [2013] OJ L176/1. 35 Article 26 SSM Regulation (‘planning and execution of the tasks conferred on the ECB shall be fully undertaken by an internal body composed of its Chair and Vice Chair’). 36 Article 6(7)(a)–(c) SSM Regulation. See also Article 25(8) (SB shall adopt ‘draft decisions’ ‘to be transmitted to the national competent authorities of the Member States concerned’). 37 Article 6(5)(b) SSM Regulation, ‘when necessary to ensure consistent application of high supervisory standards, the ECB may at any time, or on its own initiative after consulting with national competent authorities or upon request by a national competent authority, decide to exercise directly itself all the relevant powers for one or more credit institutions’. 38 Article 4(1)(b), (d)–(i) and Article 6(4)–(6) a contrario SSM Regulation. 39 Article 4(1)(i) SSM Regulation. 40 Article 97(1)(b) Capital Requirements Directive IV, discussing the review of systemic risks affecting the Member State’s financial system, and Articles 104–105, and the subsequent imposition of specific capital, liquidity, operational or governance requirements addressing those risks.

STRENGTHENING BANKING INTEGRATION 1057 following the regulations, guidelines and general instructions issued by the ECB to that effect.41 The SSM regulatory system is complex because of its federal structure, which needs to incentivize information sharing among national regulators and the central coordinating regulator (as well as the interaction with the countries outside the Eurozone). The shift towards ECB supervision represents a toughening of enforcement, since national regulators had incentives to be more lenient with their national banks. By comparison, the enforcement of competition policy by the European Commission is likewise perceived to be tougher than enforcement by national authorities.

35.21

The European Banking Authority (EBA) at the EU level has had similar problems in coordinating the implementation and application of harmonized technical and regulatory standards for banking supervision. The problems of coordination among decentralized regulators and supervisors within the EU are acute. Indeed, a supervisor based in another EU state is less likely to consider the consequences (systemic or not) for domestic residents of failure, or restructuring of a local branch or subsidiary, but only the consequences in terms of systemic stability at home. For example, a consequence of the 2007–08 crisis was that host Member State regulators have limited or even forbidden the local subsidiaries of EU/EEA-based banks from transferring liquidity across jurisdictions.42

35.22

B. ECB monetary policy and banking supervision43 The ECB’s role as a bank supervisor, however, might bring it into conflict with its main treaty objective of price stability.44 According to this view, the ECB might be tempted to lower interest rates or to loosen conditions for bank access to liquidity in order to stabilize the banking sector, but this might lead to easier terms of credit thereby conflicting with its price stability objective.45 This is why supervisory mandates for central banks tend to be controversial.46 In general, the price stability mandate of central banks is obstructed by short-term goals, eg avoiding high interest rates and unemployment due to electoral and political pressures—hence the need for central banks to be independent so that they are immune from these pressures. Accordingly, a central bank receiving explicit or implicit employment or economic growth mandates will face the same conflict. A supervisory mandate thus potentially results in lenient monetary policies to prevent bank illiquidity and insolvency; central 41 Article 6(4)–(6) SSM Regulation. 42 See Sharlene Goff and Elaine Moore, ‘Bank of Cyprus seeks FSA cover for UK savers’ Financial Times (London, 6 June 2012). Sharlene Goff, ‘Santander seeks cover from pain in Spain’ Financial Times (London, 29 October 2010). 43 The following paragraphs are based on Kern Alexander, ‘The European Central Bank and Banking Supervision: The Regulatory Limits of the Single Supervisory Mechanism’ (2016) 13 The European Central Bank and Banking Supervision 488–90 (hereafter Alexander, ‘The European Central Bank and Banking Supervision’). 44 Art 127(6) TFEU provides that ‘price stability’ is the primary objective of the European System of Central Banks. In relation to the ECB’s primary objective of ‘price stability’, a ‘financial stability’ objective is mentioned incidentally in Art 127(5) TFEU as follows: ‘The ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.’ 45 This is why Principle 2 of the Basel Core Principles for Effective Banking Supervision recommends that the functions of the bank supervisor and monetary policymaker be independent from one another. 46 See Charles Goodhart and others, Financial Regulation: Why, How, Where Now? (Routledge 2013).

35.23

1058 FINANCIAL MARKET INTEGRATION AND EMU banks also enjoy easier ’bureaucratic entrenchment’ than a supervision-only agency would, making them less accountable for the moral hazard they create. The optimal governance architecture needed for such a double mandate is unclear: lawmakers struggle to combine an efficient relationship between the monetary and supervisory sides, whilst nevertheless ensuring adequate accountability. Other governance issues are both external (especially towards national resolution authorities) and internal, such as the transparency of central bank policies: while excessive transparency may potentially damage the credibility of central banks, eg when responding to temporary market disturbance, empirical evidence shows that higher transparency in forecasts is associated with lower average inflation, and to some extent both less inflation persistence as well as reduced inflation volatility.47 35.24

The SSM Regulation attempts to address the potential conflict in dual central bank mandates by requiring that bank supervision decisions and monetary policy be strictly separated by creating a Supervisory Board which would have separate staff to work solely on banking supervision matters and not to have links with staff involved with monetary policy.48 To reinforce the independence of the Board, ECB President Mario Draghi set forth conditions that were added as an amendment to the SSM, which he argued were necessary to make the plan work and protect the ECB’s reputation for maintaining and achieving its monetary policy objective of price stability. It is an important policy objective for the ECB, therefore, that supervision and monetary policy are ‘rigorously separated’, and the SB governance structure allows national supervisors to play a significant role in any supervisory plan for participating states. Under Article 25 SSM Regulation, the Board’s organizational structure and operational functions will be separate from the ECB’s monetary policy operations and related functions.49 For instance, the SSM tasks are further prohibited from interfering with or being determined by the ECB’s other mandates, whether in relation to the European Systemic Risk Board or to the solvency monitoring of monetary policy counterparties.50

35.25

As mentioned above, the separation between monetary policy and supervisory tasks within the ECB is reinforced by a requirement to ensure the organizational separation of both the staff involved and their reporting lines.51 Beyond the separation of the staff involved on both sides of these firewalls, the Regulation requires the ECB to ensure an operational separation for the Governing Council itself as regards monetary and supervisory functions, eg through separated meetings and agendas.52 The procedure for appointing the Chair and Vice Chair of the Supervisory Board also reflects this separation: rather than having the ECB Governing Council elect a member of the Supervisory Board as was proposed in the draft Regulation, the Chair is now appointed by the Ecofin and cannot be a member of the ECB Governing Council.53 But the Vice Chair is also appointed by Ecofin, 47 Ibid. 48 Germany insisted on separation of the ECB’s supervisory functions from its monetary policy functions in order to protect ECB monetary policy from being influenced by the pursuit of banking supervision mandates. See Peter Mülbert, Presentation at European Company and Financial Law Conference (Berlin, 7 November 2014) (on file with author). 49 Article 25 SSM Regulation (‘Separation from monetary policy function’). Article 25(2) states: ‘[t]‌he ECB shall carry out the tasks conferred on it by this Regulation without prejudice to and separately from its tasks relating to monetary policy and any other tasks’. 50 Article 18(2)(1) of 19 March 2013 tripartite agreement (‘March compromise’). 51 Article 25(2) SSM Regulation. 52 Article 18(3a) March compromise. 53 Art 26(3) March compromise.

STRENGTHENING BANKING INTEGRATION 1059 but only from among the members of the Executive Board of the ECB, which person must also be a member of the Governing Council, according to Article 283(1) of the Treaty on the Functioning of the European Union (TFEU). This demonstrates that the SB’s oversight of the SSM is ultimately accountable to the ECB’s Governing Council, whose strong form of independence is guaranteed by the Treaty and whose overriding mandate is to maintain price stability, which under the Treaty arguably takes precedence over the ECB’s banking supervision mandate. However, the Governing Council’s dual oversight of monetary policy and banking supervision will be subject to separate agendas that rely on separate groups of staff and reporting channels respectively to maintain a semblance of independence for the Council whilst making decisions on monetary policy and banking supervision. To reinforce this, the Council’s oversight of these dual areas is subject to the ‘separation’ requirement in Article 18(3a) SSM Regulation, which requires that Council decision-making is based on separate agendas that rely on separate staff and reporting channels. Eurozone national authorities haves recognized that the institutional challenges about the management of conflicts of interest by the ECB, which arise from having the Governing Council approve all substantive decisions of the SB, creates a conflict of interest within the ECB. For example, a Bundesbank official expressed doubt about the effectiveness of the governance structure, and suggested limiting the Governing Council’s involvement in many supervision decisions.54 In addition, despite the SSM’s focus on independence and separation between the monetary policy function and banking supervisory mandate, it is submitted that the broader post-crisis focus of macro-prudential supervision and regulation requires some degree of coordination between monetary policy and banking supervision. Indeed, much of the literature justifying the separation of monetary policy from banking supervision arose in a period when monetary policy was seen to be independent from banking supervision and that the use of monetary policy instruments to increase bank lending in certain sectors of the economy were considered not to be within the central bank’s mandate.55

35.26

Since the crisis of 2007–09, however, central banks have adopted extraordinary measures of monetary policy (ie the ECB’s Long-Term Refinancing Operation (LTRO) and Outright Monetary Transactions (OMT) and the Bank of England’s quantitative easing and funding for lending schemes) that necessarily involve central banks in assessing the healthiness and viability of bank balance sheets in order to have a better understanding of whether the central bank is achieving its monetary policy objectives (ie price stability). This has particularly been the case in the euro area where the European Central Bank has adopted an array of monetary policy measures, including its role as the main purchaser of asset-backed securities issued by banks and bonds issued by non-bank corporates, in order to increase bank lending with an overall view of achieving the ECB’s price stability objective of 2 per cent inflation.56

35.27

54 See Andreas Dombret, ‘Plan B—where is the banking union heading?’ (Banken-und Unternehmensabend at the Deutsche Bundesbank’s Regional Office, Munich, 1 April 2018) accessed 10 February  2020. 55 Alexander, ‘The European Central Bank and Banking Supervision’ (n 43) 490–91. 56 See discussion of ECB’s unconventional monetary policy in Chapter 22.

1060 FINANCIAL MARKET INTEGRATION AND EMU 35.28

It is debateable whether the use of such broad measures of monetary policy requires the central bank to have more information and an opinion about the healthiness and ability of individual banks or groups of banks to lend in the broader economy. In a financial system where the central bank’s use of monetary policy measures has grown to play such an important role in affecting bank lending and banking regulation, it calls into question the utility of the strict separation between monetary policy and the supervision of individual banking institutions. Therefore, the strict separation between the ECB’s monetary policy function and its banking supervision mandate in the SSM should be given more consideration.

C. ECB’s macroprudential tools 35.29

The SSM Regulation also included additional powers for the ECB to exercise certain macroprudential powers in limited situations. The SSM’s macroprudential tasks are set forth in Article 5 SSM Regulation, entitled ‘Macroprudential tasks and tools’, which include the discretion to impose stricter prudential requirements, including higher capital buffers, on individual banks based on macroprudential factors in the country where the bank is based. Although the exercise of these macroprudential tools rests primarily with the NCAs,57 the ECB may intervene and utilize these tools ‘if deemed necessary’.58 In adopting a particular measure, the ECB is then required to take the specific circumstances of the Member State’s financial and economic situation into account,59 as well as to ‘duly consider’ any objection of a Eurozone national competent authority that seeks to address a macroprudential risk on its own.60 Moreover, under the Single Resolution Mechanism, the ECB will have limited macroprudential powers, merely allowing it to cooperate with the SRM’s Single Resolution Board in conducting an assessment of the extent to which banks and groups under its direct supervision are resolvable without the assumption of extraordinary public financial support,61 and to notify the SRB of a supervised entity requiring resolution.62

35.30

From a macroprudential perspective, the SSM should help to mitigate systemic risks at the level of the individual credit institution. However, the ECB/SSM will only have competence to supervise individual banks or ‘credit institutions’ as defined under EU law.63 As a result, the ECB/SSM will have only limited authority to impose regulations aimed at reducing systemic risks, involving, for example, imposing higher capital and liquidity requirements on individual banks. It will not have competence to regulate non-bank financial intermediaries—such as shadow banks—even though the CMU envisages the EU non-banking financial sector to channel a growing amount of credit and leverage to the European economy.64 In other words, the ECB will have very limited authority to address 57 Article 5(1) SSM Regulation. 58 Article 5(2) SSM Regulation. 59 Article 5(5) SSM Regulation. 60 Article 5(4) SSM Regulation. 61 Article 8(1) Commission, ‘Proposal of 10 July 2013 for a Regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) 1093/2010 of the European Parliament and of the Council’ COM (2013) 520 final. 62 Article 16(1) COM (2013) 520 final. 63 See Article 4.1(1) Regulation (EU) 575/2013. 64 Article 5 SSM Regulation.

STRENGTHENING BANKING INTEGRATION 1061 macro-prudential systemic risks that can arise in the broader financial system where non- bank financial intermediation is growing along with increased trading and clearing of leveraged-linked risky financial instruments. Five years after the SSM became operational in 2014, some Eurozone Member State regulators have developed the view that the SSM has proven itself to be an effective supervisory network that has functioned smoothly and has supported the stability and resilience of the European banking system.65 For instance, the German Federal Financial Supervisory Authority (the ‘BaFin’) has observed that ‘[i]‌t now plays an important role in safeguarding long-term financial stability and advancing financial market integration’.66 Another view, however, asserts that the SSM supervision has led to duplication of responsibilities and uncoordinated reporting with national competent authorities and increased operational costs for NCAs so that they can comply with the SSM regime.67 Furthermore, it is claimed that increased compliance costs for banks have hindered their capacity to support the Eurozone’s post-crisis economic recovery.

35.31

D. Remaining challenges: mergers In considering the extent of EU bank mergers on banking sector integration, there is a diversity of arrangements in different countries in terms of merger control and in terms of how the bank supervisor weighs regulatory factors (eg financial stability) in reviewing a proposed bank merger. In this regard, it is necessary to distinguish between domestic mergers and cross-border cases.

35.32

In most Member States, governments can grant mergers even though the relevant competition authority may have objections to the merger. This occurred in the United Kingdom in October 2008, when the British Prime Minister Gordon Brown and the Chancellor of the Exchequer Alistair Darling waived through the acquisition of the ailing Halifax Bank of Scotland (HBOS) by Lloyds Bank plc even though the merger had been questioned by the UK competition authority as leading to increased concentration in the UK banking industry.68 Similarly, bank supervisory authorities in some EU jurisdictions can reject a bank merger proposal even if it has been approved by the competition authority if the supervisory authority concludes that the merger conflicts or undermines supervisory objectives, such as depositor protection or financial stability. For instance, in the Netherlands, the Minister for Economic Affairs can overturn a merger decision of the competition authority if this

35.33

65 German Federal Ministry of Finance, ‘The Single Supervisory Mechanism: Lessons learned after the first three years’ (German Federal Ministry of Finance’s Monthly Report, January 2018) accessed 10 February  2020. 66 Ibid. 67 See Commission, ‘Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/13’ COM (2017) 591 final, 30. 68 See Office of Fair Trading, ‘Anticipated acquisition by Lloyds TSB plc of HBOS plc: Report to the Secretary of State for Business Enterprise and Regulatory Reform’ (UK Government Publishing Service, 24 October 2008) accessed 10 February 2020. See also Louise Smith, ‘The Lloyds- TSB and HBOS Merger: Competition Issues’ (Standard Note SN/BT/4097, House of Commons Library, 15 December 2008) accessed 10 February 2020.

1062 FINANCIAL MARKET INTEGRATION AND EMU conflicts with the one of the supervisory authority.69 The situation is similar in Germany, where the Minister of Economy may overturn a blocking decision by the Cartel Office for reasons of general welfare (upon consultation with the Monopoly Commission).70 In the UK, as mentioned above, the government may approve a merger against the advice of the competition authority on financial stability grounds.71 In Italy, until the 2005 reform the competition authority was only requested to issue an opinion on a proposed merger or acquisition with the supervisor in charge for merger review. In France, bank merger reviews have been integrated in common competition law since 2003 and in 2008 exclusively under the Competition Authority (which is required to consult the relevant regulator). In Portugal, the banking system has been subject to merger control since 2003, although with a delay of five years relative to the other sectors.72 35.34

Some domestic mergers have led to significant competitive concerns or have been blocked, withdrawn, or subjected to remedies by the competition authority of the EU. Cross-border mergers typically do not entail substantial anticompetitive effects, but they have been subject to domestic regulatory and supervisory obstacles.73 Factors other than competition have played an important role with some Member States using the merger regulation to block a foreign bank entering the local market on financial stability grounds. For instance, the European Commission has intervened in checking the misuse of national supervisory powers to prevent cross-border mergers when trying to protect national champions. The Commission can request all relevant information from the national supervisory authorities in mergers in the banking sector that have a Community dimension, but according to Article 21(3) of the European Merger Regulation74 Member States may block a merger to protect financial stability, which is considered a ‘legitimate interest’ in the domestic market.75

35.35

The SSM regime designates the ECB, in close cooperation with competent national authorities, the role of assessing the applications for the acquisition and disposal of qualifying holdings.76 The removal of artificial obstacles to mergers, and the single supervisory framework in the Eurozone, should facilitate consolidation in the sector extending beyond domestic mergers to include cross-border regional consolidations that are based first on geographic and cultural affinity, and then on broader international mergers. An important objective of the Banking Union was to contribute to the integration of the banking sector.

69 Article 47(1) Dutch Competition Act (DCA). 70 §42(1) Gesetz gegen Wettbewerbsbeschränkungen. 71 Section 42(2) Enterprise Act 2002. 72 See Elena Carletti and Philipp Hartmann, ‘Competition and stability: What’s special about banking?’ in Paul Mizen (ed), Monetary History, Exchange Rates and Financial Markets: Essays in Honour of Charles Goodhart (Edward Elgar Publishing 2003); Elena Carletti, Philipp Hartmann, and Steven Ongena, ‘The Economic Impact of Merger Control Legislation’ (2015) 42 International Review of Law and Economics 6. 73 Article 21 Council Regulation (EC) 139/2004 of 20 January 2004 on the control of concentrations between undertakings [2004] OJ L24/1 (hereafter (EC) Merger Regulation). 74 (EC) Merger Regulation. 75 See generally Elena Carletti and Xavier Vives, ‘Regulation and Competition Policy in Banking’ in Xavier Vives (ed), Competition Policy in the EU: Fifty Years On from the Treaty of Rome (OUP 2009), discussing cases in Member States where governments blocked bank mergers approved by competition authorities on the grounds of ‘legitimate interest’. 76 Article 14(1)(c) SSM Regulation.

STRENGTHENING BANKING INTEGRATION 1063 80

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Figure 35.3 Bank M&As involving euro area banks – value of transactions

Nevertheless, mergers and acquisitions (M&A), including cross-border M&A, in the Eurozone and EU have substantially decreased since the SSM became effective in November 2014. Figure 35.3 above illustrates the low volume of M&As within the euro area, which reached its lowest level in 2016.77 It should be noted, however, that worldwide M&As in banking were significantly lower in 2017 as well, with a volume of $79.6 billion compared to $359 billion in 2008.78 Therefore, it cannot be ruled out that the decline in bank M&A in the Eurozone may have been caused by other factors in global financial markets unrelated to creation of SSM.

35.36

There is speculation about future M&A activity in the Eurozone banking sector.79 One industry commentator stated that ‘those calling for cross-border bank consolidation are getting things the wrong way around. It is not cross-border M&A that will create an integrated single market, but an integrated single market that will drive cross-border M&A. And that does not look likely any time soon’.80

35.37

Moreover, the decrease in banking M&A in the Eurozone has also been attributed to the extra costs of higher regulatory capital requirements for merged banks that have grown in size and thus constitute significantly important institutions that require additional capital and liquidity. Indeed, any significant bank considering a merger with another significant institution should weigh the cost of moving up the scale of systemic importance, which brings with it extra capital and liquidity requirements.81

35.38

77 ECB, ‘Financial integration in Europe 2017’ (n 20). 78 Martin Arnold, Patrick Jenkins, and Laura Noonan, ‘Banking M&A: the quest to create a European champion’ Financial Times (London, 11 July 2018) (hereafter Arnold, Jenkins, and Noonan, ‘Banking M&A’). 79 Ibid. 80 Vicente Vázquez Bouza, ‘Cross-border Bank M&A? Europe Is Not Ready’ (Oliver Wyman Insights, 8 November 2017) accessed 10 February 2020. 81 Arnold, Jenkins, and Noonan, ‘Banking M&A’ (n 77).

1064 FINANCIAL MARKET INTEGRATION AND EMU

E. Market structures 35.39

Generally speaking, the above discussion suggests that the banking market in the Eurozone is ‘fragmented’, which can be inter alia seen in the fact that ‘there is one bank for about every 50,000 citizens in the Eurozone’.82 ‘Since 2008, the number of banks in the euro area has declined by about 20 per cent, to around 5,000. And the number of bank employees has fallen by about 300,000, to 1.9 million. Total assets of the euro area banking sector peaked in 2012 at about 340 per cent of GDP. Since then, they have fallen back to about 280 per cent of GDP.’83 The reduction in bank assets to GDP can also be attributed to the low interest rate environment in which bank customers have increasingly been buying more bank-issued financial products, in which the bank distributes the clients’ funds off balance sheet (rather than lending the clients’ funds on balance sheet to a borrower).

35.40

The SSM has also resulted in an increase of cross-border branches instead of subsidiaries. In general, it is not clear why this has occurred, as it is too early to attribute the effect to any single cause. Wymeersch, however, predicted that conversions of cross-border owned subsidiaries into branches would grow in number, not necessarily because of the Banking Union, but because of ‘the massive deleveraging’ of banks or their ‘withdrawal from certain regional markets or from certain activities considered to represent less core activities, where the more stringent capital requirements, and later the structural measures, may have more far-reaching consequences’.84 Although the SSM Regulation states that it is neutral as to the choice of a bank’s form (branch or subsidiary), Wymeersch observes that many banks may be reluctant to change their form from subsidiary into branch ‘in order to preserve their local brand, to preserve the relations with their employees, for tax purposes’ or other strategic reasons.85 But the European Commission has estimated that the impact of state bailouts of the banking sector and the desire of stronger home country scrutiny of cross-border operations has influenced banks in opting for more cross-border branches as opposed to subsidiaries.86

35.41

Other concerns are that there are not enough pan-European banks. If one defines pan- European banks as consisting of branches or subsidiaries in at least three EU states, there are only two pan-European banks in Europe: BNP Paribas, (France, Italy, and Benelux) and UniCredit, (Italy, Germany, and Austria). According to this view, regulation should support the creation of more pan-European banks to support the European economy.87

35.42

ECB officials believe that creating a few pan-European champions would reduce the reliance on US banks providing credit and trading support operations in Europe. Danièle

82 Ibid. 83 Danièle Nouy, ‘Too much of a good thing? The need for consolidation in the European banking sector’ (VIII Financial Forum, Madrid, 27 September 2017) accessed 10 February 2020. 84 Wymeersch, ‘The Single Supervisory Mechanism’ (n 2) 111–12. 85 Ibid. 86 COM (2017) 591 final, 5. 87 Arnold, Jenkins, and Noonan, ‘Banking M&A’ (n 77). See also Patrick Jenkins, Rachel Sanderson, and David Keohane, ‘UniCredit seeks merger with SocGen’ Financial Times (London, 3 June 2018).

STRENGTHENING BANKING INTEGRATION 1065 Nouy, former chair of the ECB’s supervisory board, stated that: ‘In my opinion, cross-border mergers within the euro area are the way forward.’ Moreover, ‘[w]‌hile the ECB would not reduce capital requirements for merged entities, officials indicate it could use its powers to help in other ways’. This could include, for example, measures allowing banks to offset more of their biggest exposures to individual clients across borders or increasing their flexibility to move capital and liquidity between countries.88 More generally, there appears to be growing optimism in the ECB’s role as a tough but fair regulator that has had a positive effect on bank performance. For example, the ECB has taken control of the non-performing loan problem that has bedevilled Eurozone banks whose assets (unlike US banks) are dominated by on-balance sheet lending. At the height of the Eurozone crisis in 2012, non-performing loans (NPLs) at Eurozone banks exceeded 7 per cent of the value of total on balance sheet loans. Since 2015, NPLs have begun to decline, most recently with NPL levels falling to 3.4 per cent of on-balance lending in 2018.

35.43

Despite progress on many fronts, the average European bank had a return on equity (ROE) of less than 6 per cent in 2017, much less than the average of nearly 10 per cent ROE for US banks. Also, Eurozone bank ROE remains less than the cost of capital. This is an important concern because it limits the ability of banks to raise capital when necessary, especially during market downturns. The ROE also limits the ability of European banks to compete effectively on global stage with US and Japanese banks.

35.44

The SSM framework must also contend with persistent weak bank performance in some European countries, such as Italy, Portugal, Cyprus, and Greece. In Italy, the fourth largest European national economy, the combination of a populist Eurosceptic government and a persistently weak banking system has revised the so-called ‘doom loop’ where banking sector fragility spreads to sovereign debt finances and can spiral downward into an economic crisis. Banks are increasing their sovereign debt exposure to their home country governments without having to hold regulatory capital against these assets. Bank exposures to sovereign debt are growing and the banks’ ability to raise capital sustainably is diminishing.89

35.45

Since becoming operational in November 2014, the ECB has been credited with helping the European banking system address some of its most pressing challenges. The ECB’s Single Supervisory Mechanism (along with monetary policy) has stabilized the euro area banking sector in the face of the Eurozone sovereign debt crisis and oversaw implementation of post-crisis regulatory reforms, such as Basel III capital and liquidity requirements and bank governance standards. Nevertheless, as discussed below, despite having an overall positive effect on banking sector performance, the SSM has serious challenges in stabilizing the Eurozone banking sector and overseeing its return to a sustainable financial position.

35.46

88 Arnold, Jenkins, and Noonan, ‘Banking M&A’ (n 77). 89 Unicredit in 2018 issued five year bonds that required an 8 per cent coupon rate. See Robert Smith, ‘UniCredit chief defends steep price for new $3bn bond’ Financial Times (London, 28 November 2018).

1066 FINANCIAL MARKET INTEGRATION AND EMU

V. Strengthening Capital Market Integration and Capital Markets Union 35.47

An important objective of the Capital Markets Union is to strengthen and complement the European Monetary and Banking Union’s institutional framework. EU legislation to promote a Capital Markets Union (CMU) across the twenty-seven EU Member States attempts to address structural challenges and barriers to the efficient financing of companies in EU capital markets. Some of the main challenges include, among others, the heavy reliance of EU-based firms on bank finance, significantly different financing terms for firms across EU states, inadequate access to capital markets for many small and medium-sized firms, segmented national markets for shareholders and buyers of corporate debt, and differing rules and market practices between EU states for products like securitized instruments and private placements.90

35.48

The CMU’s objectives include establishing a genuine single capital market in the EU where investors are able to invest their funds without hindrance across borders, and businesses can raise capital from a diverse range of sources, irrespective of their location.91 It aims to develop a more diversified financial system complementing bank financing with deeper and more developed capital markets that facilitate the cross-border flow of capital to its most productive use.

35.49

The CMU, in contrast, addresses the issue of how to create a single market for the provision of capital—both credit and equity—and financial services by non-bank intermediaries with the main objective of rejuvenating European economic growth, which has stalled in the aftermath of the financial crisis. Indeed, the Commission’s Green Paper92 attributed inadequate economic growth in Europe to a financial system that overly relies on bank intermediation for the external funding of non-financial and medium-sized firms. In comparison to the United States, which has shown signs of economic recovery post-crisis, Europe has experienced extremely subdued growth and outright contraction in many countries in the Eurozone. The relative economic success of the US has been attributed to a better balance in firm funding between banks and the capital markets, whilst the European Union’s overreliance on the universal banking model for most of its non-financial firm funding has hindered its post-crisis recovery. The Commission’s initiative therefore to reduce barriers between savers and investors in the provision of non-bank financial services and capital aims to enhance the future sustainability of the European economy by facilitating the creation of more diverse sources of business finance.

35.50

The EU legislation to create a capital markets union aims to reduce cross-border barriers to capital and trade in financial services in order to increase financial integration in the EU internal market. By removing institutional and regulatory barriers so that savers, investors and borrowers can allocate capital to its most productive use, European policy-makers hope to revitalize the EU economy and to enhance economic growth and global competitiveness. 90 Commission, ‘Completing the Capital Markets Union by 2019 –time to accelerate delivery’ COM (2018) 114 final,  5–6. 91 Commission, ‘Action Plan on Building Capital Markets Union (Communication)’ COM (2015) 468 final providing short overview of CMU initiatives. 92 Commission, ‘Green Paper-Building a Capital Market Union’ COM (2015) 63 final.

STRENGTHENING CMI AND CMU 1067 This should lead to a rise in risk-adjusted returns for investors, if an adequate level of competition is maintained. The CMU proposal is designed primarily to achieve two overriding objectives: First ensure alternative sources of credit intermediation for European non- financial firms and less reliance on the provision of credit by universal banks, and second greater efficiency in the provision of capital and a diversity of financial products for investors in capital markets. The Commission’s philosophy, rationale and objectives for CMU have been largely endorsed across Member States and constitute an important step in the development of robust and resilient EU financial markets that aim to increase financial integration in EU capital markets. Nevertheless, important gaps in the Commission’s proposal have yet to be addressed, especially regarding the way in which the expansion of capital markets and the Commission’s express goal of generating more capital and funding from the non-bank financial sector for the broader economy can be achieved without undermining financial regulatory—and in particular macro-prudential regulatory—objectives. Indeed, it is suggested that although the Commission’s goal of a more balanced provision of funding between the banking and non-bank financial sector is important, and should be supported, inadequate attention has been given to the effects of such a change in the structure of EU financial markets has on regulatory objectives—and in particular on the stability of the financial system.

35.51

The CMU aims for non-banks to take on a growing and significant role through bank disintermediation in providing credit to the European economy. That is, non-bank financial intermediaries should play a greater role—as they already do in the US and the UK—in aggregating savings and then allocating funds to firms to engage in productive economic activity. This type of bank disintermediation—involving non-bank financial firms ‘borrowing short and lending long’—is also known as ‘shadow banking’, a loosely defined term that refers to the process of disintermediation. The size of the shadow-banking sector—which includes securitization, money-market mutual funds, hedge funds, securities lending, asset-backed commercial paper (‘ABCP’) conduits, structured investment vehicles (‘SIVs’), and repo financing—is estimated at nearly $70 trillion worldwide.93 Shadow banking raises an important new source of systemic risk, because it involves the provision of high levels of leverage or debt through informal financial channels outside the scope of prudential regulation, such as bank capital and liquidity requirements. Indeed, the failure of financial regulation prior to the crisis to adequately address the build-up of leverage and liquidity risks across the financial system and, in particular, to detect excessive leverage and risk-taking in the shadow banking sector contributed substantially to the severity and duration of the crisis and its ongoing effect on the European economy.94

35.52

93 Philipp Halstrick, ‘Tighter Bank Rules Give Fillip to Shadow Banks’ (Reuters, 20 December 2011) accessed 10 February. See also Financial Stability Board, ‘Global Shadow Banking Monitoring Report 2012’ (18 November 2012) accessed 10 February 2020 (estimating shadow banking’s worldwide assets as $67 trillion in 2011). 94 Indeed, Anabtawi and Schwarcz observed that shadow banking ‘is widely believed to have contributed to the buildup of risks in the financial system in the period leading up to’ the global financial crisis. See Iman Anabtawi and Steven L Schwarcz, ‘Regulating Ex Post: How Law Can Address the Inevitability of Financial Failure’ (2013) 92 Texas Law Review 75. See also Ben S Bernanke, ‘Some Reflections on the Crisis and the Policy Response’ (Russell Sage Foundation and The Century Foundation Conference on Rethinking Finance, New York, 13 April 2012) accessed 10 February 2020, arguing that mortgage lending through shadow-banking firms encouraged risky lending practices that contributed to the financial crisis.

1068 FINANCIAL MARKET INTEGRATION AND EMU 35.53

The CMU addresses some of the issues related to the financial stability risks associated with the increased provision of credit to non-financial firms. It provides however for only limited regulatory controls to address the huge gap in the Banking Union regime that allows credit intermediation to be provided by non-bank financial firms outside the coverage of prudential supervision. It is argued that the Commission has further work to do to ensure that the CMU addresses the macro-prudential financial risks posed by bank disintermediation and the related systemic risks in the structured finance markets. It is this type of non-bank credit intermediation and related trading of credit instruments that the CMU is designed to promote throughout the EU internal market with a view to increasing alternative sources of credit and equity investment in European firms. In comparison with the US, Europe has less-developed wholesale capital markets; therefore, it is an important goal of CMU to create the conditions where non-financial firms can access adequate sources of alternative funding outside the traditional banking sector.

35.54

Notwithstanding the Commission’s emphasis on shadow banking for the EU economy, bank credit intermediation remains essential to the European financial system, supplying about three-quarters of all credit.95 With the continued growth of shadow banking, however, as envisioned by CMU, this will likely change. Although a vibrant, well-regulated shadow banking industry should be encouraged, it nonetheless should be subject to regulatory controls that meet macro-prudential objectives of controlling systemic risk across the financial system. Moreover, regulatory controls against systemic risk should be broad enough in scope to prevent excessively risky bank lending and trading from migrating from the traditional banking sector to the wholesale capital markets, where non-bank financial intermediation is increasingly providing more funding for the economy. Although the CMU proposal offers the potential for a more balanced and efficient provision of credit in EU capital markets, it nonetheless introduces certain regulatory risks that raise serious challenges for the EU policy makers plan to regulate the shadow banking sector, which, if not adequately addressed, could limit the effectiveness of the CMU project.

VI. Conclusion 35.55

Post-crisis, the EU banking market is undergoing some consolidation, as overcapacity in the EU banking system is corrected through a number of mergers and acquisitions, encouraged in some cases by regulators. However, banking margins remain under pressure and credit growth inhibited. Also, financial integration across the EU financial services sectors and, in particular, in the banking industry has become more fragmented. The Banking Union has attempted to reverse this phenomenon by creating a single supervisor across the nineteen Member States of the euro, which is open to other non-euro Member States to join.

35.56

Since becoming operational in 2014, the ECB’s Single Supervisory Mechanism has been credited with helping the European banking system to address some of its most pressing challenges. The SSM oversaw the implementation of Basel III through the Capital 95 European Systemic Risk Board, ‘Flagship Report on Macroprudential Policy in the Banking Sector’ (March 2014) accessed 10 February 2020.

Conclusion 1069 Requirements Directive IV, which resulted in significantly higher capital and liquidity buffers and enhanced oversight of bank risk management and corporate governance. Despite SSM reforms to Eurozone banking supervision, there is more room to improve regulation so that it can achieve macroprudential objectives. This potentially involves enhanced coordination between the SSM and ECB monetary policy. Although banking mergers and consolidation have increased significantly since the early 35.57 1990s, the Eurozone and EU cannot expect further integration of retail banking or the consolidation of wholesale banking without the completion of Banking Union with a common deposit insurance fund and an effective resolution framework. However, the SSM’s regulation of credit institutions does not cover the growing number of non-bank financial intermediaries and structured entities that are not defined as ‘credit institutions’ under EU law. These non-bank financial intermediaries or ‘shadow banks’ are playing an increasingly important role in the maturity transformation process—borrowing short and lending long— outside the formal banking sector in the European economy and without being subject to prudential regulatory controls. This creates a tension with the objectives of the CMU that is designed to promote the increased provision of non-bank sources of credit that would support the internal market and European economy.

36

FINANCIAL MARKET REGULATION IN THE INTERNAL MARKET Kern Alexander and Vivienne Madders

I. Introduction and Background 36.1 II. Free Movement and EU Supervisory Centralization 36.7 III. Reducing Risk in the Banking Sector: The Capital Requirements Directive IV—A Level 1 Perspective 36.11 A. Capital Requirements Regulation (CRR) B. Capital Requirements Directive (CRD) C. CRD IV and maximum harmonization D. CRD V Reform Package

IV. European Banking Authority: Regulatory and Technical Standards V. EU Legislation Regulating the Sale of Retail Investment Products

36.15 36.18 36.24 36.31

36.34 36.40

A. Rationale and theory B. EU financial legislation

VI. Markets in Financial Instruments Directive II/Markets in Financial Instruments Regulation (MiFIR) A. B. C. D.

Conduct of business rules Product regulation Unbundling and firm organization European Securities and Markets Authority (ESMA) E. Selling processes and implementation F. Packaged Retail Investment Insurance Products (PRIIPS)

36.42 36.51

36.62 36.64 36.69 36.73 36.75 36.80 36.88

VII. Summing Up—EU Financial Services Legislation—Levels 1 and 2 36.94

I. Introduction and Background 36.1

The chapter considers some of the main post-crisis European Union (EU) financial legislation from the perspective of high-level principles (Level 1) that apply to credit institutions and certain investment firms under the Capital Requirements Directive IV (CRD IV), including prudential requirements to hold minimum capital and liquidity requirements and prudential governance standards. The chapter also analyzes the EU legislation that regulates investment funds and the sale of investment products and the distribution of financial products, particularly the Markets in Financial Instruments Directive and Regulation (MiFID II/ MiFIR), the Undertakings for Collective Investments in Transferrable Securities (UCITS), the Personal Retail Investment Products Regulation, and the Alternative Investment Funds Managers Directive (AIFMD).

36.2

In the European Union, the two tasks of financial regulation and supervision have, since the 1990s, been in principle distributed between central and national authorities as follows. The general rule was that, with some exceptions, important regulation is in the hands of the EU while supervision is almost completely the responsibility of national competent authorities. Kern Alexander and Vivienne Madders, 36 Financial Market Regulation in the Internal Market In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0044

Introduction and Background 1071 As discussed in Chapter 35, the Banking Union has changed this with respect to banking supervision in the Eurozone with the ECB (European Central Bank) gaining full competence as a bank supervisor. Nevertheless, the problems of coordination among decentralized regulators and supervisors 36.3 across all EU states are acute. The traditional principle governing bank supervisory competences was set forth in the Second Banking Directive of 19891 that established a ‘single- passport’, according to which a bank chartered in one EU country could operate in another based on the home country control principle for supervision, so that the home country supervisor would also oversee the foreign EU/EEA branches. This resulted in inadequate coordination between home and host country supervisors in which the home country authority of an EU/EEA country with large international bank exposures (eg Iceland) had little incentive to consider the externalities that lax domestic supervision would impose on depositors and other bank customers in other EEA countries. Similarly, a host country supervisor would not consider the consequences (systemic or not) for domestic residents of a failure, or restructuring, of a local branch or subsidiary, but only the consequences in terms of systemic stability in the host jurisdiction. Another unfortunate result post-crisis of the home country control principle is that national competent authorities now often limit or even forbid banking subsidiaries operating under their supervisory competence from transferring liquidity to the group parent in another EU state. For the rest of the EU, however, the suitability of the centralization of regulatory powers at the EU level depended crucially on how decisions were made at the level of EU institutions. Until the early years of the last decade, the legislative process in matters of financial regulation was extremely complicated and therefore also very slow. De facto and to a certain extent also de jure, changes in financial regulation had to be based on a consensus among all major EU Member States. In particular, the UK government used to be opposed to any new regulation that might impose undue restrictions on UK-based financial institutions, and Germany and some other continental European countries were opposed to a far-reaching policy of deregulation that the EU Commission traditionally favoured.

36.4

This situation changed to some extent under the EU Financial Services Action Plan of 1999 (EU FSAP) along with the Lamfalussy Committee Report of 2000 that recognized that to promote further integration of the EU internal market for financial services and capital required a more harmonized legal and regulatory regime to govern securities markets.2 The European Commission adopted Decisions creating the Lamfalussy four-level process and the three Level 3 Committees to promote the adoption of more harmonized financial regulation across securities, banking and insurance and occupational pension funds.3 The four levels consisted of: Level 1 legislation containing high level principles adopted through Directives

36.5

1 Article 1(6) Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/EEC [1989] OJ L386/1. 2 See Alexandre Lamfalussy and others, ‘Final Report of the Committee of Wise Men on the Regulation of the European Securities Markets’ (Brussels, 15 February 2001). 3 Commission Decision 2001/527/EC of 6 June 2001 establishing the Committee of European Securities Regulators [2001] OJ L191/43; Commission Decision 2004/5/EC of 5 November 2003 establishing the Committee of European Banking Supervisors [2004] OJ L3/28; and Commission Decision 2004/6/EC of 5 November 2003 establishing the Committee of European Insurance and Occupational Pensions Supervisors [2004] OJ L3/30.

1072 FINANCIAL MARKET REGULATION: INTERNAL MARKET and Regulations. Level 2 involved EU finance ministers proposing legislative measures at the Member State level to implement the high-level principles contained in EU secondary legislation. Level 3 involved Member State regulators making proposals to Level 2 Finance Ministries regarding adoption of implementing measures and then consulting with other Member State regulators about agreeing to harmonized supervisory approaches for implementation. And Level 4 concerned Member State approaches to enforcement and European Commission oversight of Member State implementation, including bringing infringement proceedings. 36.6

Although the Lamfalussy process was a regime for financial rule-making that allowed for faster adoption of legislation by slightly relaxing the consensus requirement, decision- making power was still highly decentralized so that prompt and far-reaching decisions were hard to reach in a short time. These institutional weaknesses in EU financial decision- making and inadequate Member State supervisory coordination raised important questions about the effectiveness of the Lamfalussy framework in performing effective supervision of European financial markets.4 Nevertheless, prior to the crisis, the political will to support increased centralization of supervisory authority at the EU level did not exist. The drawback of not having any transnational EU-wide supervisory authority with true decision powers was deeply felt when large multi-country banks got into trouble in the financial crisis. Well-intentioned agreements between national supervisors, so called Memoranda of Understanding, and regular meetings of national supervisors in so called colleges of supervisors proved to be insufficient instruments of coordination in the crisis. If this state of affairs—a severely handicapped European regulator and non-existent European supervisory institutions—had remained as it was before, it would have prevented the EU from responding to the crisis in any substantial way.

II. Free Movement and EU Supervisory Centralization 36.7

After the 2007–08 crisis, EU financial regulation changed in substance along with greater consolidation of financial standard setting at EU agency level. Recognizing these institutional weaknesses and legal gaps, the EU High Level Group on Financial Supervision, chaired by former IMF Managing Director and Banque de France President Jacques De Larosière, submitted its Report on 25 February 20095 that made recommendations proposing that the EU adopt legislation to create a European System of Financial Supervision (ESFS). Reflecting the views in the De Larosière Report, the Commission proposed legislation that the ESFS consist of a European Banking Authority (EBA), a European Securities and Markets Authority (ESMA), and a European Insurance and Occupational Pension Authority (EIOPA).6 The three ESAs would, with support from a European Systemic Risk 4 See IMF, ‘Euro Area Policies: 2007 Article IV Consultation’ (IMF Country Report No 07/260, 2007) 27. 5 Commission, ‘Report of the High-level Expert Group on financial supervision in the EU’ (Chaired by Jacques de Larosière, Brussels, 25 February 2009) paras 194–214 (hereafter de Larosière Report) accessed 10 February  2020. 6 Articles 1–2, 10, and 14–16 European Parliament and Council Regulation (EU) 1093/2010 of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision 716/ 2009/EC and repealing Commission Decision 2009/78/EC [2010] OJ L331/12; European Parliament and Council Regulation (EU) 1094/2010 of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/79/EC [2010] OJ L331/48; European Parliament and Council Regulation (EU) 1095/2010 of 24

FREE MOVEMENT/EU SUPERVISORY CENTRALIZATION 1073 Board (ESRB),7 promote more effective micro-prudential and macro-prudential regulation and supervision of European financial markets and a more efficient functioning of the EU internal market.8 The ESFS entered into force on 1 January 2011 and applies to all EU Member States re- 36.8 quiring their participation in, and coordination with other EU states, the three European Supervisory Authorities in adopting regulatory and technical implementing standards.9 The ESAs’ responsibilities include developing single rulebooks consisting of regulatory and technical implementing standards and guidelines for Member States to apply in their respective financial sectors. The creation of the ‘single rulebook’ is designed to support a more unified financial regulatory policy on an EU-wide basis, with the aim of enhancing financial stability and protecting depositors and investors. In banking, the single rulebook refers to the EU directives, regulations, technical standards and guidance that apply to the twenty- eight EU states’ domestic banking regulatory regimes.10 Of particular significance, the European Banking Authority’s specific tasks and responsibilities are set forth in Article 8 EBA Regulation that include contributing to the ‘establishment of high quality common regulatory and supervisory standards and practices’.11 The EBA has competence to contribute to the ‘consistent application of legally binding EU acts’,12 as well as to monitor and assess market developments in the areas of its competence, and to coordinate and cooperate with the ESRB and other the ESAs in conducting EU-wide assessments of financial institutions’ resilience to adverse market conditions (ie stress tests).13 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/77/EC [2010] OJ L331/84. 7 European Parliament and Council Regulation (EU) 1092/2010 of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board [2010] OJ L331/1. In connection to the functioning of the ESRB, specific tasks were conferred on the ECB concerning macroprudential oversight of the financial system. See Council Regulation (EU) 1096/2010 conferring specific tasks upon the ECB concerning the functioning of the European Systemic Risk Board [2010] OJ L331/162. See also the discussion of Eilís Ferran and Kern Alexander, ‘Can Soft Law Bodies be Effective? Soft systemic risk oversight bodies and the special case of the European Systemic Risk Board’ (2010) 6 European Law Review 751. 8 See Jean-Victor Louis, ‘The implementation of the Larosière Report: a progress report’ in Mario Giovanoli and Diego Devos (eds), International Monetary and Financial Law: The Global Crisis (OUP 2010) 154. 9 Kern Alexander, ‘Reforming European Financial Supervision: adapting EU institutions to market structures’ (2011) 12 Journal of the Academy of European Law 229, 232–33. 10 The EU single rulebook in banking includes European Parliament and Council Directive 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms [2013] OJ L176/338 (hereafter Capital Requirements Directive IV/CRD IV); European Parliament and Council Regulation (EU) 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 [2013] OJ L176/1 (hereafter Capital Requirements Regulation/CRR); European Parliament and Council Directive 2014/59/EU of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/ 30/EU and 2013/36/EU, and Regulations (EU) 1093/2010 and (EU) 648/2012, of the European Parliament and of the Council [2014] OJ L173/190 (hereafter BRRD); European Parliament and Council Directive 2014/49/EU of 16 April 2014 on deposit guarantee schemes [2014] OJ L173/149. The CRD IV and CRR implement the Basel Capital Accord (now Basel III and IV) into EU law, while the BRRD provides a minimum harmonisation framework requiring Member States to adopt recovery and resolution laws for banks and certain investment firms. 11 Article 8(1) Regulation (EU) 1093/2010 providing an exhaustive list (without prejudice to Article 9) of the tasks conferred upon the EBA. These regulatory and supervisory standards and practices are further specified in Articles 10–16 and 34. 12 Articles 10–21, 29, and 34 Regulation (EU) 1093/2010. 13 See Article 8(1) Regulation (EU) 1093/2010, containing an exhaustive list of the tasks conferred upon the EBA, while paragraph 2 features an exhaustive list of all regulatory and other powers conferred on it in order to fulfil its tasks.

36.9

1074 FINANCIAL MARKET REGULATION: INTERNAL MARKET 36.10

Despite the goal of a more unified banking market based on harmonized prudential supervisory standards, it has been argued that European banking regulation and supervision is far from integrated and harmonized.14 Some of the barriers to a more integrated and harmonized supervisory framework include cultural differences, such as language and local customs, but also civil and commercial law differences. For instance, the financial industry operates largely on the basis of legal contracts that are essentially governed by Member State law. Financial products such as loans, deposits or mortgage-backed securities are contracts, which terms and conditions depend on local legislation and judicial decisions. Moreover, differences in corporate and personal insolvency laws, and collateral enforcement regimes, are considered a primary barrier to the creation of pan-European bank business models and financial products.15 In addition, the promotion of more harmonized supervisory practices by the EU Supervisory Authorities has been constrained by the unfinished business of creating an EU-wide Capital Market Union (CMU) (see Chapter 35).

III. Reducing Risk in the Banking Sector: The Capital Requirements Directive IV—A Level 1 Perspective 36.11

The EU took regulatory action in response to the crisis as early as October 2008 by beginning to implement the international regulatory reforms agreed by the G-20. Following the G-20 Heads of State Summit in September 2009, the EU began to adopt a number of directives and regulations to implement the international principles agreed by the G-20. This involved a number of new capital related regulations adopted in the form of an amendment of Capital Requirements Directive that became known as the CRD III.16 These new rules are a clear reflection of the crisis experience. Among other things, the new rules tighten capital requirements for securitizations and for the trading book risks and impose longer deferral periods for the bonuses that bankers can receive.

36.12

The EU also adopted a Regulation in 2009 regulating credit rating agencies.17 The regulation subjects EU-based CRAs to a mandatory licence and strict conduct of business rules, whereas, unlike the US, no rules had been in place prior to the crisis. However, unlike the US, which mandated the removal of all references to credit ratings in regulatory acts (under the Dodd-Frank Act),18 the EU has not done so yet, and ratings continue to be used for determining the risk weights in the standardized approach of the Capital Requirements Directives (CRD, implementing Basel II and III) and in the ECB’s open market operations providing short-term credit and liquidity to Eurozone banks.19

14 Vicente Vázquez Bouza, ‘Cross-border Bank M&A? Europe Is Not Ready’ (Oliver Wyman Insights, 8 November 2017) accessed 10 February 2020. 15 Ibid. 16 European Parliament and Council Directive 2010/76/EU of 24 November 2010 amending Directives 2006/ 48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies Text with EEA relevance [2010] OJ L329/3 (hereafter CRD III). 17 See European Parliament and Council Regulation (EC) 1060/2009 of 16 September 2009 on credit rating agencies [2009] OJ L302/1. 18 See Dodd-Frank Act §939A, 15 U.S.C. §78o-7 (2012). 19 See Francesco de Pascalis, Credit ratings and Market Over-Reliance (Brill Nijhof 2017) 86–88. See also Kern Alexander, ‘The Risk of Ratings in Bank Capital Regulation’ (2014) 25 European Business Law Review 295, 302–03.

REDUCING RISK IN THE BANKING SECTOR 1075 Probably the most important piece of regulatory change in the EU after the financial crisis was the adoption of the Capital Requirements Directive (CRD IV), which implemented the Basel Capital Accord amendments (known as Basel III) into EU law. The CRD IV consists of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). Most provisions of the CRD IV took effect in Europe in January 2013 and apply to a wide range of banking activities, including bank capital and liquidity management, corporate governance and risk management. The CRR of the CRD IV containing the capital and liquidity rules and provisions that became applicable in 2013, which addresses the calculation of regulatory capital and liquidity requirements for EU-based credit institutions and certain investment firms. As a Regulation, it is directly applicable to EU Member States’ regulatory law and administrative rulebooks. In contrast, the Capital Requirements Directive, as a Directive, is not directly applicable in Member States and must be implemented through the adoption of domestic legislation. As a Directive, the Member State is able to adapt the provisions of the Directive in a way that respects national legal requirements and practices, whereas the Regulation affords much less flexibility and must supersede through direct application existing provisions of Member State laws.

36.13

Regarding the regulation of bank governance, Article 162 CRD requires the transposition into domestic law of the CRD’s provisions dealing with ‘sound and prudent management’ of credit institutions and certain investment firms and administrative sanctions by 31 December 2013.20 Consequently, as a matter of EU law, the relevant provisions of the CRD IV applying to the ‘sound and prudent management’ of credit institutions and administrative sanctions were required to have been implemented by Member States by 31 December 2013 and should have been applicable to all regulatory enforcement actions relating to bank governance beginning in 2014. The European Commission considers the implementation of CRD IV to be an essential element in rebuilding the EU financial regulatory regime in the aftermath of the global financial crisis.21

36.14

A. Capital Requirements Regulation (CRR) The use of a Regulation to implement capital and liquidity standards is a significant change from past EU bank legislation practice, which relied exclusively on directives that afforded Member States discretion in implementing the directive into Member State law and regulation. This past practice led to diverse practices in prudential regulation across Member States that allowed states, in some situations, to engage in regulatory arbitrage by imposing less stringent capital standards on banks in certain areas of risk measurement.22 This allowed some banks to have a competitive advantage over other EEA banks that were supervised more strictly in other jurisdictions. 20 In contrast, the Capital Requirements Regulation (CRR) requirements concerning capital and liquidity requirements for systemically important financial institutions (Article 131) and returns on initial capital for credit institutions are not required to be implemented until 1 January 2016. 21 Commission, ‘Note Presenting a Stock-Take of Financial Reforms’ (Brussels, 29 November 2017) 1–3 accessed 10 February 2020. 22 For example, the UK and Italy did not require banks to hold capital against risk-based assets they originated if the bank had shifted the asset off its balance sheet through securitization or some other type of risk transfer.

36.15

1076 FINANCIAL MARKET REGULATION: INTERNAL MARKET 36.16

The CRR increases the level of core Tier 1 regulatory capital to 7 per cent (including a capital conservation buffer) from 2 per cent under the pre-crisis CRD 2006.23 Also, core Tier 1 capital has a tighter definition consisting of only ordinary common shares and equivalent loss-absorbent financial instruments, an additional 2.5 per cent countercyclical capital ratio (yet to be determined for implementation) and a higher capital charge for global systemically important financial institutions (SIFIs) of between 1 per cent and 2.5 per cent.24 Basel III and CRD IV also set forth liquidity requirements in which the main requirements consist of a liquidity coverage ratio (LCR) and a net stable funding ratio (NSFR). The LCR would require the banks to hold a certain ratio of high-quality liquid assets (ie highly-rated government and corporate bonds) that could be sold in a stress scenario to cover a loss of funding for up to one year.25 The NSF ratio would require banks to maintain a positive ratio of incoming funds to out-going funds over a period of time approved by the relevant supervisor.26 Another important requirement with respect to liquidity is that Basel III and the CRD IV would require banks to limit their overall leverage to 3 per cent or 33.5 to one (total leverage/total common equity). These requirements are generally expected to limit the ability of banks to have excessive reliance on short-term funding that could be withdrawn quickly in a severe market downturn and excessive debt funding.27

36.17

The issue of how to implement the capital and liquidity requirements had created political and diplomat concerns in European capitals, especially in London where the UK Parliament was critical of the maximum harmonization approach for implementing the single rulebook that tightly constrained the discretion of Member States to require stricter capital and liquidity requirements than those set forth in the CRR. Many large cross-border banks generally favour the ‘single rulebook’ approach for determining capital and liquidity; however, they have criticized the stricter capital requirements under the CRR as limiting their ability to lend to small and medium size businesses in the EU markets. This could potentially put the EU at a competitive disadvantage if other jurisdictions, such as the US, followed a more relaxed approach to Basel III implementation.28

B. Capital Requirements Directive (CRD) 36.18

The Capital Requirements Directive addresses mainly the Basel III pillar II standards of corporate governance, counter-cyclical capital requirements, and risk management, while also containing pillar three market discipline disclosure requirements for credit institutions so that investors have more meaningful information about their solvency and liquidity. Most of the CRD IV requirements that relate to bank corporate governance standards and risk 23 See Article 92(1)(a) CRR and Article 129(1) CRD IV. 24 See Article 131(4)–(9) CRD IV. 25 See Article 412 CRR. 26 See Articles 413 and 510 CRR. 27 See Article 87 CRD. The detailed rules on leverage calculation and reporting can be found in Articles 429 and 430 CRR. 28 The European Banking Federation has also expressed its ‘concern over the impact of the new requirements’ and has raised strong concerns regarding the liquidity requirements. See European Banking Federation, ‘European banks vigilant on unintended consequences from the proposals for CRD IV’ (Press Release EBF ref D1329A-2011, Brussels, 20 July 2011) accessed 10 February 2020.

REDUCING RISK IN THE BANKING SECTOR 1077 management practices are found in the CRD. The use of a Directive affords much more discretion to Member States to devise rules governing bank corporate governance and risk management from within their existing domestic legal and regulatory regimes. In that regard, the CRD requirements regarding bank corporate governance and risk management build on and enhance existing requirements that were established under the previous Capital Requirements Directives I, II, and III.29 Under the CRD, bank supervisors have wide discretion to address the particular risks that individual banks face and pose to the domestic banking system. As such, bank supervisors are not subject to a prescriptive framework of rules (although rules supplement the exercise of supervisory discretion). Supervisors may adopt stricter requirements with some banks, as opposed to others, where they decide that the institution has not devised a risk management model or implemented suitable corporate governance practices and strategies that address the particular risks that the bank faces and poses to the financial system.30

36.19

Under CRD IV, Member State supervisory authorities have the authority to take all necessary measures to ensure the prudent and sound management of banks and certain investment firms, and they may subject these institutions to remedial, business and recovery and resolution plans whose content must be approved by the supervisor. Under CRD IV, the bank supervisor may also regulate and approve the risk management practices and strategies of banks under its supervision and may vet and approve the appointment of bank senior managers and board members during normal periods of bank operations as well as when the bank is subject to remedial orders or plans and/or recovery and resolution plans.

36.20

The CRD does not simply replicate Basel III into EU law. The CRD is designed to take into account certain requirements of EU law and the particular institutional and legal frameworks in Member State jurisdictions. For instance, although the Basel Accord was originally intended only to apply to internationally-active banks, EU law has always applied it to all banks and investment firms, because its application to only internationally active banks would have created competitive distortions and the opportunity for arbitrage in the internal market.

36.21

The CRD addresses the level playing field concerns within the EU internal market by making minor adjustments to Basel III in four areas when transposing it into EU law. First, the CRD IV Directive strengthens corporate governance arrangements and processes and introduces new rules that aim to increase the board of director’s oversight of risk management, strengthening the risk management function within the bank. Second, Member State supervisors are required to impose administrative sanctions on banks and individuals if the CRD or rules adopted by the European Banking Authority to implement the CRD are breached. Fines and penalties must prove to be effective deterrents to violations of the CRD.

36.22

29 See European Parliament and Council Directive 2006/48/EC of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast) [2006] OJ L177/1. See also European Parliament and Council Directive 2006/49/EC of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast) [2006] OJ L177/201 (hereafter together referred as CRD I); Commission Directive 2009/83/EC of 27 July 2009 amending certain Annexes to Directive 2006/48/EC of the European Parliament and of the Council as regards technical provisions concerning risk management [2009] OJ L196/14 (hereafter CRD II). 30 Kern Alexander, ‘The EU Single Rulebook: Capital Requirements for Banks and the Maximum Harmonisation Principle’ in Luis Hinojosa and Jose Beneyto (eds), European Banking Union: The New Regime (Wolters Kluwer 2015) 24.

1078 FINANCIAL MARKET REGULATION: INTERNAL MARKET 36.23

Third, supervised firms are required to provide supervisors with an annual supervisory review program which must include greater and more systematic use of on-site supervisory examinations and forward-looking risk assessments. Fourth, the CRD aims to reduce reliance by credit institutions on external ratings. This would be achieved in part by requiring all banks’ investment decisions to be based not only on ratings but also on their own internal credit opinion. Also, banks with a material number of exposures in a given portfolio must develop their own internal ratings for that portfolio, rather than relying on external ratings of that portfolio to determine its capital requirements.

C. CRD IV and maximum harmonization 36.24

CRD IV poses major implementation challenges for EU/EEA States, especially with respect to maintaining a level playing field for the application of enhanced capital and liquidity standards. The European Banking Authority (EBA) has responsibility for ensuring that Member State supervisors follow a maximum harmonized approach to regulating bank risk management and measurement practices. This ‘maximum harmonization’ principle has been emphasized by EBA officials as being a linchpin of the new EU/EEA supervisory framework and has attracted criticism from some Member States, notably the United Kingdom.

36.25

Member States can apply stricter requirements in some circumstances if these can be justified by national circumstances. For example, higher capital requirements for real estate lending could be imposed to address the danger of a real estate bubble. Such requirements would also apply to institutions from other Member States that do business in that Member State. In addition, each Member State is responsible for adjusting the level of its countercyclical buffer to its economic situation and to protect the economy/banking sector from any other structural variables and from the exposure of the banking sector to any other risk factors related to financial stability. The countercyclical buffer would allow regulators to require banks to hold additional capital during good times, both to slow the growth of credit and to build reserves to absorb losses during bad times.

36.26

Under the CRD IV’s ‘Pillar 2’ system, Member States can also impose a range of measures, including additional capital requirements, on individual institutions or groups of institutions in order to address higher-than-normal risk. Therefore, theoretically, national supervisors should be able to impose higher requirements if they so wish. However, whether they are able to do so in practice may depend on the threshold for evidence required to justify any deviation from the baseline requirements set in the CRD, and whether it is practical to implement such requirements.

36.27

CRD IV applies to over 8,000 deposit-taking banks and investment banks with their headquarters or subsidiaries in an EU Member State.31 The impact of CRD IV on the costs of 31 See House of the Oireachtas, ‘EU Scrutiny Report No 1: CRD IV Legislation on Prudential Capital Banking Requirements under Basel III’ (31/FPER/006, Irish Joint Committee on Finance, Public Expenditure and Reform, 14 February 2012) 3 accessed 10 February 2020.

REDUCING RISK IN THE BANKING SECTOR 1079 the banks’ business has been significant. The Commission has estimated that for EU banks to implement CRD IV fully they will have to raise an additional 544 billion euro of CET1 capital by 2019.32 These amounts are equivalent to just less than 3 per cent of the industry’s risk-based assets.33 The EU’s maximum harmonization approach to implementing the single rulebook has created a level playing field for the CRR’s capital and liquidity requirements. Assuming consistent implementation across EU countries, regulatory arbitrage for other areas of banking activity, including wholesale and investment banking may be less likely to be a concern. However, it is not clear that Basel III will be consistently implemented outside the EU, where countries are free to follow different implementation approaches. Nevertheless, CRR and CRD constitute a maximum harmonization regime in which capital and liquidity requirements (CRR) and the more general governance and risk management standards (including counter-cyclical capital), along with administrative sanctions, are expected to be applied in a substantially similar way across EU Member States.

36.28

From a financial stability perspective, the CRD IV has a number of weaknesses and gaps that arise from the fact that CRR and CRD only apply to ‘credit institutions’ and certain investment firms. ‘Credit institution’ is defined as an ‘undertaking whose business is to receive deposits or other repayable funds from the public and to grant credit for its own account’. However, it is pointed out that the concept of ‘repayable funds from the public’ and the concepts of ‘credit’ and ‘deposits’ can be interpreted in different ways, meaning that financial institutions performing similar activities in different Member States may be classified as a ‘credit institution’ in one Member State, but not in another. This means that the CRD IV does not apply to an array of institutions not defined as credit institutions under diverse Member State laws. Similarly, a ‘credit institution’ subject to the ECB’s Single Supervisory Mechanism jurisdiction for carrying on activities governed by EU prudential banking law is not subject to ECB supervision for activities not subject to EU prudential banking law, such as brokering and dealing securities or the marketing and sale of retail financial products.34

36.29

Although the CRR and CRD attempt to mitigate systemic risk at the level of individual institutions, it does not cover a wide variety of financial institutions borrowing and lending in the so-called shadow banking markets, as competent authorities only have powers to supervise individual banks or ‘credit institutions’ as defined under EU law.35 Member State prudential authorities do not have competence to regulate non-bank financial intermediaries—such as shadow banks—nor do they have competence to regulate the off-balance sheet entities involved in the securitization and structured finance markets that are increasingly playing a greater role in channelling large volumes of credit and leverage to European businesses and consumers.36 In other words, the Member State authorities (including the ECB) have very

36.30

32 Ibid. 33 European Banking Authority, ‘Basel III Monitoring Exercise—Results based on Data as of 31 December 2017’ (4 October 2018) 13 accessed 10 February 2020. For a complete overview of data related to bank capitalization and CET1 ratios as of Q3 2018, see ECB, ‘Supervisory Banking Statistics: Third quarter 2018’ (January 2019) accessed 10 February 2020. 34 Article 4(1)(1) CRR. 35 See Commission, ‘Shadow Banking— Addressing New Sources of Risk in the Financial Sector (Communication)’ COM (2013) 614 final. 36 Article 5 SSM Regulation.

1080 FINANCIAL MARKET REGULATION: INTERNAL MARKET limited authority to address the macro-prudential systemic risks that can arise outside the formal banking sector where non-bank financial intermediation is growing.

D. CRD V Reform Package 36.31

The Commission’s 2017 proposed Regulation and Directive37 proposes to make the scope of prudential capital and liquidity regulation more proportionate to the risks that individual credit institutions and investment firms pose to the financial system, but it fails to address the financial stability risks posed by the shadow banking market. Rather, the CRD V package focuses on it reducing capital, liquidity and risk management requirements for investment and securities firms subject to the CRD IV (including investment firm groups without a credit institution) but which are not deemed under the legislation to be systemically significant. Instead, the CRD V would apply less strict requirements in these areas in order to make prudential regulation more proportionate to the risks that smaller and medium-sized investment firms pose to the market. It is also intended to lessen prudential regulatory requirements for non-bank investment firms which trade or invest in company and other securities and thereby support increased investment in firms as part of the European Union Capital Markets Union initiative.38

36.32

However, a few systemically important investment firms, defined as such under Article 131 CRD IV, would still be subject to the CRR/CRD IV framework, including the proposed CRD V amendments to the CRR/CRD IV because these firms incur and underwrite risks (both credit and market risks) on a largescale basis in the EU single market. The rationale for subjecting smaller and systemically less important institutions to exemptions from the CRD IV capital and liquidity requirements is based on the lower level of perceived systemic risk they pose to the financial system. This is designed to provide a ‘more streamlined regulatory toolkit’ to allow these firms to provide services more efficiently across different type of business models.39

36.33

CRD V package does not contain any additional regulatory requirements to control risk- taking in the shadow bank market, and it also fails to address the loophole in EU bank capital legislation that does not require EU-based banks to hold regulatory capital against their holdings of EU Member State sovereign bonds. This has distorted the EU and Eurozone sovereign debt market and has resulted in many large and systemically important financial institutions holding disproportionate and excessive exposures against Eurozone sovereign debt.

37 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on the prudential requirements of investment firms and amending Regulation (EU) No 575/2013 (EU) No 600/2014 and (EU) No 1093/2010’ COM (2017) 790 final, 3–4. 38 See Chapter 35. 39 Commission, ‘Review of the prudential framework for investment firms’ SWD (2017) 481 final, 16–19. See also Commission, ‘Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures’ COM (2016) 854 final, 4.

EBA: REGULATORY AND TECHNICAL STANDARDS 1081

IV. European Banking Authority: Regulatory and Technical Standards The European System of Financial Supervision consists of the European Banking Authority (EBA), European Securities and Market Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA).40 The three European Supervisory Authorities (ESAs) have responsibility for developing the legally binding regulatory and technical implementing standards, rules and non-binding guidelines and recommendations that, together with the Level 1 EU secondary legislation, constitute the EU single rulebook in financial services regulation. This section will discuss the role of the EBA in adopting regulatory and technical standards and non-binding guidance. The European Banking Authority was established in 2010 to promote enhanced harmonization of supervisory practices in transposing EU banking legislation across the Member States. As discussed in Chapter 35, EU banking regulation and supervision demonstrates the complexity of the EU federal system of laws and jurisdictions that contain layers of administrative rulemaking that overlap. The use of EU state agencies to implement Union law has long been a feature of the EU, but Union authorities and agencies have grown in influence and legal importance.41 The three European Supervisory Authorities (ESAs) have come to be involved on a day-to-day basis with executing supervision and in the case of the EBA coordinating with the Single Resolution Board make decisions on whether banks should be taken into resolution.

36.34

The EBA is designated under CRD IV to develop regulatory technical standards (RTS) to give more precision to Member State authorities regarding how they define regulatory capital and liquidity and risk governance standards, and to ensure that Member States adopt administrative regulations to implement the CRD IV based on the EU constitutional principles of proportionality, legality and due process.

36.35

The implications of Brexit are important in the context of how the EBA conducts itself after the UK exits the European Union. This is of particular importance regarding voting reforms in the EBA and the other ESAs. The Commission’s 2017 consultation on the ESAs and European Systemic Risk Board (ESRB) includes a response that post-Brexit voting shares in the EBA/ESAs should be calculated based on the size of a Member State’s financial sector.42 Also, Banking Union countries suggested the elimination of double-majority

36.36

40 See Commission, ‘Proposal for a Regulation of the European Parliament and of the Council Amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority); Regulation (EU) No 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority); Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority); Regulation (EU) No 345/2013 on European venture capital funds; Regulation (EU) No 346/2013 on European social entrepreneurship funds; Regulation (EU) No 600/2014 on markets in financial instruments; Regulation (EU) 2015/760 on European long-term investment funds; Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; and Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market’ COM (2017) 536 final, 13, 23. 41 See Miroslava Scholten, The Political Accountability of EU and US Independent Regulatory Agencies (Brill Nijhoff 2014); Edoardo Chiti, ‘European Agencies’ Rulemaking: Powers, Procedures and Assessment’ (2013) 19 European Law Journal 93; Madalina Busuioc, ‘Rule-Making by the European Financial Supervisory Authorities: Walking a Tight Rope’ (2012) 19 European Law Journal 111; Merijn Chamon, ‘EU agencies between Meroni and Romano or the devil and the deep blue sea’ (2011) 48 Common Market Law Review 1055. 42 Commission, ‘Feedback Statement on the public consultation on the operations of the European Supervisory Authorities having taken place from 21 March to 16 May 2017’ (Brussels, 20 June 2017) 16; see COM (2017) 536

1082 FINANCIAL MARKET REGULATION: INTERNAL MARKET voting, while Member States outside the Banking Union argue that double-voting should be maintained.43 The Commission proposed a draft Regulation44 in 2017 that the voting arrangements in the EBA should be amended to include voting status of the SSM and SRB on the EBA supervisory board in order to help bridge the current institutional divide between regulatory, supervisory and resolution functions. The Commission also proposed to keep the double majority voting system for measures and decisions adopted by the EBA Board of Supervisors,45 but that voting rules should be modified to ensure that votes would not have to be postponed if a quorum on the BoS is not met. The draft Regulation amendment therefore clarifies that a decision would need to be supported by a simple majority of NCAs from non-participating Member States present at the vote and of national competent authorities from participating Member States present at the vote.46 36.37

The EBA is also responsible for administering the EU-wide stress tests and the development of a complete methodology, whereas national competent authorities (including the ECB) are responsible for the quality of the data and operation of the stress test. Coordination between EBA and national supervisors (including the ECB) is required, but often lacking. Although it does not have direct control over the quality assurance process of the stress tests, the EBA is held accountable to EU policy-makers for the EU-wide stress tests. It is recommended therefore that close cooperation between the EBA and ECB is necessary to ensure the quality and accountability of the stress tests.47

36.38

Related to the EU-wide stress tests, the EBA is also responsible for designing technical standards and guidelines for the supervisory review and evaluation process (SREP) that assesses bank corporate and risk governance under the Capital Requirements Directive 2013. An important component of the SREP involves the EBA developing and refining forward-looking scenario stress tests that Member State competent authorities (including the ECB) are required to apply. The application of the SREP methodology may result in additional capital requirements, and the adjustment of bank business models and strategy. The Commission’s consultation, however, recommends that the EBA could further refine the SREP Guidelines and scenario testing for business models and strategies in order to promote enhanced supervisory convergence across EU states. Also, the EBA encourages final, 23–24; See Commission, ‘Communication from the Commission to the European Parliament, the Council, the European Central Bank, The European Economic and Social Committee and the Committee of the Regions reinforcing integrated supervision to strengthen Capital Markets Union and financial integration in a changing environment’ COM (2017) 542 final. 43 Jakub Gren, ‘The Eurosystem and the Single Supervisory Mechanism: institutional continuity under constitutional constraints’ (2018) European Central Bank Legal Working Paper Series No 17, 16 accessed 10 February 2020. See Commission, ‘Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1023/2013’ SWD (2017) 336 final, 12 accessed 10 February 2020. For the opposite view, see Paul Weismann, ‘The European Central Bank under the Single Supervisory Mechanism: Cooperation, Delegation, and Reverse Majority Voting’ (2018) 24 European Journal of Current Legal Issues; Roland Vaubel, ‘The Breakdown of the Rule of Law in the Euro-Crisis: Implications for the Reform of the Court of Justice of the European Union’ (International Law and the Rule of Law under Extreme Conditions, XIVth Travemünde Symposium on the Economic Analysis of Law, 27–29 March 2014) 8. 44 COM (2017) 536 final. 45 Ibid, 23. 46 Ibid, 24. 47 SWD (2017) 336 final, 52.

SALE OF RETAIL INVESTMENT PRODUCTS 1083 the ECB to coordinate the development of its own SREP methodology to avoid legal uncertainty and divergent supervisory practices across EU states.48 The EBA also seeks to ensure that the exercise of supervisory powers, including the exercise of powers that intervene in the governance of banking and investment firms and the application of sanctions under the CRD IV, is not excessively divergent across EU jurisdictions and that the exercise of supervisory powers, including imposing administrative and punitive sanctions, are based on recognized principles of proportionality, legality and due process.

36.39

V. EU Legislation Regulating the Sale of Retail Investment Products Investor protection is a central element in the political and legal character of post-crisis EU banking and investment services law. The financial crisis caused cross-market financial turmoil and exposed the interlinkage between macro-and micro-prudential regulation. As financial stability was weakened by systemic risk, market confidence was also shaken by massive mis-selling of investment and financial products by banks and other financial institutions. In turn, weak investor confidence further harmed financial stability. Indeed, financial policy-makers and regulators now acknowledge that a vicious cycle can arise between investor confidence and financial stability.49

36.40

The European Union is exemplary for having strong consumer-oriented regulation and case law to fight misleading sales practices and other manipulative and anti-competitive behaviour, which can be seen across competition, data protection and financial and investment services law. In the latter realm, the retail investor is exposed to potential market failures such as information asymmetries and product distributors’ conflicts of interest. The EU has aimed to address these concerns by replacing the 2004 Markets in Financial Instruments Directive I (MiFID I)50 with the stricter and more elaborate MiFID II51 and Markets in Financial Instruments Regulation (MiFIR).52 These laws have been viewed as the cornerstone of how EU investment services law, changing the way in which investment service providers act in business and towards their clients.53 The EU follows a sectoral approach to regulating the marketing and sale of financial products, which results in segmentation and arbitrage risks. This section analyzes the theoretical basis of the regulation of retail markets by asking: who are the retail investors, what risks do they face and how and to what extent

36.41

48 Ibid, 44. 49 See Chapter 20. 50 European Parliament and Council Directive 2004/39/EC of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC [2004] OJ L145/1 (MiFID I). 51 European Parliament and Council Directive 2014/65/EU of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU [2014] OJ L173/349 (MiFID II). 52 European Parliament and Council Regulation (EU) 600/2014 of 15 May 2014 on markets in financial instruments and amending Regulation (EU) 648/2012 [2014] OJ L173/84 (MiFIR). 53 Matthias Lehmann, ‘Security Markets and Services: Introduction to MiFID II and MiFIR’ in Matthias Lehmann and Christoph Kumpan (eds), European Financial Services Law: Article-by-Article Commentary (CH Beck, Hart Publishing, and Nomos 2019) 1.

1084 FINANCIAL MARKET REGULATION: INTERNAL MARKET should regulation intervene? It then discusses how EU law has intervened on a number of fronts to protect investors and ensure more efficient capital market regulation.

A. Rationale and theory 36.42

Individual economic welfare is enhanced through long-term savings and investment products.54 The economy also relies on investment services for the provision of liquidity to the market and a more efficient allocation of resources. According to Moloney, ‘[r]‌etail markets matter’,55 as well as their regulation, as ‘greater responsibility for financial planning and welfare provision is being imposed on individuals and households internationally: welfare is increasingly being privatized and governments are seeking stronger individual financial independence’.56 There is hence a transfer of risk from the government to the household and with intensified retail engagement, risk exposures are magnified.57 The retail investment market also has societal impacts since poor investor decisions can erode individual financial circumstances in the short and long term due to lacking product suitability or unanticipated and/or excessive charges and costs.58 Lack of product access may also prompt exclusion risk.59

36.43

Retail investor detriment can be caused by external structural factors in financial markets that are driven by innovation and volatility in the financial system.60 The macroeconomic environment, globalization, technological advancements, and disruptions in the financial system can penetrate to and harm retail investors.61 Moreover, detriment to retail investors may arise in connection with investment service providers that are influenced by sub- standard business models, misleading marketing and sales techniques and weak corporate governance. These can produce supply chain or product risks that can harm retail investors. Further, retail investment decision-making can be affected by behavioural bias, overconfidence, financial background and cultural factors.62

36.44

Prior to 2007, EU retail market policy was mainly driven by the information paradigm, a theory emblematic to the law and economics school of thought. Under this theory, investors will take rational decisions if they are provided with all necessary information. According to Beales, information about price, quality and other product attributes enables investors

54 Niamh Moloney, ‘Regulating the Retail Markets: Law, Policy and the Financial Crisis’ in Colm O’Cinneide and George Letsas (eds), Current Legal Problems (vol 63, OUP 2010) 396 (hereafter Moloney, ‘Regulating the Retail Markets: Law, Policy’). 55 Moloney, ‘Regulating the Retail Markets: Law, Policy’ (n 54) 384. 56 Ibid, 387. 57 Ibid, 387. Moloney mentions in footnote 66 that this phenomenon has been recurrently stated in reports, such as Ignazio Visco and others, ‘Ageing and Pension System Reform: Implications for Financial Markets and Economic Policies’ (Banca d’Italia 2005) and Jacques Delmas-Marsalet, ‘Report on the Marketing of Financial Products for the French Government’ (November 2005). 58 Financial Services User Group, ‘For Better Supervision and Enforcement in Retail Finance’ (October 2016) 8. 59 Ibid. Exclusion in this context would arise when a consumer has no access to banking services such as a bank account or a line of credit. 60 Ibid. 61 Ibid. 62 Ibid.

SALE OF RETAIL INVESTMENT PRODUCTS 1085 to ‘make the best use of their budget by finding the product they most prefer’.63 This in turn creates an incentive for product distributors to compete and provide higher quality products. Superior distributors will aim for enhanced disclosure to distinguish themselves from others.64 The information paradigm theory is based on several presuppositions, including that (i) information enables rational investment decision-making;65 (ii) investors use and analyse the information available; and (iii) the supplier’s information is adequate. According to the Nobel Prize winner Eugene Fama’s efficient capital market hypothesis, the information in the market about the financial product would be reflected in the product’s market price.66 In this framework, the regulator’s task is to provide a disclosure regime that focuses primarily on requiring the disclosure of relevant information, thus justifying regulatory intervention only where strictly necessary.67

36.45

A fundamental assumption of EU policy-makers was that the disclosure of more and relevant information to investors and customers would lead to a more efficient and socially optimal market. Indeed, the Commission in 1999 presented the Financial Services Action Plan (FSAP) consisting of over forty pieces of legislation aimed to make European financial markets more competitive and innovative in order to compete globally, particularly with the US capital markets.68 The FSAP relied on the notions that disclosure of information ensured by regulation would better protect investors and consumers and that regulatory intervention can only be justified when it is cost-effective and a least restrictive option to protect consumers.

36.46

A paradigm shift, however, occurred with the financial crisis of 2007–08. In addition to weak prudential regulation and inadequate oversight of financial stability, the crisis revealed persistent and systematic mis-selling of financial products by financial institutions and investment firms, partly due to conflicts of interest of product distributors. The crisis exemplified the substantial failure of the pre-crisis regulatory approach based on the disclosure paradigm to protect retail investors and other customers who were mis-sold financial products. As the European Commission observed:

36.47

[t]‌he financial crisis . . . provided a stark reminder of the importance of transparency in financial products and of the potential costs of irresponsible selling. A collapse in investor confidence has underlined the urgency of ensuring the right regulatory framework is in place, so that the rebuilding of confidence can occur on a sound basis.69

The 2011 European Commission Staff Working Paper Executive Summary of the Impact Assessment identified further weaknesses in regulation and market practice concerning 63 Howard Beales, Richard Craswell, and Steven C Salop, ‘The Efficient Regulation of Consumer Information’ (1981) 24(3) Journal of Law and Economics 492 (hereafter Beales, Craswell, and Salop, ‘The Efficient Regulation of Consumer Information’). 64 Ibid. 65 Ibid, 491–92. 66 Eugene Fama, ‘Efficient Capital Markets: A review of Theory and Empirical Work’ (1970) 25 The Journal of Finance 383–417. 67 See Beales, Craswell, and Salop, ‘The Efficient Regulation of Consumer Information’ (n 63) 532–39, discussing examples of situations deemed deserving of regulatory intervention under the law and economics approach. 68 Commission, ‘Implementing the Framework for Financial Markets: Action Plan’ COM (1999) 232 final. 69 Commission, ‘Packaged Retail Investment Products (Communication)’ COM (2009) 204 final, 2.

36.48

1086 FINANCIAL MARKET REGULATION: INTERNAL MARKET the inadequate quality of product distribution especially due to conflicts of interest that pervaded the distribution of financial products and investments.70 Accordingly, EU policy- makers planned to overhaul the pre-crisis approach by accentuating the limits of the information paradigm and emphasising the influence of behavioural elements. Through behavioural finance, in which psychology is infused into the traditional realm of law and economics, investment choices are shaped not by reason but rather by behavioural bias and heuristics.71 These can lead to investors behaving according to economically irrational ‘rules of thumb’, herd behaviour and other psychological factors such as hindsight bias and risk aversion.72 36.49

The Commission, through numerous reports on investment patterns, consumer decision- making and investor confidence, has now reformulated much of EU retail investor protection legislation on the assumption that the retail investor is unsophisticated, unskilled in decision-making and prejudiced by behavioural weaknesses.73 It finds that the average retail investor struggles to comprehend conflict of interest disclosures and risks and relies heavily on investment advice.74 Hence, retail investors confront capability barriers and fail to make decisions based on financial literacy which, according to the OECD, entails ‘financial awareness, knowledge, skills, attitude and behaviours necessary to make sound financial decisions’.75

36.50

EU financial policy by and large has now incorporated a behavioural finance approach devoted to investor protection and the fair treatment of customers.76 Information remains a key element to resolve asymmetry of information. In the interests of the investor and transparency, EU legislation will be discussed below about how it requires the presentation and form of information to be fair, clear and not misleading to enable optimal decision-making.

B. EU financial legislation 36.51

EU retail market regulation has the purpose to protect and empower investors, build investor confidence and congruently achieve market stability.77 The protection of investors can be accomplished both through defensive action against unscrupulous market actors and interventionist action in the market to correct market failures arising from information

70 Commission, ‘Commission Staff Working Paper Executive Summary of the Impact Assessment on MiFID’ SEC (2011) 1227 final. 71 Mydhili Virigineni and M Bhaskara Rao, ‘Contemporary Developments in Behavioral Finance’ (2017) 7(1) International Journal of Economics and Financial Issues 448. 72 Ibid. 73 Niamh Moloney, EU Securities and Financial Markets Regulation (3rd edn, OUP 2014) 776; Optem, ‘Pre- contractual Information for Financial Services: Qualitative Study in the 27 Member States’ (2008); BME Consulting, ‘The EU Market for Consumer Long-Term Retail Savings Vehicle: Comparative Analysis of Products, Market Structure, Costs, Distribution Systems, and Consumer Savings Patterns’ (2007); Decision Technology and others, ‘Consumer Decision-Making in Retail Investment Services: A Behavioural Economics Perspective’ (2010) (hereafter ‘Decision Technology’). 74 Decision Technology (n 73) 5–7. 75 OECD, ‘OECD/INFE Toolkit for Measuring Financial Literacy and Financial Inclusion’ (May 2018). See also Dimity Kingsford Smith and Olivia Dixon, ‘The Consumer Interest & The Financial Markets’ in Niamh Moloney, Eilís Ferran, and Jennifer Payne (eds), Oxford Handbook on Financial Regulation (OUP 2015) 707. 76 Ernst & Young, ‘MiFID II: Time to Take Action’ (29 July 2014) 5. 77 Moloney, ‘Regulating the Retail Markets’ (n 54) 739–44.

SALE OF RETAIL INVESTMENT PRODUCTS 1087 asymmetries.78 Arguably, post-crisis, the EU has taken an interventionist approach to achieve investor protection.79 In the EU, the building blocks for achieving investor protection can generally be considered to be (i) the provision of information for enhancing transparency on the product structure and issuer; (ii) conduct of business rules to mitigate conflicts of interests in distribution; and (iii) product governance regulating the availability of products on the market.80 The regulation of EU retail financial markets consists of a number of legislative measures.

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The Prospectus Directive 2003/71/EC81 and Regulation (EU) 2017/112982 require issuers of securities to the public or trading on a regulated market to produce a prospectus in a standardized and comprehensible format.83 The prospectus contains information concerning the issuer such as its financial position, assets and liabilities and rights attaching to its securities.84 Such issuers are required to file a prospectus that includes a summary prospectus with the authority of their home Member State.85 Failure to comply can lead to the imposition of civil liability on the issuer.86

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As discussed below, the Packaged Retail and Insurance- Based Products Regulation (EU) 1286/2014 (PRIIPs)87 requires PRIIPs88 producers and distributors to issue a Key Information Document (KID)89 containing summary information to allow investors to assess the comparability of products across financial sectors.90

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The Undertakings for the Collective Investment in Transferrable Securities IV2009/65/EC (UCITS)91 Directive regulates collective investment schemes and requires UCITS funds to publish a Key Investor Information Document (KIID) containing standardized and

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78 Ibid. 79 Moloney, EU Securities and Financial Markets Regulation (n 73) 771. 80 See Veerle Colaert, ‘Building Blocks of Investor Protection: All-Embracing Regulation Tightens Its Grip’ (2017) 6 Journal of European and Consumer Market Law 229. 81 European Parliament and Council Directive 2003/71/EC of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC [2003] OJ L345/64. The Prospectus Directive is valid until 20 July 2019, following which only the Prospectus Regulation will apply. 82 European Parliament and Council Regulation (EU) 2017/1129 of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC [2017] OJ L168/12 (Prospectus Directive). 83 See Recital (27) Prospectus Regulation. 84 Ibid. Article 5(1) Prospectus Directive which also requires the information to be presented in a concise and appropriate manner. 85 Article 14(1) Prospectus Directive. 86 Article 6(1) and (2) Prospectus Directive; See also ESMA, ‘Comparison of liability regimes in Member States in relation to the Prospectus Directive’ (ESMA/2013/619, 30 May 2017). 87 European Parliament and Council Regulation (EU) 1286/2014 of 26 November 2014 on key information documents for packaged retail and insurance-based investment products OJ L352/1 (PRIIPs Regulation). 88 Article 4(1) PRIIPs Regulation defines PRIIPs as: ‘an investment . . . where, regardless of the legal form of the investment, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the investor’. 89 See Chapter II PRIIPs Regulation. KID information includes the identity of the product manufacturer and a presentation of the risks and rewards, costs, including performance examples. Information must be presented in an easily analyzable and comprehensible format. 90 Joint Committee of the European Supervisory Authorities, ‘Discussion Paper: Key Information Document for Packaged Retail and Insurance-based Investment Products (PRIIPs)’ (JC/DP/2014/02, 17 November 2014) 5. 91 European Parliament and Council Directive 2009/65/EC of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities [2009] OJ L302/32 (hereafter UCITS IV).

1088 FINANCIAL MARKET REGULATION: INTERNAL MARKET comprehensive information about a UCITS product.92 Civil liability can arise when information in the KIID is misleading, inaccurate or inconsistent with the prospectus.93 36.56

The Insurance Mediation Directive 2002/92/EC (IMD),94 succeeded by the Insurance Distribution Directive 2016/97/EU (IDD)95 that came into effect in October 2018, requires insurance product distributors to adhere to certain information and conduct of business requirements.96 The IDD increases the requirements of its predecessor (IMD) by imposing stricter conduct of business rules that are substantially similar to the conduct of business rules of MiFID II.97

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The Investor Compensation Scheme Directive 97/9/EC (ICSD)98 allows retail investors to receive up to 20,000 euro compensation if an investment firm fails to meet its repayment obligations to the investor because of fraud or operational failure.99 ICSD has been criticized on the grounds that it does not cover losses caused by other types of misconduct, such as violations of conflict of interest rules, negligent advice and misleading advertising. This is particularly concerning from a consumer protection perspective given that there were millions of investor claims for mis-selling against financial institutions across Europe both before and after the 2007–08 crisis.100

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MiFID II101 and MiFIR102 introduce changes to product distribution, governance and intervention rules that concern a wide range of financial instruments.103 MiFID II/MiFIR constitute the most comprehensive and strictest body of EU investment services law and regulation. Moloney and Colaert have observed that this legislative regime and regulatory framework is ‘silo-based’, as different measures impose different requirements to functionally similar products.104 This approach has been critically analyzed as leading to regulatory arbitrage, thereby undermining investor protection and the operation of the internal market.105

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The EU has acknowledged the problems associated with the silo-based legislative-regime. The 2007 Commission Call for Evidence106 found that stakeholders support having an integrated distribution, disclosure and product governance model, yet the Commission cautioned that such a project would involve massive organizational re-structuring and risks 92 Chapter IX, Section 3 UCITS IV. 93 Article 79(2) UCITS IV. 94 European Parliament and Council Directive 2002/92/EC of 9 December 2002 on insurance mediation [2002] OJ L9/3 (Insurance Mediation Directive). 95 European Parliament and Council Directive (EU) 2016/97 of 20 January 2016 on insurance distribution (recast) [2016] OJ L26/19 (Insurance Distribution Directive). 96 Chapter V Insurance Distribution Directive. 97 Moloney, EU Securities and Financial Markets Regulation (n 73) 776. 98 European Parliament and Council Directive 97/9/EC of 3 March 1997 on investor-compensation schemes [1997] OJ L84/22 (Investor Compensation Scheme Directive). 99 Article 4 Investor Compensation Scheme Directive. 100 Moloney, EU Securities and Financial Markets Regulation (n 73) 843. 101 MiFID II (n 51). 102 MiFIR (n 52). 103 See Danny Busch, Product Governance (OUP 2017). 104 Moloney, EU Securities and Financial Markets Regulation (n 73) 779–780. Such products include UCITS collective investment schemes (‘CIS’), non-UCITS CIS, insurance-linked investments and structured securities. Moloney, EU Securities and Financial Markets Regulation (n 73) 779–80. 105 Moloney, EU Securities and Financial Markets Regulation (n 73) 780. 106 Commission, ‘Need for a Coherent Approach to Product Transparency and Distribution Requirements for ‘Substitute’ Retail Investment Products’ (Call For Evidence G4, 2007).

MIFID II/MIFIR 1089 for firms.107 Nevertheless, the EU legislator has addressed segmentation risks in the PRIIPs Regulation by introducing more coherence and harmonization across financial product sectors by adopting a cross-sectoral and horizontal selling regime for PRIIPs investments and products. MiFID II, MiFIR, and the IDD also aim to be more aligned in setting similar stringent standards for different financial products.108 Although retail markets involve many different financial products governed by various EU legislation, the next section will examine the MiFID II/MiFIR regime. MiFID II/MiFIR are deemed to be the biggest and most substantial pieces of EU post-crisis financial and investment services legislation, ushering in a new regulatory landscape for EU capital and investment markets.109

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Despite the implementation of MiFID II/MiFIR, the EU has acknowledged the problems associated with the silo-based legal framework. Further, evidence suggests that stakeholders support having an integrated distribution, disclosure and product governance model.110 As discussed above, the PRIIPs Regulation introduces cross-sectoral requirements and standards for a more coherent and horizontal selling regime across sectors.111 MiFID II, MiFIR and the IDD also aim to be more aligned in setting similar stringent standards for different financial products.112 Although retail markets involve many different financial products and areas of legislation and regulation the following section focuses on the MiFID II/MiFIR regime. MiFID II/MiFIR are deemed to be the biggest and most substantial pieces of EU post-crisis legislation in financial and investment services, likely to redesign the face of EU capital and investment markets and the way firms operate.113

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VI. Markets in Financial Instruments Directive II/Markets in Financial Instruments Regulation (MiFIR) MiFID II has the stated objective of making European financial markets safer, fairer and more transparent and to restore investor confidence after the financial crisis. As part of its post- crisis reforms, the Commission attempted to address gaps and weaknesses in MiFID I by replacing it with Directive 2014/ 65/ EU (MiFID II) and adopting Regulation 600/2014 (MiFIR).114 The Commission has issued a number of implementing and delegated acts further specifying the rules under MiFID II115 and 107 Moloney, EU Securities and Markets Regulation (n 73) 779–80. 108 Ibid, 778. 109 See, for instance, Ernst & Young, ‘The World of Financial Instruments is More Complex. Time to Implement Change’ (Client Brochure, 2015) 1. 110 Commission, ‘Need for a Coherent Approach to Product Transparency and Distribution Requirements for ‘Substitute’ Retail Investment Products’ (Call For Evidence G4, 2007). 111 Moloney, EU Securities and Markets Regulation (n 74) 780. 112 Ibid, 778. 113 See for instance, Ernst & Young, ‘The World of Financial Instruments is More Complex. Time to Implement Change’ (Client Brochure, 2015) 1. 114 European Parliament and Council Directive 2014/65/EU of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU [2014] OJ L173/349 (hereafter Markets in Financial Instruments Directive/MiFID II) and European Parliament and Council Regulation (EU) 600/2014 of 15 May 2014 on markets in financial instruments and amending Regulation (EU) 648/2012 [2014] OJ L173/84 (hereafter Markets in Financial Instruments Regulation/MiFIR). 115 For instance, Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating

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1090 FINANCIAL MARKET REGULATION: INTERNAL MARKET MiFIR.116 MiFID II was required to be transposed into Member State law by July 2017 and, together with MIFIR, became legally enforceable on 3 January 2018.117 As discussed below, the Commission launched several infringement actions against Member States who failed to transpose the legislation by the deadline.118 36.63

MiFID II regulates investment firms, market operators, data reporting services providers and third country investment firms with an EU branch119 that sell or advise clients on structured deposits,120 certain services provided by UCITS121 and Alternative Investment Funds (AIF).122 MiFID II responds to the MiFID I shortcomings exhibited by the financial crisis in which major scandals of financial product mis-selling occurred. Arguably, this was due to MiFID I’s inadequate regulation of product distribution and disclosure, leaving room for investment firms to deviate or not fully acknowledge them.123 The sectoral application of MiFID I may have also contributed to mis-selling activities as the same investor protection was not afforded to different products, thereby promoting regulatory arbitrage. In fact, Colaert suggests that firms repackaged mutual funds into life insurance products or structured deposits to escape the stricter MiFID regime.124

A. Conduct of business rules 36.64

MiFID II adopts stricter conduct of business rules than MiFID I. More rigid restrictions are placed on clients’ abilities to reclassify or purchase certain complex structured products conditions for investment firms and defined terms for the purposes of that Directive [2017] OJ L87/1; Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits [2017] OJ L87/500. 116 For instance, Commission Delegated Regulation (EU) 2017/567 of 18 May 2016 supplementing Regulation (EU) 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions [2017] OJ L87/90. The Commission has adopted more than 30 implementing and delegated acts for MiFID II and MiFIR. 117 European Parliament and Council Regulation (EU) 2016/1033 of 23 June 2016 amending Regulation (EU) 600/2014 on markets in financial instruments, Regulation (EU) 596/2014 on market abuse and Regulation (EU) 909/2014 on improving securities settlement in the European Union and on central securities depositories [2016] OJ L175/1; European Parliament and Council Directive (EU) 2016/1034 of 23 June 2016 amending Directive 2014/65/EU on markets in financial instruments [2016] OJ L175/8. 118 See Commission, ‘Wednesday, 4 October 2017: The Commission is planning to adopt its monthly infringements package’ (Press Release, Brussels, 5 October 2017) accessed 10 February 2020. As of 20 February 2018, ten Member States did not fully implement MiFID II and Commission Delegated Directive (EU) 2017/593. 119 Article 1(1) MiFID II. Insurance undertakings and related undertakings are expressly excluded from MiFID II scope (Article 1(1) MiFID II). 120 Article 1(4) MiFID II. This is wider in scope than MiFID I which only applies to ‘investment services’ relating to ‘financial instruments’. 121 Collective investment schemes providing certain MiFID services. See Article 6(3)-(4) UCITS IV. 122 Article 6(4)–(6) of Parliament and Council Directive 2011/61 of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) 1060/2009 and (EU) 1095/ 2010 OJ L174/1 (Alternative Investment Fund Managers Directive/AIFMD). 123 Commission, ‘Proposal for a Directive of the European Parliament and of the Council on Markets in Financial Instruments (Recast)’ COM (2011) 656 final. 124 Veerle Colaert, ‘MiFID II in Relating to Other Investor Protection Regulation: Picking up the Crumbs of a Piecemeal Approach’ in Danny Busch and Guido Ferrarini (eds), Regulation of the EU Financial Markets: MiFID II and MiFIR (OUP 2017) 591 (hereafter Colaert, ‘MiFID II in Relating to Other Investor Protection Regulation’).

MIFID II/MIFIR 1091 on an execution-only basis. This has resulted in many clients falling under the retail client category.125 MiFID II introduces provisions on sales targets and remuneration aimed at financial intermediaries and investment firms to promote the client’s best interest and avoid conflicts of interest.126 Product distributors need to inform their clients about the nature of the advice (whether it is independent or tied), the financial product selection advised on, the firm’s policy on periodic suitability assessments, risks, charges and costs.127 Independent investment advice must relate to cross-market instruments and commission payments for such advice are prohibited.128 Know-your-Customer (KYC) rules require investment firms to carry out suitability and appropriateness tests. In assessing suitability, a firm is required to obtain information concerning the client’s background including knowledge and experience in finance, financial situation, the ability to bear losses and investment objectives.129 Based on this, the provider is to recommend financial products suitable for the client. Under the appropriateness tests, which is to be carried out in execution-only relationships, the investment firm is to request information on the client’s knowledge and experience in finance, based on which it assesses whether the products are appropriate.130

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The investment service provider must adhere to the principle of fair treatment of clients and the duty to act in the client’s best interests.131 This addresses the principal-agency problem as well as asymmetric information. Firms must also communicate all information, including marketing communications and information on costs and fees, to clients in a ‘fair, clear and not misleading manner’.132 Moreover, in ensuring quality of advice, MiFID II obliges investment advisers to have the necessary competence and knowledge about financial instruments.133

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The distribution of financial products requires regulation due to the particularities of the retail market. It has been shown that retail customers place strong trust in advice and other intermediary means of distribution.134 Conflicts of interest between the investment service provider and the client, and between two different clients, may arise, for instance, as a result of commission-based products sold by the service provider.135

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MiFID II requires product distributors to adopt certain organizational rules to prevent conflicts of interest. Under the product governance rules, distributors must ‘maintain, operate and review a process for the approval of each financial instrument’ and ensure that the product fits the target market before being marketed or distributed.136 Reports of certain

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125 Client classification determines the level of protection afforded. A customer can be an eligible counterparty, a professional client or a retail client. The categorization depends on the client’s experience, knowledge and expertise (Article 4(1)(10) MiFID II and Annex II). Each client has per se status but requalification is possible when certain qualitative and quantitative criteria are fulfilled. MiFID II has made these criteria much stricter. 126 See Article 24 MiFID II. 127 Article 24(4) MiFID II. 128 Article 24(7) MiFID II. 129 Article 25(2) MiFID II. 130 Article 25(3) MiFID II. 131 Articles 9(3)(c) and Article 24 MiFID II, respectively. 132 Article 24(3) MiFID II. 133 Recital (79) Article 25(1) MiFID II. 134 See, for instance, Decision Technology (n 73). 135 Moloney, EU Securities and Financial Markets Regulation (n 73) 793–94. 136 Article 16(3) 2nd para MiFID II.

1092 FINANCIAL MARKET REGULATION: INTERNAL MARKET activities in this regard must be kept, including records of telephone conversations or electronic communications when clients deal on their own account or in execution-only orders.137

B. Product regulation 36.69

Product regulation in MiFID II/MiFIR addresses product quality requirements, product design and product bans. MiFIR product intervention measures grant competences to National Competent Authorities (NCAs) and the European Securities and Markets Authority (ESMA).138 Product intervention can be achieved ex-ante through product governance or ex-post through product prohibition. Ex-post measures are intended for exceptional cases and where MiFID II organizational and conduct rules have been unsuccessful.139 The rationale for this is that product intervention carries risks such as harm to innovation, reduction in investor choice, regulatory arbitrage and excessive regulation.140

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The role of NCAs is to monitor and potentially restrict or prohibit financial instruments marketed, distributed or sold, or a type of activity exercised in a Member State.141 Intervention may be exercised where there are ‘significant investor protection concerns’ or dangers to the orderly functioning and integrity of financial markets and the risks warranting intervention are not sufficiently addressed in existing EU regulation or cannot be better addressed by improved supervision or enforcement of existing measures.142 Before utilizing such measures, Member State authorities are to ensure that intervention is appropriate and proportionate.143 They must also coordinate with NCAs from other Member States and ESMA.144 Moreover, the ban must cease to apply when the conditions that gave rise to the intervention are no longer present.145

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MiFID II includes rules on NCA enforcement. NCAs must use their supervisory powers, set administrative sanctions and measures for infringement and, where national law so requires, impose criminal sanctions.146 Additionally, NCAs have a duty to provide, exercise and publish NCA decisions.147 MiFID II further requires NCAs to report infringements, ensure appeal rights and extra-judicial mechanisms for consumer complaints.148

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ESMA has been granted additional powers under the new framework which include market monitoring and temporary product restriction or prohibition.149 ESMA’s interventions will supersede NCA action.150 The reasons for intervention are identical to those for NCAs, ie 137 Article 16(7) MiFID II. 138 Articles 41–42 MiFIR. 139 Moloney, EU Securities and Financial Markets Regulation (n 73) 829 and 833. See also Recital (29) MiFIR. 140 Moloney, EU Securities and Financial Markets Regulation (n 74) 825. 141 Articles 39(3) and 42 MiFIR. 142 Recital (46) and Article 42(2)(a)-(b) MiFIR. 143 Article 42(2) MiFIR. 144 Article 42(2)(d) and (3) MiFIR. 145 Article 42(6) MiFIR. 146 Title VI, Articles 67–88 MiFID II. 147 Article 42(5) MiFIR. 148 Reporting infringements (Article 73 MiFID II), Right of appeal (Article 74 MiFID II), extra-judicial mechanism for consumer complaints (Article 75 MiFID II). 149 Article 40(1) MiFIR. 150 Article 40(7) MiFIR.

MIFID II/MIFIR 1093 in cases of significant investor protection concerns and danger to the orderly functioning and integrity or stability of financial markets.151 In addition, ESMA can only take action if existing EU regulatory requirements insufficiently address the threat in question and the NCA has taken no or inadequate action. ESMA’s intervention in this context will supersede NCA action.152 ESMA is also tasked with the coordination of NCA activities.

C. Unbundling and firm organization MiFID II applies to all financial institutions and infrastructure including banks, investment firms, fund managers, exchanges and other trading venues, high frequency traders, brokers and pension funds and retail investors. Banks and other financial intermediaries are required to unbundle client payments for analyst research and trading commissions, and provide stricter standards for investment products. The unbundling of client payments for analyst research and trading commissions is likely to affect how financial products are sold and how investment advice is rendered. The unbundling and organizational requirements are expected to have an impact beyond the EU. The EU demands for the personal details of traders are already creating tensions with the privacy rules of other jurisdictions outside the EU, such as Hong Kong, Singapore, and the United States. The MiFID II regime on payments for research also poses a significant challenge for US brokers.153 The Securities and Exchange Commission (SEC) (the US regulator), however, has waived the US registration requirements until 2020 for brokers under the Investment Advisers Act 1940 that would have otherwise prohibited them from receiving direct payments from their customers for research without registering. Beyond 2020, it is expected that US banks and other institutions which employ these brokers will come under pressure to comply with the MiFID II rules and if they do so they will agree to register with the SEC as investment advisers in order to be able to continue servicing clients with EU operations.154

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MiFID II also addresses the selling processes of financial institutions by adopting rules governing the organizational requirements and conduct of business provisions. As to the investment firms’ organizational requirements, reference is made to the new provisions on product governance arrangements relating to firms which develop financial products and to those which sell them.155 The purpose of such provisions is to enhance the firms’ understanding of the products they develop or sell and to ensure that they are suitable to the clients to whom they are being sold.156 To this end, investment firms are required to maintain, operate and review the process for approval of each financial instrument and significant adaptations of existing financial instruments before it is marketed or distributed to clients.157 Moreover, specific record-keeping provisions have been laid down in the context

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151 Article 40(2)(a) MiFIR. 152 Article 40(2)(b)–(c) and Article 40(7) MiFIR. Article 43 MiFIR. 153 Under US regulations, brokers cannot receive direct payments for research unless they are formally registered as investment advisers under the Investment Advisers Act of 1940. 154 Siobhan Riding, ‘End the clash over EU research rule, SEC urged’ Financial Times (2 February 2019). 155 See Danny Busch, ‘Product Governance and Product Intervention under MiFID II/MiFIR’ in Danny Busch and Guido Ferrarini (eds), Regulation of the EU Financial Markets: MiFID II and MiFIR (OUP 2017) ch 5, 124 (hereafter Busch, ‘Product Governance and Product Intervention under MiFID II/MiFIR’). 156 Article 16 MiFID II. 157 Article 16(3) MiFID II.

1094 FINANCIAL MARKET REGULATION: INTERNAL MARKET of the organizational requirements. In particular, records shall include the recording of telephone conversations or electronic communications relating to, at least, transactions concluded when dealing on own account and the provision of client order services that relate to the reception, transmission and execution of client orders. Investment firms must also notify new and existing clients that telephone communications or conversations between the investment firm and its clients that result, or may result, in transactions will be recorded.158

D. European Securities and Markets Authority (ESMA) 36.75

As discussed in section II, it has been suggested that the financial crisis paved the way ‘towards a greater Europeanisation and centralisation of financial supervision’ as the EU engaged in a major overhaul of the financial system.159 An illustration of this is that the European System of Financial Supervision (ESFS) aims to ensure coherent and consistent financial across the EU.160 The ESFS framework attempts to linked-up the ESRB’s macropudential oversight with the microprudential standard setting of the three European Supervisory Authorities (ESAs).161

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As discussed above with the EBA, the ESAs establish and supervise the implementation of a single rulebook which consists of rules for individual financial institutions.162 They are also attentive to financial market conditions for timely detection of risks and vulnerabilities.163 In the field of investment services, ESMA has the task to improve investor protection and ensure the proper functioning of financial markets in the EU.164 ESMA’s powers reach beyond those of its predecessor, the Committee of European Securities Regulations (CESR), which was more a network of national supervisory authorities rather than a centralized EU authority with special mandates and competences. ESMA’s tasks and powers include: (1) To enact (quasi-)rules by adopting regulatory technical standards implementing legislation and issuing guidelines, recommendations and warnings.165 NCAs and market participants are demanded to ‘make every effort to comply’.166 ESMA may investigate a breach and intervene when an NCA has not complied with its duties. In cases of consistent non-compliance of an NCA with an ESMA guideline defining a

158 Article 16(6) and (7) MiFID II. It should also be mentioned that to ensure that record keeping occurs properly, the investment firms must even synchronize their clocks with clocks at the exchanges. 159 Olha O Cherednychenko, ‘Contract Governance in the EU: Conceptualising the Relationship between Investor Protection Regulation and Private Law’ (2015) 21 European Law Journal 506 (hereafter Cherednychenko, ‘Contract Governance in the EU’). 160 ECB, ‘European System of Financial Supervision’ accessed 10 February 2020. 161 Ibid. 162 See Recital (22) of European Parliament and Council Regulation (EU) 1095/2010 of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision 716/2009/EC and repealing Commission Decision 2009/77/EC OJ L331/84 (ESMA Founding Regulation). 163 Recital (43) and Article 32 ESMA Founding Regulation. 164 Article 1(5) and 8(1)(h) ESMA Founding Regulation. 165 Cherednychenko, ‘Contract Governance in the EU’ (n 159) 506. Article 8(1)(a) ESMA Founding Regulation. 166 Article 16(3) ESMA Founding Regulation.

MIFID II/MIFIR 1095 breach of EU law, ESMA may investigate and take further action according to Article 17 of the ESMA Founding Regulation.167 (2) To monitor financial products that are marketed, distributed or sold in the EU. The Commission’s 2017 proposal to strengthen the ESFS includes an extension of ESMA’s direct supervisory powers to specific, highly-integrated sectors with significant cross-border activities and which are mostly regulated by directly applicable law.168 (3) To gather information from local supervisory authorities on supervisory practices.169 (4) To restrict or ban products (temporarily, not in excess of three months although renewal is possible) that either raise significant investor protection concerns; threaten the proper functioning and integrity of financial/commodity markets; or wholly or partly threaten financial stability.170 Although ESMA can intervene when a service involves retail or professional clients, it is not directly competent with respect to complaints against credit or financial institutions. Nonetheless, under Article 17 of ESMA Founding Regulation, ESMA may investigate a breach and intervene where a NCA has not complied with its duties.171

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Whilst ESMA can produce binding decisions only in certain circumstances,172 ESMA’s presence can be considered significant in influencing EU conduct of business rules and supervision at national level. For instance, ESMA’s 2016 guidelines on MiFID’s suitability requirements has arguably played a considerable role in harmonizing conduct of business rules.173 However, according to the Meroni principle, ultimately ESMA’s powers are limited as it cannot have discretionary decision-making power that involves or could shape EU policy.174 This would restrict ESMA’s potential contract-shaping abilities, also because it lacks the competence to terminate, suspend or modify contractual obligations.175 Moreover, Della Negra argues that were such powers conferred, ESA acts may decline in ‘effectiveness and credibility’, and risks of systemic regulatory errors could increase.176 Additionally, NCA discretion and flexibility could be undermined.177

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167 ESMA Founding Regulation. See also Commission, ‘Report to the European Parliament and the Council on the evaluation of the Regulation (EU) 236/2012 on short selling and certain aspects of credit default swaps’ COM (2013) 885 final. 168 Article 2(5) ESMA Founding Regulation; Article 39(1) MiFIR; Commission, ‘Capital Markets Union: Creating a stronger and more integrated European financial supervisory architecture, including on anti- money laundering’ (Fact sheet, 1 April 2019). 169 Article 45(1) MiFIR in particular. See also Articles 22(3), 25, and 26 MiFIR; Cherednychenko, ‘Contract Governance in the EU’ (n 159) 506–07. 170 Article 40 MiFIR. 171 ESMA Founding Regulation (n 164). 172 ESMA can take binding decisions when such task has been specifically delegated to it. 173 ESMA, ‘MiFID Suitability Requirements Peer Review Report’ (ESMA/2016/584, 2016). Cherednychenko, ‘Contract Governance in the EU’ (n 159) 506. 174 Case C-9/56 Meroni & Co., Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community [1958] ECR 133. 175 Federico Della Negra, ‘The Effects of the ESMA’s Powers on Domestic Contract Law’ in Mads Andenas and Gudula Deipenbrock, Regulating and Supervising European Financial Markets (Springer 2016) 123. Della Negra further argues that if such function were assigned to ESAs and market participants could challenge an ESA decision, the effectiveness and credibility’ of ESAs’ consumer protection mandate would dissolve. 176 Ibid. 177 Ibid. Moloney, ‘Regulating the Retail Markets: Law, Policy’ (n 54) 1312, 1317. See also Niamh Moloney, ‘The European Securities and Markets Authority and Institutional Design for the EU Financial Market—A Tale of Two Competences: Part (1) Rule Making; Part (2) Rules in Action’ (2011) 12 European Business Organisation Law Review 184, 190.

1096 FINANCIAL MARKET REGULATION: INTERNAL MARKET 36.79

ESMA first agreed to use its Article 40 MiFIR product intervention powers in March 2018, according to which it would place restrictions on the provision of contracts for differences and prohibit the selling of binary options to retails investors.178 As the products were deemed unduly complex, non-transparent and risky due to a build-up of excessive leverage, ESMA restricted them for raising ‘significant investor protection concern’.179 Indeed, according to ESMA, contracts for differences have caused between 74 and 89 per cent of retail clients to incur losses.180 The measures were formally adopted in June 2018 and have been in effect since July 2018.

E. Selling processes and implementation 36.80

As discussed above, MiFID II also addresses the selling processes of financial institutions by adopting rules governing the organizational requirements and conduct of business provisions. As to the investment firms’ organizational requirements, reference is made to the new provisions on product governance arrangements relating to firms which develop financial products and to those which sell them.181 The purpose of such provisions is to enhance the firms’ understanding of the products they develop or sell and to ensure that they are suitable to the clients to whom they are being sold.182 To this end, investment firms are required to maintain, operate and review the process for approval of each financial instrument and significant adaptations of existing financial instruments before it is marketed or distributed to clients.183 Moreover, specific record-keeping provisions have been laid down in the context of the organizational requirements. In particular, records shall include the recording of telephone conversations or electronic communications relating to, at least, transactions concluded when dealing on own account and the provision of client order services that relate to the reception, transmission and execution of client orders. Investment firms must also notify new and existing clients that telephone communications or conversations between the investment firm and its clients that result, or may result, in transactions will be recorded.184

36.81

Sales targets and remuneration rules are also applicable to banks and other covered financial intermediaries. These rules are based on the ESMA’s185 Guidelines on Remuneration Policies and Practices and aim at ensuring that staff incentives do not result in conflict of interests or impinge upon the firm’s obligation to act in the best interest of the client.186 Finally, as to conduct of business, Articles 25 and 27 of MiFID II narrow the list of execution- only products and widen the list of information investment firms have to provide with regard to best execution.187 178 Hannah Murphy, ‘Europe Regulators Back Tough Rules for Spread-Betters’ Financial Times (London, 27 March 2018). 179 ESMA, ‘ESMA agrees to prohibit binary options and restrict CFDS to protect retail investors’ (ESMA71-98- 128, 27 March 2018). 180 Ibid, 1. 181 See Busch, ‘Product Governance and Product Intervention under MiFID II/MiFIR’ (n 155) ch 5, 124. 182 Article 16 MiFID II. 183 Article 16(3) MiFID II. 184 Article 16(6) and (7) MiFID II. It should also be mentioned that to ensure that record keeping occurs properly, the investment firms must even synchronise their clocks with clocks at the exchanges. 185 See Chapter 20. 186 Article 24(10) MiFID II. 187 Articles 25 and 27 MiFID II.

MIFID II/MIFIR 1097 MiFID II now contains a stronger principle of fair treatment that includes a fiduciary-style obligation on the investment firm to act fairly in the client’s best interests (Article 24(1) MiFID II), and a duty to act honestly, fairly, and professionally in accordance with the best interests of firm’s clients. This is known more generally as a duty of loyalty that is designed to address the weaknesses with the previous information disclosure regime that did not take account of the disadvantages confronting clients who often suffer from asymmetric information problems and behaviour biases.188 Also, regarding marketing, Article 24(3) requires that all information addressed by a firm to clients to be ‘fair, clear and not misleading’.189

36.82

Compared to MiFID I, MiFID II aims to enhance the level of protection of different 36.83 categories of clients. However, there will be room for further analysis once the implementation process is completed in accordance with the Commission’s ongoing Level 2 rule- making process and the final Level 3 compliance and enforcement stage. Before the Brexit referendum, the UK competent authorities were considering the necessary changes for transposing MiFID II into domestic legislation.190 In particular, they were assessing the impact that the new EU legislation may have on the ability of UK credit institutions and investment firms to contract out of their duty of care to retail and wholesale customers and to limit their liability to both consumer and commercial customers.191 As of 2019, the UK has implemented all requirements on the distribution and sale of financial and investment products under MiFIR/MiFID II. In a Brexit ‘no-deal’ scenario, the UK could potentially qualify as having a regulatory regime for the distribution of financial products that qualifies for an ‘equivalence’ designation by the European Commission under the MiFID II equivalence provisions. The final date for Member State transposition of MiFID II into national law was 3 July 2017 and the rules came into effect for market participants on 3 January 2018.192 However, as of 25 January 2018, implementation was still incomplete across the EU with merely 12 out of 28 Member States having fully transposed the Directive into their national law, thereby leaving the transposition status at 64 per cent.193 This may undermine the effectiveness of the general framework as the MiFID rules are only legally binding on market participants once the Directive is transposed into national law.194

188 See Niamh Moloney, The Age of ESMA (Hart Publishing 2018) 15–21. 189 See Luca Enriques and Matteo Gargantini, ‘The Overarching Duty to Act in the Best Interest of the Client in MiFID II’ in Danny Busch and Guido Ferrarini (eds), Regulation of the EU Financial Markets: MiFID II and MiFIR (OUP 2017) ch 4. 190 The Financial Services and Markets Act 2000 (Qualifying EU Provisions) (Amendment) Order 2016. This Order applies some amendments to the Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013. The purpose of these amendments is twofold: (1) to make MiFIR a qualifying EU provision for various parts of FMSA; and (2) to ensure that the FCA and PRA have the appropriate powers to perform their roles under MiFIR. 191 HM Treasury, ‘A new approach to financial regulation: judgment, focus and stability’ (Cm 7874, July 2010) 15–16 accessed 10 February  2020. 192 Article 93 MiFID II; Commission, ‘MiFID II Directive—Transposition Status’ accessed on 10 February  2020. 193 Jeroen Jansen, ‘Monthly update on the latest EU policy and regulatory developments—issue no 1/2018’ (DLA Piper, 14 February 2018) accessed 10 February 2020. 194 See generally the EU principle of direct effect.

36.84

1098 FINANCIAL MARKET REGULATION: INTERNAL MARKET 36.85

The Commission has launched infringement proceedings against Member States including Slovenia and Spain for not, or only partially, notifying the Commission of national measures transposing MiFID II.195 This line of events is similar to 2007 when the Commission commenced infringement actions against Member States for failure to transpose of MiFID I.196 The inadequate implementation may point to the complexity and volume of MiFID I/II measures which would require a longer timeframe to transpose into national law.197

36.86

Investment service providers have also encountered complexities and high costs in implementing the MiFID regime.198 It can be argued that considerable firm misconduct leading to investor harm occurred during and after the crisis because MiFID I rules had not been correctly implemented by firms. This can be supported by the fact that numerous studies suggest that MiFID I implementation by firms was largely unsuccessful. The 2011 Commission/Synovate market study on advice in retail investment services concluded that under MiFID I:199 – information collected by investment firms on financial knowledge, experience and situation of their clients was oftentimes insufficient; – investment firms frequently laid more importance on the amount a client could invest rather than performing due diligence; – financial advice was based rather on superficial information lacking in detail which undermined an informed decision by the investor. Accordingly, in only 57 per cent of mystery shopping cases could investors make informed investment decisions.

36.87

A similar pattern may exist in the MiFID II era: in February 2018, a study by SCM Direct was conducted on investment firms’ compliance with MiFID II duties of full transparency of fees and charges through aggregate presentation.200 The findings include that 40 per cent of traditional investment funds use the European MiFID II Template (EMT), a non-compulsory industry-created template, to disclose MiFID II cost disclosures on their websites.201 Zero per cent of Robo-Advisers/Online Wealth Managers disclosed any aggregate costs and charges on their websites.202 Accordingly, it could be argued that, in its MiFID I review, the EU missed the opportunity to introduce a standardized cost and fees information document for MiFID II products as the KID exists for UCITS products. This could for instance have been possible by making the use of the EMT compulsory.

195 Commission, ‘Securities markets: Commission refers Slovenia and Spain to the Court of Justice for failing to fully enact EU rules on markets in financial instruments’ (Press Release IP/18/4530, 19 July 2018). 196 Commission, ‘Commissioner McCreevy urges Member States to ensure rapid implementation of Markets in Financial Instruments Directive (“MiFID”)’ (IP/07/547, April 2007). 197 Silla Brush, ‘More than half of the EU Is Still Racing to Comply with MiFID Rules’ Bloomberg News (18 October 2017). 198 Joel Lewin, ‘MiFID II preparation could cost firms $2.1bn—report’ Financial Times (29 September 2016). 199 Commission/Synovate, ‘Consumer Market Study on Advice within the Area of Retail Investment Services’ (Final Report 2011). 200 SCM Direct, ‘SCM Direct Research into Cost and Fees Reporting in the UK Post MiFID II Legislation’ (12 February 2018). 201 Ibid, 9. 202 Ibid, 10.

MIFID II/MIFIR 1099

F. Packaged Retail Investment Insurance Products (PRIIPS) Another gap in the MiFID II regime is that it does not apply to insurance-based investment products. Insurance-based investment products (IBIPs) are also known as endowment insurance products. The Packaged Retail Investment Insurance Products (PRIIPs)203 Regulation applies to such products and introduced this technical term to insurance law. PRIIPs requires that the sale of such products be accompanied by a Key Information Document (KID) that describes the risks and is not misleading.204 IBIPs expose retail investors to the risk of capital loss (directly or indirectly) subject to market fluctuations. However, they are also often linked to capital life insurance, unit-linked life insurance and hybrid products. This type of investment product acknowledges that life insurance contracts cover biometric risks and frequently contain an investment component (with risks and opportunities) intended to offer value to policyholders both in the event of death and survival.

36.88

The PRIIPs Regulation defines IBIPs as insurance products which offer ‘a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations’. IBIPs generally are not subject to MiFID II regulatory controls on product regulation, conflicts of interests and remuneration. Instead, IBIPs have been subject to lighter touch regulation under the Insurance Mediation Directive (IMD), which contains only minimum restrictions on the design and distribution of products and minimal restrictions on remuneration. The IMD has since been replaced by the Insurance Distribution Directive (IDD) in October 2018.205

36.89

Under both PRIIPs and the IDD, there is an obligation for the issuer of IBIPs to produce a KID and additional requirements for distribution stipulated in the IDD Implementing Act that covers advice and sales. MiFID II and the IDD have similar principles for the regulation of product design and distribution, such as the general duty to act honestly, fairly, and professionally in accordance with the customer’s best interests (Article 17(1) IDD reflecting Article 24(1) MiFID II). Although they contain similar principles, there are significant differences between MiFID II and IDD. There are higher protections under MiFID II. For instance, IDD has no separate conduct of business rule on product governance (equivalent to

36.90

203 European Parliament and Council Regulation (EU) 1286/2014 of 26 November 2014 on key information documents for packaged retail and insurance-based investment products [2014] OJ L352/1 (hereafter PRIIPs). 204 See Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 supplementing Regulation (EU) 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products (PRIIPs) by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents [2017] OJ L100/1. The Commission’s Delegated Regulation for PRIIPS requires that the KID is limited to three pages and must contain a description of (1) purpose; (2) the product; (3) what are the risks and expected returns?; (4) what if the underlying PRIIPS issue is unable to pay out to the investor?; (5) what are the costs?; (6) how long must the investor hold the product before selling it?; and (7) complaints procedure. 205 See Publications Office of the European Union, ‘National Transposition measures communicated by the Member States concerning: Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution’ (2019) accessed 10 February 2020. See Proposal of the Commission to postpone the implementation of the IDD to October 2018 accessed 10 February 2020.

1100 FINANCIAL MARKET REGULATION: INTERNAL MARKET Article 24(2) MiFID II). Also, MiFID II and IDD have different conduct of business rules for inducements, independent advice, and investor protection. 36.91

Regarding inducements,206 MiFID II prohibits all inducements with limited exceptions, whereas the IDD permits insurance intermediaries/undertakings to receive inducements so long as it is part of ‘fulfilling their obligations’ to their customers and if not detrimental to the quality of service and duties to act honestly, fairly, and professionally in the customer’s best interests. The IDD provides minimum harmonization in this area while Member States are allowed to have stricter ‘super-equivalent’ provisions along the lines of the UK Retail Distribution Review.

36.92

Regarding ‘independent advice’ MiFID II has strict rules regarding disclosure to the customer about whether the adviser is providing independent advice. Moreover, the provision of independent advice must involve advice on a wide variety of products, and also comply with the inducements regime (Article 24(7) MiFID II). In contrast, the IDD has minimum harmonization rules on the provision of independent advice and Member States are not required to restrict inducements (ie bonuses) for the provision of independent advice.

36.93

Moreover, for investor protection, MiFID II has a much stricter distinction between retail and professional investors and limits the ability of the firm to upgrade a retail investor to professional investor status unless certain assessments are completed regarding investor’s suitability to be treated as a professional investor. In contrast, the IDD has no such distinction between retail and professional investor. This is a significant difference in treatment regarding the sale and distribution of MiFID II products and IBIP products governed under the IDD.

VII. Summing Up—EU Financial Services Legislation—Levels 1 and 2 36.94

The EU legislative framework follows a sectoral approach to financial regulation involving the sectoral authorities— the EBA, ESMA, and EIOPA207— adopting regulatory and implementing standards that reflect the sectoral focus of Level 1 and Level 2 legislation. Where financial firms and their investment products serve and have similar functions and characteristics, this sectoral approach may overlook gaps and overlaps that can result in more unnecessary fragmentation and segmentation in the markets. Another regulatory risk arises where the prudential supervision objectives of the CRD IV, for example, are often at odds with the investor and consumer protection objections of other EU legislation, such as MiFID II, because lower and more transparent costs in financial products might limit bank profitability and in some cases undermine their solvency and stability.

36.95

An important development going forward is that the CRD V Regulation and Directive208 (CRD V Package) have the aim of making prudential regulation more proportionate. One 206 Colaert, ‘MiFID II in Relating to Other Investor Protection Regulation’ (n 124) 596. 207 See Chapter 20. 208 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on the prudential requirements of investment firms and amending Regulation (EU) 575/2013 (EU) No 600/2014 and (EU) No 1093/ 2010’ COM (2017) 790 final, 3–4.

SUMMING UP—EU FINANCIAL SERVICES LEGISLATION 1101 way the CRD V does this is by making the regulation of securities and investment firms that are deemed to be systemically insignificant less stringent as part of the Capital Markets Union initiative that is designed to increase the flow of capital to European companies and entrepreneurs from non-bank finance sources.209 Specifically, the CRD V reforms propose to reduce capital, liquidity and risk management requirements for certain investment and securities firms (including investment firm groups without a credit institution) that are currently subject to the CRD IV. CRD V would create a category of securities and investment firms that would be deemed to be non-systemic and thus subject to much less stringent prudential requirements. CRD V aims to make prudential regulation for securities and investment firms more proportionate to the risks that they pose to the financial system and economy. It is also designed to support the objective of loosening regulatory requirements for securities and investment firms and companies seeking to raise capital in the EU markets. However, a few systemically important investment firms, defined as such under Article 131 CRD IV, would still be subject to the CRR/CRD IV capital, liquidity and risk governance requirements because these firms incur and underwrite risks (both credit and market risks) on a largescale basis in the EU single market. The rationale for subjecting smaller and systemically less important institutions to exemptions from the CRD IV prudential requirements is based on the lower level of perceived systemic risk they pose to the financial system.210 This is meant to provide a ‘more streamlined regulatory toolkit’ to allow these firms to provide services more efficiently across different type of business models and to adjust prudential requirements accordingly to reflect the diminished systemic risk they pose to the financial system.211 An important omission in the CRD V package, however, remains that it does not address the financial stability risks that appear to be emerging the EU shadow banking market.212

36.96

The CRD V package is likely to make a great deal of further regulatory adjustment necessary including renewed reform of capital and liquidity requirements under the Basel Accord 2017 reforms that allow banks to rely less on internal ratings-based models by limiting the reduction in risk-based assets to not less than 70 per cent of the standardized approach and stricter counter-party margining requirements. These proposals, among others, are contained in the draft CRR III and will apply the proportionality principle further to take into account the specificities of Member State markets as well as the European market.

36.97

Other weaknesses in the EU framework include that it is piecemeal and lacks common con- 36.98 cepts and terminology. For instance, MiFID II should perhaps have covered also insurance- based investment products (IBIPs) which are generally considered to be substitutes for certain financial instruments and structured deposits which are subject to MiFID II’s conduct of business rules. These differences lead to segmentation risk and to regulatory arbitrage.213 As mentioned, EU supervision is sectorally divided (MiFID: ESMA/IDD: EIOPA) 209 See Chapter 35. 210 COM (2016) 854 final. 211 COM (2017) 791 final, 2. 212 COM (2016) 854 final. 213 Colaert, ‘MiFID II in Relating to Other Investor Protection Regulation’ (n 124) 988–89; Kern Alexander, ‘Marketing, Sale and Distribution. Mis-selling of Financial Product’ (2018) ECON Committee accessed 10 February 2020.

1102 FINANCIAL MARKET REGULATION: INTERNAL MARKET between the ESMA and EIOPA. This hampers creation of a true regulatory level playing field for all investment products within the EU internal market. The EU sectoral approach to regulating differently investment products that have similar economic characteristics should be reconsidered, as different regulatory approaches for these products lead to segmentation risk and regulatory arbitrage. 36.99

The chapter also discusses how the MiFID II and MiFIR regime has become core to EU financial product and investment services law. Nevertheless, the MiFID II/MiFIR rules contain some gaps in coverage leading to segmentation in the types of investment products covered, while Member State transposition has not been uniformed or timely. Further, evidence suggests that the industry is not disclosing the full costs of investment products in a clear and unambiguous way. These issues could be addressed through concrete EU guidance, aimed at assuring Member State competent authorities’ have adequate capacities to achieve stronger supervisory convergence, which may occur in the future through the implementation of the Capital Markets Union.

37

BANKING SUPERVISION Christoph Ohler

I. From Sovereign Debt Crisis to Banking Union

A. Interdependence of sovereigns, banks, and markets B. Emergency measures C. ‘Cutting the Gordian Knot’: Single Supervisory Mechanism D. From Single Supervisory Mechanism to European Banking Union

II. SSM As First Pillar of the European Banking Union A. Legal basis B. The distinction between prudential regulation and supervision C. Risks as the object of regulation and supervision D. Objectives of the SSM E. Main features of the SSM

III. Distribution of Competences Within the SSM

37.1 37.1 37.6 37.15 37.20 37.25 37.25 37.32 37.33 37.47 37.53 37.58

A. B. C. D. E.

Competences ratione personae Competences ratione materiae Territorial scope of SSM Direct supervision Indirect supervision

IV. Organizational Principles

A. Independence and accountability of the ECB B. Governance: Supervisory Board and Governing Council of the ECB C. Separation of supervisory and monetary functions D. Single rulebook; relationship to EBA E. Administrative and judicial control

V. Powers of the ECB A. B. C. D. E.

Applicable law Investigatory powers Supervisory powers Common procedures Administrative penalties and sanctions

37.58 37.61 37.63 37.67 37.72 37.73 37.73 37.79 37.83 37.85 37.90 37.93 37.93 37.95 37.97 37.99 37.103

I. From Sovereign Debt Crisis to Banking Union A. Interdependence of sovereigns, banks, and markets The sovereign debt crisis in Europe that started in early 2010 was the ground on which profound institutional reforms of the Economic Monetary Union (EMU) were put into place. It was triggered by the inability of Greece, Ireland, Portugal, and later on also Spain, to continue borrowing from the markets when fears increased that these Member States could default on their sovereign debt.1 The reasons why these Member States lost their access to the financial markets differed considerably, however. Greece had been suffering from a high 1 Alicia Hinarejos, The Euro Area Crisis in Constitutional Perspective (OUP 2014) 11–14; Jörg Haas and Katharina Gnath, ‘The Euro Area Crisis: A Short History’ (Bertelsmann Stiftung, Policy Paper 172, September 2016) 3. See also IMF, ‘A Banking Union for the Euro Area’ (IMF Staff Discussion Note, 13 February 2013) 5 (hereafter IMF, ‘A Banking Union for the Euro Area’).

Christoph Ohler, 37 Banking Supervision In: The EU Law of Economic and Monetary Union. Edited by: Fabian Amtenbrink and Christoph Herrmann, Oxford University Press (2020). © The several contributors 2020 DOI: 10.1093/oso/9780198793748.003.0045

37.1

1104 BANKING SUPERVISION level of indebtedness for many years, while rising sovereign debt in Ireland, Portugal and Spain was the result of public bail-outs of the national banking systems. The rescue measures in the latter countries had become necessary when, due to the financial crisis that preceded the debt crisis, a boom in the private housing markets came to a sudden halt. Common features of the development in all these countries were the high levels of sovereign debt and the strong dynamics of indebtedness,2 so that the governments lost their ability to borrow freely and at interest rates acceptable in the context of public budgetary systems. 37.2

The financial weakness of the governments exposed their countries not only to economic and social risks. It also revealed their inability to stabilize the financial system in their countries, in case that rescue measures should become necessary again.3 Shortly after the global financial crisis of 2008/2009, that had left deep traces in the economies of many Member States, there were two reasons why the risks of a return of the financial turmoil were high. Firstly, banks held considerable portions of government bonds in their books, which suddenly carried solvency risks when prices for these bonds fell. Secondly, as a direct result of the recession that followed from the global financial crisis, many banks held non-performing loans and other assets in their balance-sheets at levels that seemed to be unsustainable.

37.3

In Greece, the fiscal problems of the government triggered a reassessment among market participants of the creditworthiness of the Greek banking sector, seriously restricting Greek banks’ access to capital markets.4 Similar developments occurred in other countries of the euro area. If one of the major banks should fail again, so was the common analysis in these years, this could trigger a new systemic crisis with all its negative consequences for the real economy and social life.5 But, rescuing the ailing banks would pose considerable budgetary risks for the governments themselves6 and create moral hazard.7 At the same time, governments still wished to rely on banks as financiers of their notorious budget deficits, in particular in times of economic recession. Banks should continue purchasing government bonds that were in good times a riskless investment, but that could become illiquid assets from one day to another if the issuing government was cut-off the financial markets.

37.4

This development had severe consequences on the functioning of financial markets in the euro area. While some governments and parts of the banking sector lost access to the markets, and others faced increasing funding costs, the markets for government bonds in 2 On these two factors, see Antonio Bassanetti, Carlo Cottarelli, and Andrea Presbitero, ‘Lost and found: Market Access and Public Debt Dynamics’ (December 2016) IMF Working Papers WP/16/253 accessed 30 January  2020. 3 Compare Paul De Grauwe, ‘Design Failures in the Eurozone: Can they be fixed?’ (2013) LEQS Paper No 57, 3 (hereafter De Grauwe, ‘Design Failures’): ‘deadly embrace’. See also Niamh Moloney, ‘European Banking Union: assessing its risks and resilience’ (2014) 51 Common Market Law Review 1609, 1622 (hereafter Moloney, ‘European Banking Union: assessing its risks and resilience’). 4 ECB, ‘Financial Stability Review’ (December 2010) 11. 5 Compare G-20, Toronto Summit Declaration (26–27 June 2010) Annex I, para 2; G-20, Cannes Summit Final Declaration (4 November 2011) para 1. 6 According to figures provided by the Commission, recapitalization measures represented 3.2 per cent of the EU Gross Domestic Product (GDP) in 2012, but they represented more than 10 per cent of the country’s GDP in Ireland, Greece, and Cyprus: see Commission, ‘European Financial Stability and Integration Report 2013’ SWD (2014) 170 final, 74. 7 Compare Financial Stability Board, ‘Reducing the moral hazard posed by systemically important financial institutions’ (FSB Recommendations and Time Lines, 20 October 2010).

From Sovereign Debt Crisis to Banking Union 1105 northern Europe remained relative stable. The question of how to interpret the strong divergence of yields in bond markets gave rise to contradicting interpretations. In an initial assessment, the German Federal Constitutional Court (Bundesverfassungsgericht) considered this a normal market reaction to the divergent development of risks in European Union (EU) countries.8 The European Central Bank (ECB) and other institutions, including the IMF, put forward another line of interpretation.9 They feared a fragmentation of financial markets within the euro area with adverse effects for the coherence of EMU and the functioning of monetary policy. In the end, the massive and persistent capital flight from Greece and other countries to safe havens in northern Europe demonstrated that the problems were not of a temporal nature, but required substantive answers. In order to find these answers, the complex—on an economic, political and psychological level—interplay of several factors had to be taken into consideration: the interdependence of sovereigns and banks in their relationship as debtors and creditors, the continued fragmentation of markets, as well as the dynamics and the order of magnitude of the financial turmoil. All these factors were at the heart of all attempts to contain the crisis and, later on, to reform the financial system in the euro area. Starting in 2010, emergency measures were taken by different actors and on several levels, mostly reflecting an incremental approach that evolved over time. The same logic applied to subsequent legislative reforms that resulted from the crisis.

37.5

B. Emergency measures 1. Monetary Policy In the area of monetary policy, the ECB continued flooding the banking system with central bank liquidity. In technical terms this happened by full allotment of tenders and by lending at interest rates of around 1 per cent. On 10 May 2010, in the face of severe market tensions caused by fears about whether Greece would remain a member of the euro area, the ECB decided to intervene in the markets of the euro area and purchase securities of sovereign and private issuers. With the Securities Markets Programme (SMP),10 as it was officially titled, the ECB aimed at relaxing the markets and re-establishing the confidence in the stability of EMU.11 Two years later, on 6 September 2012, when tensions in the markets increased again, the ECB adopted the Outright Monetary Transactions (OMT) programme.12 Even though the programme was never implemented in practice, the ECB managed to anchor a strong psychological effect and persuade market participants that it was able to sustain the monetary transmission mechanism in the euro area.13 The programme did not remain 8 Bundesverfassungsgericht, Decision of 14 January 2014, 2 BvR 2728/13 (OMT), para 71. 9 ECB, ‘Monthly Bulletin’ (October 2012) 8; Commission, ‘A blueprint for a deep and genuine economic and monetary union’ COM (2012) 777 final, 8; IMF, ‘A Banking Union for the Euro Area’ (n 1) 5. 10 Decision of the ECB of 14 May 2010 establishing a securities markets programme (ECB/2010/5) [2010] OJ L124/8. 11 For a critical assessment, see Matthias Ruffert, ‘The European debt crisis and European Union Law’ (2011) 48 Common Market Law Review 1777, 1787 (hereafter Ruffert, ‘The European debt crisis’). 12 The documentation of the OMT Programme is available at accessed 30 January 2020. 13 Compare ECB, Annual Report (ECB 2012) 16. See also Moloney, ‘European Banking Union: assessing its risks and resilience’ (n 3) 1623–24.

37.6

1106 BANKING SUPERVISION uncontested,14 but the Court of Justice of the EU (CJEU) confirmed its legality on 16 June 2015.15

37.7

37.8

2. Intergovernmental Financial Assistance In parallel to the measures taken by the ECB, the Member States of the euro area attempted to assist those Member States that were hit severely by the debt crisis and which, accordingly, had become a source of further contagion for other countries and the financial system as a whole.16 Initially, the Member States granted financial assistance on a bilateral basis, but the panic in May 2010 prompted them to establish the multilateral European Financial Stability Facility (EFSF). In legal terms, the EFSF is a company governed by the laws of Luxembourg. In political terms, the EFSF is an intergovernmental mechanism, formed on a temporary basis, with the objective to bundle existing funds and mobilize additional capital by the issuance of debt securities in the international financial markets.17 With these means, the effective volume of financial assistance should be increased considerably. In addition, the decision-making process for granting financial assistance was transferred from the national to the international level, comprising the EFSF, the Commission, the ECB, and the International Monetary Fund (IMF). By year-end 2010, it had become evident that the means of the EFSF were not sufficient to reassure markets and to address the financial needs of Greece, in particular. Hence, the euro area Member States decided to establish the European Stability Mechanism (ESM) as a permanent international institution governed by international law.18 The Treaty establishing the ESM of 2 February 2012 entered into force on 1 October 2012. This new development also gave the EU an opportunity to solve the ongoing dispute on the conformity of these measures with the no-bail-out provision under Article 125 of the Treaty on the Functioning of the European Union (TFEU)19 by amending the Treaties and inserting a new paragraph 3 into Article 136 TFEU.20 The new provision reads: The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.

In accordance with this objective, the Treaty Establishing the European Stability Mechanism (ESM Treaty) permits the provision of financial assistance by the ESM to euro area Member 14 Cf the reference for a preliminary ruling by the German Bundesverfassungsgericht, Decision of 14 January 2014, 2 BvR 2728/13 (OMT). For a legitimation of OMT, see De Grauwe, ‘Design Failures’ (n 3) 17. 15 Case C-62/14 Peter Gauweiler and Others v Deutscher Bundestag [2015] ECLI:EU:C:2015:400. 16 For an overview, see Alberto de Gregorio Merino, ‘Legal developments in the Economic and Monetary Union during the debt crisis: the mechanisms of financial assistance’ (2012) 49 Common Market Law Review 1613 (hereafter de Gregorio Merino, ‘Legal developments in the Economic and Monetary Union’). 17 Compare de Gregorio Merino, ‘Legal developments in the Economic and Monetary Union’ (n 16) 1619. 18 For an overview, see Christoph Ohler, ‘The European Stability Mechanism: the long road to financial stability in the euro area’ (2011) 54 German Yearbook of International Law 47. 19 See eg Peter M Huber, ‘The rescue of the euro and its constitutionality’ in Wolf-Georg Ringe and Peter M Huber (eds), Legal Challenges in the Global Financial Crisis (Hart Publishing 2015) 9; Ruffert, ‘The European debt crisis’ (n 11) 1785. The dispute was settled mainly by the decision of the CJEU of 27 November 2012 in Case C-370/ 12 Thomas Pringle v Government of Ireland and Others [2012] ECLI:EU:C:2012:756. 20 European Council Decision 2011/199/EU of 25 March 2011 amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro [2011] OJ L91/1.

From Sovereign Debt Crisis to Banking Union 1107 States and to financial institutions established in their territory for the specific purpose of their recapitalization, subject to strict conditionality.21 Financial support for banks, however, should be granted on an indirect basis, ie via the Member State in whose territory the bank was established.22 The support measures taken by Member States, the EFSF and the ESM during the years 2010 to 2012 lead to two fundamentally contrasting views in the public opinion. In the view of the financial markets, the ‘firepower’ of the intergovernmental approach was too little. This perception was the reason why the markets remained extraordinarily nervous up to the moment when the ECB published its OMT Programme in September 2012, two months after its President, Mario Draghi, had declared: ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’23 In contrast to this view, there was a widely shared public feeling that the banks attempted to blackmail governments and made them pay for their own failures prior to the crisis. This sentiment resulted in the political claim that never again the national taxpayers should be forced to bail-out insolvent banks.24

3. Establishment of the European System of Financial Supervision One of the pivotal political decisions of the EU to overcome the global financial crisis was to improve the effectiveness of financial markets’ supervision by national authorities. Based on a sober analysis of the causes of the financial crisis, the Larosière Report of 25 February 2009 recommended a thorough reform of the existing supervisory model in the EU with its shared responsibilities of home and host supervisors.25 In the view of the experts, EU banking supervision suffered from several flaws. First of all, it lacked a macroprudential perspective that payed particular attention to common or correlated shocks and to shocks to those parts of the financial system that trigger contagious knock-on or feedback effects. The decentralized system of banking supervision also favoured distortions and regulatory arbitrage stemming from different supervisory practices that had the potential of undermining financial stability, inter alia, by encouraging a shift of financial activity to countries with lax supervision.26 It was also stressed that the existing processes and practices for challenging the decisions of a national supervisor have proven to be inadequate and that peer review arrangements proved ineffective.27 Interestingly enough, the experts took the view that the ECB should not become responsible for the microsupervision of financial institutions.28 21 Articles 12–16 ESM Treaty. 22 Article 15 ESM Treaty. 23 Mario Draghi, ‘Speech at the Global Investment Conference’ (London, 26 July 2012) accessed 30 January  2020. 24 Compare Recital (1) of European Parliament and Council Directive 2014/59/EU of 5 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms [2014] OJ L173/190. 25 Jacques De Larosière and others, ‘Report of the High Level Group on Financial Supervision in the EU’ (Brussels, 25 February 2009) 38ff (hereafter The High Level Group). See also Natalia Kohtamäki, Die Reform der Bankenaufsicht in der Europäischen Union (Mohr Siebeck 2012); Rosa M Lastra, International Financial and Monetary Law (2nd edn, OUP 2015) paras 11.25ff (hereafter Lastra, International Financial and Monetary Law). 26 The High Level Group (n 25) 39; an illustrative example is provided by Benedikt Wolfers and Thomas Voland, ‘Level the playing field: The new supervision of credit institutions by the European Central Bank’ (2014) 51 Common Market Law Review 1446 (hereafter Wolfers and Voland, ‘Level the playing field’). 27 The High Level Group (n 25) 40. 28 The High Level Group (n 25) 44.

37.9

37.10

1108 BANKING SUPERVISION 37.11

In rare unity, Member States and EU organs agreed to these conclusions, so that in November 2010, by adopting three nearly identical regulations, the EU legislator established the European System of Financial Supervision (ESFS) as at network of supervisory authorities. In addition to the national supervisors, it comprises three independent EU agencies responsible for the banking sector (European Banking Authority, EBA),29 the insurance and pension funds sector (European Insurance and Occupational Pensions Authority, EIOPA)30 and the securities markets (European Securities and Markets Authority, ESMA).31 These three European Supervisory Authorities (ESAs) replaced the existing advisory committees, the so-called ‘level-3’ committees of the Lamfalussy procedure.32 Further elements of the ESFS are the European Systemic Risk Board (ESRB), which is responsible for the macroprudential oversight of the financial system in the EU, and the national supervisory authorities.

37.12

The main task of the ESAs is to contribute to the creation of a ‘European Single Rulebook’ in order to provide a single set of harmonized prudential rules for financial institutions throughout the internal market. For this purpose, the ESAs may submit proposals for regulations and decisions, which are to be adopted by the European Commission under Articles 290 and 291(2) TFEU. The authorities may also issue non-binding guidelines and recommendations to national authorities or financial institutions. Under certain circumstances, eg in the event of a crisis, they have the power to adopt binding decisions addressed to national authorities as well as financial institutions.

37.13

4. Structural weaknesses of the European System of Financial Supervision From its inception, the ESFS, and in particular the EBA, suffered from considerable structural weaknesses, however. The authorities were ill-equipped with regard to staff, money and executive powers.33 In addition, the economic development in Europe left them practically no time learning to understand the complex and huge system for the oversight of which they had been established. At the beginning of 2011, when the ESFS became operative, the financial sector in the EU was still in crisis mode, which even worsened in the course of the debt restructuring of Greece during the first-half of 2012. In parallel to this event, the ongoing economic recession in Spain dug deeply in its banking system, causing severe concerns about growing recapitalization needs of individual institutions. The EBA, performing its first stress tests in 2011 in order to analyse the ongoing risks for the capital basis of banks, was not able to provide a realistic description of the problems. The situation worsened when in Spain the supervisory authorities, at least initially, failed to understand the order of magnitude of the recapitalization needs, that significant parts of the Spanish

29 European Parliament and Council Regulation (EU) 1093/2010 of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority) [2010] OJ L331/12. 30 European Parliament and Council Regulation (EU) 1094/2010 of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority) [2010] OJ L331/48. 31 European Parliament and Council Regulation (EU) 1095/2010 of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority) [2010] OJ L331/84. 32 On this procedure, see Lastra, International Financial and Monetary Law (n 25) para 11.18ff. 33 House of Lords, European Union Committee, ‘The post-crisis EU financial regulatory framework: do the pieces fit?’ (HL Paper 103, 2 February 2015) 43–44; Howard Davies, ‘Unfinished business: an assessment of the reforms’ in Eddy Wymeersch, Klaus Hopt, and Guido Ferrarini (eds), Financial Regulation and Supervision (OUP 2012) 55.

From Sovereign Debt Crisis to Banking Union 1109 banking system were about to face.34 In the eyes of the European institutions, all of this demonstrated that the means of the EBA were insufficient to increase the resilience of the banking system in the EU and to cure the inefficiencies of national supervisory practices. These events also underlined the need to solve the so-called financial trilemma, ie the difficulty to achieve simultaneously a single financial market and financial stability while preserving a high degree of nationally based supervision.35

5. Constitutional restraints of legislative reforms Accordingly, a reform of this system became of utmost political importance in the course of 2012. Yet, the easiest way, an amendment of the EBA regulation that would grant more powers to this authority, was barred for constitutional reasons. All powers to be delegated by the legislator to authorities established under secondary law are subject to severe restraints according to the criteria which the CJEU had developed. Since its Meroni decision of 1958 the CJEU has held that the organs of the EU may not confer upon the authority receiving the delegation powers different from those which the delegating authority itself received under the Treaty.36 In addition, the CJEU distinguishes between two fundamentally different forms of delegation: The consequences resulting from a delegation of powers are very different depending on whether it involves clearly defined executive powers the exercise of which can, therefore, be subject to strict review in the light of objective criteria determined by the delegating authority, or whether it involves a discretionary power, implying a wide margin of discretion which may, according to the use which is made of it, make possible the execution of actual economic policy. A delegation of the first kind cannot appreciably alter the consequences involved in the exercise of the powers concerned, whereas a delegation of the second kind, since it replaces the choices of the delegator by the choices of the delegate, brings about an actual transfer of responsibility.37

In a judgement of 2014 referring to powers delegated to ESMA, the CJEU stated that in principle those criteria also apply to the EU legislator when it defines the tasks of an agency established by secondary law.38 However, the Court seemed to be prepared to restrain its control over the legislature at least partly, as long as the powers available to a supervisory authority are ‘precisely delineated and amenable to judicial review in the light of the objectives established by the delegating authority’.39 In legislative practice, this means that a supervisory authority set up by secondary law may not be vested with broad powers subject only to very general prudential objectives. Yet, prudential supervision on the level of individual banks as well as on the macroprudential level will always imply the exercise of wide discretion where the consequences of a decision may have a far-reaching impact not only on the 34 In particular, this referred to the restructuring of the BFA Group and its subsidiary Bankia. A short analysis is provided by the state aid decision of the Commission C (2012) 8764 final of 28 November 2012. See also Tobias Tröger, ‘The Single Supervisory Mechanism—Panacea or Quack Banking Legislation?’ (2014) 15 European Business Organization Law Review 459 (hereafter Tröger, ‘Single Supervisory Mechanism’). 35 Lastra, International Financial and Monetary Law (n 25) para 10.11; Dirk Schoenmaker, ‘The Financial Trilemma’ (2011) Tinbergen Institute Discussion Paper No 11-019/2/DSF accessed 30 January 2020. 36 Case 9/56 Meroni & Co, Industrie Metallurgiche, SpA v ECSC High Authority [1957-58] ECR 133, 150. 37 Ibid, 152. 38 Case C-270/12 United Kingdom v Parliament and Council [2014] ECLI:EU:C:2014:18, para 43. 39 Ibid, para 53.

37.14

1110 BANKING SUPERVISION institution to which it was addressed but potentially also on the broader financial system and the economy as a whole. This became obvious when in September 2008 the US authorities declined to rescue the investment bank Lehman Brothers Inc., thereby triggering its bankruptcy and, within a few days only, a worldwide financial crisis.40

C. ‘Cutting the Gordian Knot’: Single Supervisory Mechanism 37.15

Addressing these complex problems required an overhaul of the reform agenda that had begun only two years ago with the putting into place of the ESFS. The strong dynamics of the debt crisis urged practically all Member States to find a solution that would cut the Gordian knot of rising sovereign indebtedness and continuous instability of banks and markets. On 29 June 2012, the Euro Area Summit concluded: We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.

37.16

The vicious circle,41 which the Heads of State or Government emphasize in their statement, relates to the interference of growing public debt and declining solvency of banks. It is based on a mixture of hard economic facts and psychological elements, mainly a negative perception of the ability of states to rescue failing banks without the states themselves being pushed to the brink of insolvency. The EU legislator described this adverse interference later on with the following words: The stability of credit institutions is in many instances still closely linked to the Member State in which they are established. Doubts about the sustainability of public debt, economic growth prospects, and the viability of credit institutions have been creating negative, mutually reinforcing market trends. This may lead to risks to the viability of some credit institutions and to the stability of the financial system in the euro area and the Union as a whole, and may impose a heavy burden for already strained public finances of the Member States concerned.42

37.17

On its summit of 18–19 October 2012 the European Council concluded: We need to move towards an integrated financial framework, open to the extent possible to all Member States wishing to participate. In this context, the European Council invites the legislators to proceed with work on the legislative proposals on the Single Supervisory Mechanism (SSM) as a matter of priority, with the objective of agreeing on the legislative 40 For an in-depth analysis, see The Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report— Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (US Government, January 2011). 41 See Jan Ceyssens, ‘Teufelskreis zwischen Banken und Staatsfinanzen’ (2013) 66 Neue Juristische Wochenzeitschrift 3704; Lastra, International Financial and Monetary Law (n 25) para 10.12; Moloney, ‘European Banking Union: assessing its risks and resilience’ (n 3) 1629. 42 Recital (6) SSM Regulation.

From Sovereign Debt Crisis to Banking Union 1111 framework by 1 January 2013. Work on the operational implementation will take place in the course of 2013. In this respect, fully respecting the integrity of the Single Market is crucial.

The decision to establish the Single Supervisory Mechanism (hereafter SSM) on the basis of Article 127(6) TFEU was a highly political step,43 in procedural as well as in substantive terms. Procedurally, it involved the participation of all Member States, including the Member States outside the euro area, in the legislative process.44 The result is striking. While the regulation adopted by the Council is directly applicable in all Member States of the EU, effectively, the Treaties limit the territorial scope of the reform to the euro area as the powers of the ECB are confined to the participating Member States.45 In substantive terms, all political actors, including the ECB, hoped that the SSM would break the adverse link between banks and sovereigns in the euro area and reverse the process of financial market fragmentation in the euro area.46 The political price to be paid for this step was high. It required a considerable conferral of competences from the national level upon the ECB by the euro area Member States, while it left intact the autonomy of all other Member States in the area of prudential supervision. However, the latter Member States feared that the SSM would deepen the division between the ins and outs of the EMU and threaten the integrity of the internal market.47 In addition, the establishment of the SSM should become a prerequisite for direct recapitalization operations by the ESM to ailing banks in euro area Member States. The rationale for linking the ESM’s competence for direct recapitalization measures with the entering into force of the SSM was typical for the mechanisms of European integration. If the ESM had to take the risk of directly holding equity in banks, then the ECB should assume the responsibility for the supervision of banks in order to reduce the probability that financial support by the ESM would become necessary.

37.18

The EU legislator had additional reasons why the supervisory tasks were conferred upon the ECB and not upon another organ or an institution like EBA. Firstly, the Meroni doctrine of the CJEU does not apply when powers are conferred upon an organ of the EU in accordance with the Treaties.48 Secondly, the ECB can be seen as particularly qualified for this task because it disposes of extensive professional knowledge in macroeconomic issues and is familiar with the structure of the euro area’s banking system.49 It is against this backdrop that the Council adopted Regulation (EU) 1024/2013 of 15 October 2013 (SSM Regulation).50

37.19

43 Jens Binder and Christos Gortsos, European Banking Union: A Compendium (CH Beck and Hart Publishing 2016) 2 (hereafter Binder and Gortsos, European Banking Union). 44 Article 127(6) TFEU requires unanimous vote by the Council. On the political risks of this procedure, see Eddy Wymeersch, ‘The Single Supervisory Mechanism: Institutional Aspects’ in Danny Busch and Guido Ferrarini (eds), European Banking Union (OUP 2015) 99 (hereafter Wymeersch, ‘The Single Supervisory Mechanism’). 45 Article 139(1), (2) subpara 1(e) taken together with Article 132 TFEU. 46 ECB Opinion of 27 November 2012 on a proposal for a Council regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and a proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) 1093/2010 establishing a European Supervisory Authority (European Banking Authority) (CON/2012/96) [2013] OJ C30/6, para 1.1. 47 House of Lords, European Union Committee, ‘European Banking Union: Key Issues and Challenges’ (HL Paper 88, 12 December 2012) 40ff. See also Moloney, ‘European Banking Union: assessing its risks and resilience’ (n 3) 1661. 48 Klaus Lackhoff, Single Supervisory Mechanism (CH Beck 2017) 20ff (hereafter Lackhoff, Single Supervisory Mechanism). 49 Recital (13) SSM Regulation. 50 Council Regulation (EU) 1024/2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L287/63.

1112 BANKING SUPERVISION The SSM became operative on 4 November 2014 with the ECB assuming its tasks under the SSM Regulation.51

D. From Single Supervisory Mechanism to European Banking Union 37.20

The ongoing debt crisis exposed that the SSM would not suffice to prevent bail-outs of banks in the future and curb its adverse effects on public households.52 The SSM would be, once it had been established, a system for the prevention of bank failures, but not one for the management of failures that nonetheless could occur. The experience with ongoing bank crises demonstrated that national insolvency proceedings were neither adequate for the resolution of banks, in general, nor for a cross-border context, in particular.53 In order to safeguard the stability of the financial system as a whole, it was necessary to overhaul the whole system and establish rules under which banks could fail in an orderly manner without triggering contagion risks for other financial institutions in the internal market. In addition, a mechanism had to be found that permitted, in parallel to the SSM, a centralized system of bank resolution in the euro area. In the absence of these instruments, Member States were still forced to provide financial assistance to failing banks in order to prevent their breakdown. These were the main reasons why on each of its summits in 2012 the European Council reiterated that: ‘It is imperative to break the vicious circle between banks and sovereigns.’ In a ‘Roadmap for the Completion of EMU’, the European Council stated on 12–13 December 2012: In a context where bank supervision is effectively moved to a single supervisory mechanism, a single resolution mechanism will be required, with the necessary powers to ensure that any bank in participating Member States can be resolved with the appropriate tools.

37.21

The existing institutional architecture did not permit an adequate solution, however. The ECB would only become competent to supervise banks, but it would not be competent under Article 127(6) TFEU to restructure and resolve failing banks.54 Also the ESM was not in a position to fill this lacuna since its mandate was restricted to mere recapitalization measures while crisis management and resolution on the level of individual banks would be performed by national authorities.

37.22

In 2014, a solution was reached by the adoption of two legal acts under Article 114 TFEU: Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD)55 and Regulation (EU) 806/2014

51 Article 33(2) SSM Regulation. 52 ECB Opinion of 29 November 2012 on a proposal for a directive establishing a framework for recovery and resolution of credit institutions and investment firms (CON/2012/99) [2013] OJ C39/1. IMF, ‘A Banking Union for the Euro Area’ (n 1) 4. 53 ECB, ‘Monthly Bulletin’ (July 2011) 86. 54 Kern Alexander, ‘The European Central Bank’s supervisory powers’ in ECB (ed), ECB Legal Conference 2017 (ECB 2017) 359; Rosa M Lastra, ‘Banking Union and Single Market: Conflict or Companionship?’ (2013) 36 Fordham International Law Journal 1190, 1207. 55 See (n 24).

From Sovereign Debt Crisis to Banking Union 1113 establishing a Single Resolution Mechanism (SRM Regulation).56 The latter regulation forms the legal basis for an additional independent authority, the Single Resolution Board (SRB), which is in charge of implementing the requirements of BRRD as specified by the SRM Regulation for the euro area. Both the SSM and the SRM form together what the EU legislature proudly calls the Banking Union,57 with the SSM being considered the first and the SRM the second ‘pillar’. A third pillar of the Banking Union, a common deposit insurance scheme, has not been implemented so far as this project faced strong political opposition from Germany. Still, the Banking Union was and is considered by the Commission as a holistic approach under which the EU pursues several ambitious objectives: increasing financial stability while minimising costs to taxpayers, completing the EMU, restoring confidence in the financial sector and reducing market fragmentation, and ultimately contributing to economic recovery.58

37.23

It is difficult to answer the question of whether the Banking Union will fulfil these high 37.24 political expectations. Neither the SSM nor the SRM will abolish the multiple lines of economic interdependence between banks and states in the euro area. Banks will continue to provide credit for the financing of public budget deficits and to that extent states will remain their debtors. Governments will also rely on the vital economic functions performed by banks and, accordingly, will have a strong interest that these functions are not interrupted in times of crises.59 It is also unrealistic to believe that banking crises will not occur in the future, even if nobody can forecast their causes, timing and magnitude. The Banking Union does not address the unsolved problem of high levels of public indebtedness in the euro area, too. From a legal point of view, this responsibility lies with the Commission and the Council under the excessive deficit procedure in accordance with Article 126 TFEU. With a view to the systemic risks of a sovereign default, any attempts to establish a creditworthy and stable restructuring mechanism for over- indebted states have not been successful so far. The ESM Treaty contains some elements of such a mechanism,60 yet the experience with the Greek debt restructuring (‘haircut’) of 2012 is sobering. Against this backdrop, the Banking Union can reduce the risks of a negative interference between banking crises and public debt crises, but it cannot fully prevent them.61

56 European Parliament and Council Regulation (EU) 806/2014 of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) 1093/2010 [2014] OJ L225/1. 57 Recital (11) SSM Regulation and Recitals (2), (5)–(7) SRM Regulation. 58 SWD (2014) 170, 76; compare also Recitals (2)–(4) SSM Regulation. 59 Article 14(2)(a) SRM Regulation. See also Eva Hüpkes, ‘The last frontier: Protecting critical functions across border’ in Eddy Wymeersch, Klaus Hopt and Guido Ferrarini (eds), Financial Regulation and Supervision (OUP 2012) 425. 60 Article 12(3) ESM Treaty with its obligation to introduce collective action clauses in bonds permitting a ‘private sector involvement’ in the event that the public debt should become unsustainable. 61 IMF, ‘A Banking Union for the Euro Area’ (n 1) 8; Moloney, ‘European Banking Union: assessing its risks and resilience’ (n 3) 1629.

1114 BANKING SUPERVISION

II. SSM As First Pillar of the European Banking Union A. Legal basis 37.25

1. Scope of Article 127(6) TFEU Article 127(6) TFEU provides that the Council may ‘confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings’. The wording of this enabling clause was the result of a political compromise during the discussions within the Committee of Governors of the Central Banks that had the task to prepare the draft Statute of the European System of Central Banks and of the European Central Bank (ESCB Statute).62 The compromise was confirmed in the intergovernmental negotiations that led to the adoption of the Maastricht Treaty of 7 February 1992. As a result, the wording of the provision does not permit to define exactly the extent of the competence, which the EU legislator may exercise under Article 127(6) TFEU. In particular, it is unclear what the ‘specific tasks’ are that can be conferred on the ECB. In academic literature, it is generally assumed that the full spectrum of supervisory tasks and powers may not be conferred on the ECB.63 This implies that substantial tasks must remain with national authorities, provided, however, that they may be performed in cooperation with the ECB.64 Apart from this analysis ex negativo, the wording does not permit a positive finding on the substance of the ECB’s potential competences.

37.26

This finding could result in a more or less technical solution where it is upon the EU legislator to make use of the leeway granted to it by Article 127(6) TFEU and to determine in its own right the specific tasks to be conferred on the ECB. As long as the regulation resulting from this approach would only specify certain supervisory tasks, the legislator would comply with Article 127(6) TFEU. In the light of the principle of conferral, however, this approach would not fully take into account the limitations inherent in Article 127(6) TFEU. The word ‘specific’ does not only imply that the tasks conferred on the ECB must be spelled out in detail (in the meaning of ‘certain tasks’) and must be delineated from the supervisory competences that remain in the national sphere. It also implies that these tasks must have a substantive quality that is commensurate to the tasks carried out by the ECB as the supreme monetary authority within the Eurosystem.

37.27

A systematic interpretation suggests that Article 127(6) could be read in conjunction with Article 127(5) TFEU.65 This provision relates the prudential supervision of credit institutions exercised by national authorities to the objective of the stability of the financial system. If one accepts this finding, then the legal basis of Article 127(6) TFEU may be used to confer supervisory competences upon the ECB as long as their objective relates to issues of financial stability, including the supervision of systemically important banks. Insofar, the EU 62 Article 25.2 ESCB Statute; an analysis of the negotiations is provided by Markus Brunnermeier, Harold James, and Jean-Pierre Landau, The Euro and the Battle of Ideas (Princeton UP 2016) 368. 63 Lackhoff, Single Supervisory Mechanism (n 48) 16; Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (CH Beck 2015) 145 (hereafter Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion); Wolfers and Voland, ‘Level the playing field’ (n 26) 1486. See also Bundesverfassungsgericht, Decision of 30 July 2019, 2 BvR 1685/14 (Banking Union), paras 162ff. 64 René Smits, The European Central Bank (Kluwer Law International 1997) 356. 65 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (n 63) 145.

SSM As First Pillar of EBU 1115 legislator is also competent to define which banks can be regarded as being systemically important, or, in the wording of the SSM Regulation, as ‘significant’. With regard to Article 132 TFEU, the ‘tasks’ conferred upon the ECB also encompass ‘powers’, ie the right of the ECB to adopt measures that are legally binding on the addressees.66 Any other interpretation would render useless the legislative option of which the Council may make use of under Article 127(6) TFEU. Problems could arise when the ECB wants to take over additional responsibilities relating to less significant banks by claiming its right of intervention as provided by Article 6(5) (b) SSM Regulation. Under this provision, the ECB may at any time decide to exercise directly itself all the relevant powers for a less significant credit institution, in order to ensure consistent application of high supervisory standards. The ECB is of the opinion that its right of intervention applies if, eg, the ECB’s instructions have not been followed by the national competent authorities (NCAs) and thus the consistent application of high supervisory standards is compromised.67 The legal prerequisites for this shift of responsibility are vague and could be fulfilled practically at any time. As a consequence, an extensive use of this provision could undermine the competences of national authorities. This effect would be incompatible with the wording of Article 127(6) TFEU permitting only the conferral of ‘specific tasks’. Therefore, it is suggested that the ECB may only make use of its competence under Article 6(5)(b) SSM Regulation in extraordinary cases.68

37.28

All in all, the SSM Regulation seems to exhaust the powers available under Article 127(6) TFEU.69 This is underlined by the fact that the ECB is not only the supervisory authority for all significant banks in the euro area, but has full control over authorizations and the acquisition of qualifying holdings for all banks in the euro area, and enjoys far reaching powers in the field of indirect supervision.

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2. Complementary national legislation Prior to the adoption of the SSM Regulation, the German parliament (Deutscher Bundestag) adopted a federal law authorising the German government representative in the Council to vote in favour of the proposed regulation. Both the federal government and the parliament were of the opinion that such an authorising act was necessary under German constitutional law because a regulation according to Article 127(6) TFEU would trigger the Bundestag’s political responsibility in matters of EU integration. The constitutional necessity of this law was vividly disputed.70 The solution, however, does not depend directly on 66 Bundesverfassungsgericht, Decision of 30 July 2019, 2 BvR 1685/14 (Banking Union), para 165. This was disputed by parts of the German doctrine, eg Matthias Herdegen, ‘Europäische Bankenunion: Wege zu einer einheitlichen Bankenaufsicht’ (2012) 66 WM 1889, 1891; Ann-Katrin Kaufhold, Systemaufsicht (Mohr Siebeck 2016) 286 (hereafter Kaufhold, Systemaufsicht). 67 ECB, Guide to banking supervision (ECB 2014) 42. This refers to Article 67(2)(d) SSM Framework Regulation. 68 Cf Bundesverfassungsgericht, Decision of 30 July 2019, 2 BvR 1685/14 (Banking Union), para 178. 69 See also Alexander Glos and Markus Benzing, ‘Institutioneller Rahmen: SSM, EZB und nationale Aufsichtsbehörde’ in Jens-Hinrich Binder, Alexander Glos, and Jan Riepe (eds), Handbuch Bankenaufsichtsrecht (RWS Verlag 2018) para 8 (hereafter Glos and Benzing, ‘Institutioneller Rahmen’). 70 Franz C Mayer and Daniel Kollmeyer, ‘Sinnlose Gesetzgebung? Die Europäische Bankenunion im Bundestag’ [2013] DVBl 1158ff; Rainer Wernsmann and Marcel Sandberg, ‘Parlamentarische Mitwirkung bei unionaler Sekundärrechtsetzung’ [2014] DÖV 49ff; Benedikt Wolfers and Thomas Voland, ‘Europäische Zentralbank und Bankenaufsicht—Rechtsgrundlagen und demokratische Kontrolle des Single Supervisory Mechanism’ (2014) 14 BKR—Zeitschrift für Banken-und Kapitalmarktrecht 177ff (hereafter Wolfers and Voland, ‘Europäische Zentralbank und Bankenaufsicht’).

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1116 BANKING SUPERVISION German constitutional law but on the compatibility of the SSM Regulation with its legal basis in the Treaties. More specifically, the question was whether the legislative competence of the Council under Article 127(6) TFEU had already been conferred upon the EU under the Treaty of Maastricht. Again, the wording of Article 132(1) first indent TFEU with its reference to Article 25.2 of the ESCB Statute—the parallel provision to Article 127(6) TFEU— confirms that this was the case.71 To that extent, the Article can be used as a legal basis for the SSM Regulation, the Council acted within its competences, so that any complementary national legislation would be meaningless. If the legal basis of Article 127(6) TFEU had not sufficed for the adoption of the SSM Regulation, the Council would have acted ultra vires. In this case, the unilateral approval of the Bundestag by adopting a federal law could not heal the violation of primary law.

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3. SSM Regulation and SSM Framework Regulation Article 6(7) SSM Regulation provides that the ECB shall ‘adopt and make public a framework for the practical arrangements for the implementation’ of the division of competences between ECB and NCAs within the SSM. It is on this legal basis, together with Article 132 TFEU, that the ECB adopted Regulation (EU) 468/2014 of 16 April 2014 (SSM Framework Regulation).72 It provides many important clarifications to the structure of the SSM, which the SSM Regulation outlines rather roughly. In addition, it defines the procedural rights and obligations of the ECB and the NCAs as applicable between themselves, and towards the credit institutions supervised in accordance with the SSM Regulation. In respect of the latter persons, the SSM Framework Regulation enshrines all relevant due process guarantees,73 and, thereby, closes a gap that the EU legislator had left in the SSM Regulation.

B. The distinction between prudential regulation and supervision 37.32

In the area of banking supervision, the terminology used in public and semi-public statements is not always clear. ‘Prudential regulation’ and ‘prudential supervision’ appear as interchangeable terms—which they are not.74 Firstly, the adjective ‘prudential’ is commonly used to describe the public task of effective oversight of financial institutions, ie not only banks but also insurance companies and other financial intermediaries. Secondly, against the backdrop of the constitutional principles of representative democracy and division of powers, the various roles played by the legislature and the executive must be distinguished. Accordingly, the term ‘regulation’ refers to all measures taken by the legislator vis-à-vis financial institutions to pursue public objectives that are relevant in this context, mainly the maintenance of financial stability and the protection of depositors, investors and consumers. In a system of division of competences, legislative measures are commonly complemented by norms and standards adopted by the executive, ie 71 See also Larissa Dragomir, European Prudential Banking Regulation and Supervision (Routledge 2010) 233. 72 ECB Regulation (EU) 468/2014 of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM Framework Regulation) (ECB/2014/17) [2014] OJ L141/1. 73 Articles 25–35 SSM Framework Regulation. 74 Lastra, International Financial and Monetary Law (n 25) para 3.06.

SSM As First Pillar of EBU 1117 supervisory authorities, central banks and other agencies. Also these measures can be termed as ‘regulation’ as long as their scope is of general nature.75 In contrast thereto, ‘supervision’ is the activity of the executive that aims at implementing and enforcing the regulatory requirements on a case-by-case basis. Effective supervision builds on collecting solid information on the structure, business model, activities and management of the banks including the risks related to these activities. This information forms the basis for all subsequent supervisory measures, be it to enforce regulatory requirements or to further investigate an affair.

C. Risks as the object of regulation and supervision 1. Risk-based approach Prudential regulation and supervision have as their object the risks that are inherent in the banking business.76 All banking involves risks, carrying both opportunities and hazards.77 The standard business model of a bank reflects these risks. Banks are financial intermediaries who provide long-term loans to borrowers or invest in other financial assets and incur short-term liabilities, mainly deposits and other financial debts. This type of business implies a broad range of risks on both sides of the balance sheet, including credit risks, market risks, liquidity risks and operational risks.78 It is a further peculiarity of the banking business that the risks on both sides of the balance sheet do not match each other directly, but may diverge considerably in terms of, eg, maturity, interest rate and currency denomination. Taking these risks is the normal business of banks in order to generate profits,79 overseeing the risks taken by banks, with a particular emphasis on its downside aspects, is the fundamental task of supervisors. It is for these reasons that the ECB, like other supervisory authorities, pursues a risk-based approach when performing its tasks.80 Article 97 of the Capital Requirements Directives (CRD IV) terms this the ‘Supervisory Review and Evaluation Process’ (SREP) whereby the competent authorities monitor: ( a) risks to which the institutions are or might be exposed; (b) risks that an institution poses to the financial system taking into account the identification and measurement of systemic risk; (c) risks revealed by stress testing taking into account the nature, scale and complexity of an institution’s activities.

Core elements of this review are the business model of a bank, its governance and risk management, risks to capital and risks to liquidity.

75 Lastra, International Financial and Monetary Law (n 25) para 3.07 who, contrary to the approach chosen herein, includes in her definition also instruments of private self-regulation. 76 For a broad overview, see Peter O Mülbert, ‘Managing risk in the financial system’ in Niamh Moloney, Eilís Ferran, and Jennifer Payne (eds), The Oxford Handbook of Financial Regulation (OUP 2016) 364 (hereafter Mülbert, ‘Managing risk in the financial system’). 77 Alastair Hudson, The Law of Finance (Sweet & Maxwell 2009) 24. 78 Article 1 CRR. See also Mülbert, ‘Managing risk in the financial system’ (n 76) 369. 79 Joanna Benjamin, Financial Law (OUP 2007) para 1.28 (hereafter Benjamin, Financial Law). 80 ECB, Guide to banking supervision (ECB 2014) 6.

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1118 BANKING SUPERVISION 37.35

2. Risks and uncertainties As has been said before, regulation and supervision have a particular focus on the downside aspects of risks. Insofar, risks can be defined as the probability of damage for a good, or, more specifically in the context of banking, as probability of losses and their extent.81 Risks always relate to future events that may have the potential to create losses.82 The relationship between events and losses can be based on causation, ie cause and effect. But, on financial markets, the risk bearing relationship can also be one of correlation, eg when the prices of two securities move in relation to each other. Risks can be high or low, depending on the assessment of facts by an individual person or a group of persons. The risk assessment involves, first of all, an ex-ante approach that combines facts and value judgements. In most cases, an ‘objective’ assessment of risks remains a theoretical ideal, due to cognitive limitations of the persons involved or conceptual limitations of the methods used.

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A key to understanding financial risks is that they can be measured. Measuring refers both to the probability of future events and the degree of the damage caused by them. The regular methods build on quantitative or qualitative risk measurement models that are based on market data as expressed in monetary units or build on certain assumptions. In practice, also heuristics may play an important role within the—mostly dynamic—process of risk management. Both methods, mathematical models and heuristics, rely on experiences made in the past that are projected into the future.83 As any new crisis proves, models as well as expert opinions can be deficient. Accordingly, also supervisors should not overly rely on their own models and supervisory techniques but leave room for critical and sober analysis on a case-by-case basis.

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In contrast to risks, uncertainties cannot be measured.84 The reasons and the extent of this uncertainty may vary, as do the ways to react to situations of uncertainty. In instances of ignorance, events occurring in the future or their potential to do harm are completely unknown and, therefore, no provisions are taken. Sometimes, this ignorance is only a partial one, but the problem may remain that it is impossible to attribute a useful probability to these events and/or their outcomes. This is the main reason why, in real life, banks as well as supervisors face situations they cannot control. As far as assumptions about future events exist, there remains the option to adopt precautionary measures. In the same way, the legislator may react to known but uncertain factors by referring to the precautionary principle and requiring measures for this purpose.85

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3. Pre-emption, prevention and ring-fencing of risks Depending on the timing and on the extent to which risks have been identified, the tasks of the regulator/supervisor are, firstly, to analyse, understand and weigh risks; and secondly, to pre-empt or prevent the occurrence of damages. Some risks will never unfold, others 81 Kaufhold, Systemaufsicht (n 66) 348; Benjamin, Financial Law (n 79) para 1.27. 82 Benjamin, Financial Law (n 79) para 1.27. 83 Benjamin, Financial Law (n 79) para 1.27. 84 On this fundamental distinction, see Marion Schmidt-Wenzel, Die Regulierung von Kreditderivativen (Nomos 2017) 108. In contrast thereto, the academic discussion in administrative law defines risk as a situation of uncertainty, Kaufhold, Systemaufsicht (n 66) 349 with further references. 85 Michela Passalacqua, ‘A possible reconstruction of risk regulation in financial markets’ (Ius Publicum Network Review, Annual Report— March 2013— Italy) accessed 30 January 2020.

SSM As First Pillar of EBU 1119 in the far future only, some already in the near future, some of them fully and others only partly. The realization of risks will work together with factors known beforehand, while other factors having an impact on the realization of a specific risk are unknown before the damage actually occurs. When things go wrong, there remains at least the task to ring-fence the problem and prevent it from spreading further. In each of these cases, the reaction of the regulator/supervisor will be somewhat different, based on the knowledge available and the interpretation of facts at a certain point in time and depending on the objectives to be pursued and on the extent to which effective counter-measures are still possible.

4. Microprudential perspective The tasks of prudential regulation can be understood both from a micro-and a macroperspective. Microprudential regulation focuses on the individual financial institutions and the risks, which these entities face as well as the risks they trigger for others, in particular their customers. Its main objective is limiting the likelihood of failure of individual institutions. Prudential regulation ensures ‘that banks operate in a safe and sound manner and that they hold capital and reserves sufficient to support the risks that arise in their business’.86 Accordingly, the supervisors mainly oversee compliance with quantitative solvency requirements and qualitative risk management requirements which the regulator had adopted before. In this way, supervision contributes to the customers establishing trust in the stability and reliability of banks they are doing business with, which is a prerequisite for a well-functioning banking system. 5. Macroprudential perspective: financial stability and systemic risks In the macroprudential perspective, regulators and supervisors consider the interplay between financial institutions and the overall risks within the financial system.87 The reason is that financial institutions are connected which each other in many ways—via price-building mechanisms on capital markets, by contractual relationships and through technical infrastructures—so that conditions in one part of the financial system are closely related to the situation elsewhere.88 The objective of macroprudential supervision is maintaining the stability of the financial system—or at least limiting the costs to the real economy from crises of the financial system. As a result of the global financial crisis, it is recognized that an effective banking supervision must take into account the stability of the financial system so that the macroperspective complements the microprudential approach.89 Nevertheless, a comprehensive theoretical framework of what constitutes ‘financial stability’ is still outstanding.90 Negative definitions refer mainly to the absence of financial crises while positive definitions stress the ability of the financial system to withstand external or

86 Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (BIS 1997) 8. 87 Dirk Schoenmaker and Peter Wierts, ‘Macroprudential supervision: from theory to policy’ (February 2016) ESRB Working Paper Series No 2 accessed 30 January 2020. 88 An early analysis was provided by Andrew Crocket, Banking Supervision and Financial Stability (The Group of Thirty 1998) 9 (hereafter Crocket, Banking Supervision and Financial Stability). 89 Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (BIS 2012) para 20 (hereafter Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision). See also Mülbert, ‘Managing risk in the financial system’ (n 76) 369. 90 Lastra, International Financial and Monetary Law (n 25) para 3.65.

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1120 BANKING SUPERVISION internal shocks.91 The theoretical problems go deeper, however. In contrast to the objective of price stability, which can be described and measured quantitatively, financial stability refers to a multitude of mutually interdependent, qualitative factors. Assessing their interaction requires the use of several, non-conclusive criteria and corresponding value judgements. Similar difficulties occur when remedies have to be found, as has been said: ‘If the causes of a crisis are multi-faceted, so are the solutions.’92 These are the main reasons why the concept of financial stability is vague and remains surrounded by uncertainties. 37.42

On an operational level, a key element of macroprudential supervision is to identify systemic risks and prevent them from unfolding in a financial crisis that could damage the real economy, with all its consequences for social life.93 Systemic risks are defined in EU secondary law as ‘risk[s]‌of disruption in the financial system with the potential to have serious negative consequences for the internal market and the real economy’.94 As the EU legislator noted, ‘all types of financial intermediaries, markets and infrastructure may be potentially systemically important to some degree’.95 The essential question is to what extent such systemic risks can be identified at an early point in time so that counter-measures can be taken before a crisis actually unfolds. Under the conditions of globally operating financial institutions, open capital markets, the big volume of transactions and the high number of participants, there is no guarantee that each and any systemic risk will be detected in time. This means that uncertainty about future developments rests upon any effort to enhance financial stability.

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With the establishment of the ESFS, the task of monitoring macroeconomic developments and analysing the occurrence of systemic risks was conferred on the European Systemic Risk Board (ESRB).96 It does not have the power to regulate or supervise individual financial institutions but may issue recommendations and risk warnings to the competent authorities. The SSM Regulation provides that the ECB cooperates closely with the ESRB, and with the other authorities forming the ESFS.97

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6. The regulatory approach of the EU It is recognized that charging a supervisory authority with responsibility for financial stability is not sufficient to safeguard an appropriate outcome of the supervisory process, unless it disposes of appropriate tools and powers.98 In the light of this major challenge, 91 Tommaso Padoa Schioppa, Regulating Finance (OUP 2004) 110; see also Garry Schinasi, ‘Understanding Financial Stability: Towards a practical framework’ in IMF (ed), Current Developments of Monetary and Financial Law, vol 5 (IMF 2008) 65, 91 (hereafter Schinasi, ‘Understanding Financial Stability’); Francois Gianviti, ‘The Objectives of Central Banks’ in Mario Giavanoli and Diego Devos (eds), International Monetary and Financial Law (OUP 2010) 449, 475 (hereafter Gianviti, ‘The Objectives of Central Banks’). 92 Crocket, Banking Supervision and Financial Stability (n 88) 9. 93 A deep analysis is provided by Kaufhold, Systemaufsicht (n 66) 20ff. See also Rosa M Lastra, ‘Systemic risk and macro-prudential supervision’ in Niamh Moloney, Eilís Ferran, and Jennifer Payne (eds), The Oxford Handbook of Financial Regulation (OUP 2015) 309. For an economic perspective, see Markus Brunnermeier, Andrew Crockett, Charles Goodhart, Avinash D Persaud, and Hyun Song Shin, Fundamental Principles of Financial Regulation (International Center for Monetary and Banking Studies 2009) 13ff. 94 Article 2(c) European Parliament and Council Regulation (EU) 1092/2010 of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board [2010] OJ L331/1. 95 Ibid. 96 Kaufhold, Systemaufsicht (n 66) 88ff; Lastra, International Financial and Monetary Law (n 25) para 11.30ff. 97 Article 3(1) SSM Regulation. 98 Stefan Ingves, ‘Central bank governance and financial stability’ (BIS, May 2011) 1.

SSM As First Pillar of EBU 1121 the EU’s regulatory answer was ambitious. In a first step, capital requirements were hardened and additional capital buffers were introduced under the CRD IV99 and the Capital Requirements Regulation (CRR).100 In particular, the adoption of the CRR meant a considerable step forward in the implementation of a uniform system of banking supervision. For the first time in the (short) history of EU banking legislation, Parliament and Council adopted a directly applicable regulation in accordance with Article 288(2) TFEU. It contains practically all own funds (capital) and liquidity provisions for banks and, accordingly, permits a prudential supervision on the basis of identical quantitative requirements for banks active in the internal market. For the first time, the CRD IV also provides macroprudential tools, ie capital buffers that may be applied by the supervisory authorities to counter systemic risks.101 In a second step, the EU legislator complemented the substantive requirements by a broad shift of competences from the national level to the ECB under the SSM Regulation. The ‘significant credit institutions’ are directly supervised by the ECB while smaller banks remain within the competence of the national authorities.102 In most cases, the ‘significant’ banks can be qualified as systemically important, due to their size, interconnectedness, substitutability, global or cross-jurisdictional activity (if any), and complexity.103 They form the most critical elements of the financial system as their failure could threaten the stability of other financial institutions and, consequently of the financial system as a whole. In respect to these banks, the ECB’s powers are broad and primarily serve the purpose of preventing stability risks. If the ECB fails to prevent a breakdown of one or more of the significant institutions, then resolution procedures will be initiated in accordance with the SRM Regulation. To conclude, stricter capital requirements, a centralized prudential supervision mechanism with far-reaching powers for the ECB and a centralized resolution mechanism are supposed to tackle problems arising from a collapse of systemically important banks.

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Yet, the comprehensive approach taken by the EU legislator has its limitations. It builds on the inherent logic that the next banking crisis will be similar to the last one, as concerns its causes and the effects on the real economy. It also builds on the assumption that severe crises can be identified at an early point in time so that the supervisor can take the measures necessary for the effective pre-emption of the crisis. The third critical point relates to the architecture of the second pillar of Banking Union. The SRM will be, together with financial assistance provided by the ESM and liquidity measures provided by the ECB, the relevant financial backstop to halt the failure of one or more significant banks. Within the SRM, several EU organs and institutions but also the governments of all euro area Member States will participate in the decision-making process. The high number of agents involved could hinder a timely and resolute management of banking crises. Effective are only those

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99 European Parliament and Council Directive 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV) [2013] OJ L176/ 338. 100 European Parliament and Council Regulation (EU) 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR) [2013] OJ L176/1. 101 Articles 128–142 Directive 2013/36/EU. 102 Article 6 SSM Regulation. 103 Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (n 89) para 17 under n 8. On the correspondence of both concepts, see Wymeersch, ‘The Single Supervisory Mechanism’ (n 44) 108.

1122 BANKING SUPERVISION resolution procedures that permit a bank to be wind down in an orderly manner, without creating considerable risks for other financial institutions.

D. Objectives of the SSM 37.47

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1. Underlying policy consideration With the adoption of the SSM Regulation, the EU legislator pursued a comprehensive and complex set of policy objectives. They include (i) generating a higher quality of financial integration and thereby reversing the fragmentation of the internal market; (ii) ensuring the impartial application of high and common standards of prudential supervision and for the resolution of banks, and (iii) help ensuring the smooth transmission of monetary policy and breaking the link between sovereign and bank debt, sparing bail outs with public money; reinforcing financial stability and restoring confidence in the sector, and fostering economic recovery.104 2. Supervision in the public interest As a general rule, the tasks of prudential supervision are performed in the public interest only, and not in the interest of individual persons, be they depositors, investors or consumers.105 Also the SSM Regulation considers the supervisory activities of the ECB as measures undertaken in the interest of the Union only. This is explicitly provided by Article 19(1) and Article 25(1) subparagraph 1 SSM Regulation saying that all members of the Supervisory Board shall act in the interest of the Union as a whole. Insofar, the SSM Regulation makes it sufficiently clear that its objectives are pursued exclusively in the public interest of the EU—and not in the interest of any of the Member States, the undertakings supervised or their customers. This is supported by Article 1 SSM Regulation that defines the subject matter and scope of the tasks of the ECB. The wording of the provision does not permit the interpretation that individual depositors or investors may derive rights or claims against the ECB thereunder. The legal relevance of this concept is high since it excludes claims for damages by individual depositors or investors against the ECB under Articles 268 and 340 TFEU and against national supervisory authorities under national law.106 3. Uniform application of supervisory standards The model of decentralized implementation of prudential requirements by national authorities prior to SSM bore the risk of incoherent approaches to banking supervision. It resulted in inconsistencies between the standards applicable in individual Member States, thereby favouring insufficient supervision of cross-border operations by national authorities and regulatory arbitrage by banks. This lead to the conclusion that an integrated banking system, as it is envisaged by the internal market concept of the EU, requires an equally integrated prudential oversight.107 With the ECB as the superior authority of the SSM, administrative 104 SWD (2014) 170 final, 76. See also Recitals (2)–(4) SSM Regulation. 105 For an analysis in the context of national law, see Case C-222/02 Peter Paul and Others v Bundesrepublik Deutschland [2004] ECR I-9425. See also Ann-Katrin Kaufhold, ‘Instrumente und gerichtliche Kontrolle der Finanzaufsicht’ (2016) 49 Die Verwaltung 339, 363ff (hereafter Kaufhold, ‘Instrumente und gerichtliche Kontrolle der Finanzaufsicht’). 106 Lackhoff, Single Supervisory Mechanism (n 48) 260f. 107 IMF, ‘A Banking Union for the Euro Area’ (n 1) 4.

SSM As First Pillar of EBU 1123 inefficiencies due to divergent prudential standards of national authorities within the internal market should be abolished.108 In addition, the SSM eliminates the national bias in the supervision of cross-border banking operations,109 since the ECB acts in the common European interest and may not, therefore, pursue national preferences. Accordingly, Article 1(1) SSM Regulation provides that the ECB performs its tasks ‘with full regard and duty of care for the unity and integrity of the internal market based on equal treatment of credit institutions with a view to preventing regulatory arbitrage’. It is also hoped that the independence of the ECB as well as its extensive powers to oversee national authorities and supervise banks will contribute to a more effective enforcement of regulatory requirements.

4. Contributing to the safety and soundness of credit institutions As it lies traditionally at the heart of any supervisory system,110 the SSM aims at the safety and soundness of individual credit institutions.111 This microprudential approach is performed by the enforcement of capital, liquidity and risk management requirements applicable to individual banks. The practical benefit of the microprudential task is that it is relatively easy to fulfil, because its objectives and the prudential standards are clearly defined in secondary law. The objective of safety and soundness of credit institutions does, however, not mean that the SSM should prevent banks from failing. Rather, supervision should aim to reduce the probability and impact of a bank failure.112 5. Contributing to financial stability A further objective of the SSM is to preserve the stability of the financial system within the EU and each Member State.113 Financial stability became a key objective of financial market supervision when the financial crisis of 2008/2009 revealed the weakness of the microprudential approach that focused on the individual institutions but neglected the multiple interferences between financial institutions, markets and infrastructures. As of to date, it is generally accepted that ‘supervisors and other authorities need to assess risk in a broader context than that of the balance sheet of individual banks’.114 Accordingly, the objective of financial stability is to be understood in a macroprudential sense so that the risk correlations within the overall financial system and their effects on credit institutions form the object of supervision. In this very broad context, the tasks of a supervisory authority are difficult to perform: First of all, credit institutions form only one element of the financial system, other ones being investment firms, insurance companies, pension funds and managers of various kinds of investment and hedge funds. The financial system also relies on markets and their infrastructures, including payment and settlement systems.115 Accordingly, financial stability requires the supervisory authority to take a holistic approach. A second challenge results from the fact that the functioning of a firm varies over time and depends primarily on its

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Recital (12) SSM Regulation. Binder and Gortsos, European Banking Union (n 43) 7. 110 Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (n 89) para 16. 111 Article 1(1) SSM Regulation. 112 Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (n 89) para 16. 113 Recital (5) and Article 1(1) SSM Regulation. 114 Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (n 89) para 20. 115 Schinasi, ‘Understanding Financial Stability’ (n 91) 92; Gianviti, ‘The Objectives of Central Banks’ (n 91) 475. 109

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1124 BANKING SUPERVISION management and the outcome of competition on the relevant markets. These factors underline the need for a process-oriented approach to financial stability. Thirdly, financial stability is also a relative concept.116 The corrective forces of the market may repair some of the shortcomings of a bank and the insolvency of a (minor) bank does not threaten necessarily the financial system as a whole.117 Fourthly, depending on the territorial reach of markets, the purview of the supervisory task can be more or less limited. Even if Article 1(1) SSM Regulation limits the ECB’s task to the EU and its Member States, business relations of firms located in Europe may extend to all other parts of the world so that the risks can originate from abroad but unfold at home. Fifthly, financial stability interrelates, positively as well as negatively, to decisions of public bodies, mainly monetary policy decisions of central banks, but also to regulatory and supervisory measures. Accordingly, these decisions may produce moral hazard or promote, often unintendedly, the occurrence of risk concentrations.118

E. Main features of the SSM 37.53

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1. ECB and NCAs The SSM is composed of the ECB and the national competent authorities of the participating Member States.119 In a functional perspective, it is a system of centralized decision-making by the ECB and decentralized implementation by NCAs. The German doctrine described it as a progressive form of a Verwaltungsverbund, ie a product of administrative federalism within the EU.120 As such, it is not an agency and has no legal personality.121 Subject to the provisions of the SSM Regulation, the authorities constituting the SSM, the ECB and the NCAs, maintain their fundamental legal status, the ECB under Article 13 TEU, and the NCAs under the laws of the Member States in which they were established. The participating Member States either belong to the euro area (‘Ins’) or, as long as they are Member States with a derogation under Article 139(2) TFEU (‘Outs’), have established a close cooperation with the ECB in accordance with Article 7 SSM Regulation.122 2. Vertical distribution of competences The vertical organization of the SSM builds on a complex distribution of competences between the ECB and the NCAs. In general, the ECB is competent for the supervision of all credit institutions established in the participating Member States. Other financial institutions remain outside the scope of the SSM Regulation. Ratione materiae, this competence applies to specific subject matters, ie those expressly mentioned in Articles 4 and 5 SSM Regulation. They include authorization of credit institutions,123 acquisition of qualifying holdings,124 own funds requirements, securitization, large exposure limits, liquidity, 116 Schinasi, ‘Understanding Financial Stability’ (n 91) 92: ‘occurring along a continuum’. 117 Schinasi, ‘Understanding Financial Stability’ (n 91) 92. 118 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (n 63) 101. 119 Article 6(1) SSM Regulation. 120 Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (n 63) 160. 121 Binder and Gortsos, European Banking Union (n 34) 21; Glos and Benzing, ‘Institutioneller Rahmen’ (n 69) para 9. 122 See the definition in Article 2(1) SSM Regulation. 123 Article 4(1)(a) SSM Regulation. 124 Article 4(1)(c) SSM Regulation.

SSM As First Pillar of EBU 1