Responding to the Economic Crisis: Public Law in a Post-Lisbon Age

Prof. Kenneth A. Armstrong

European institutions have reacted to the economic crisis by adopting a range of legal instruments intended to strengthen economic governance. With the adoption of the muscular ‘six pack’ of legislative measures, the talk in Brussels was of the return of the ‘Community Method’ as the Europeam Parliament – exercising its new powers of co-decision in the economic field – and the European Commission signalling their collective unwillingness to let ‘intergovernmentalism’ weaken the legislative bargain.

Subsequently, however, the initiative shifted to the leaders of the Member States as talk began of the need for treaty reform. Barely two years on from the completion of the tortuous process leading to the entry into force of the Lisbon Treaty, and despite the prophecy of the UK Foreign Secretary in October 2011 that treaty change was ‘years away’, an informal meeting of the European Council on 30 January 2012 endorsed two new treaty texts to establish a permanent European Stabilisation Mechanism (ESM Treaty) and to enhance coordination, stability and governance in economic and monetary union (CSG Treaty aka ‘Fiscal Compact’ Treaty).

My interest lies not in the content of these reforms but rather the processes associated with these initiatives. At its simplest, the argument is that the choice of legal instrument also entails choices as to the decision-making process to be used. Yet variations in process also entail variation in the mechanisms for democratic and constitutional approval: mechanisms which – like the UK’s recent European Union Act 2011 – have themselves evolved in response to past treaty revisions. In this way, the legal response to the economic crisis is a perfect illustration of the complex interweaving of EU and domestic public law. In this first of two contributions, the issues surrounding the adoption of the ESM Treaty are discussed. The CSG Treaty will be discussed in a subsequent piece.

An important innovation of the Lisbon Treaty is the capacity to amend the treaties via a simplified revision procedure (Article 48(6) TFEU). This vests power in the European Council to adopt a decision by unanimity to amend the treaties. As this dispenses with the procedural step of establishing a Convention – the constitutional innovation designed to represent the interests of national and European parliaments, EU governments and the European Commission – and without the need to convene a formal Intergovernmental Conference, its use is limited to amendments which do not increase the competence of the EU and entail amendments solely to the substantive provisions found in Part III of the Treaty on the Functioning of the European Union (TFEU).

The first use of this procedure is to allow Eurozone states to establish a permanent financial support mechanism – the European Stability Mechanism (ESM). As an immediate response to the crisis, a temporary European Financial Stabilisation Mechanism (EFSM) was created by Council Regulation in May 2010. The European Financial Stability Facility (EFSF) was simultaneously created as a company under Luxembourg law, with Eurozone Member States as its shareholders, to provide loans to Member States raised from the capital markets. Anticipating (correctly) potential domestic legal challenges to the bailout mechanisms, Chancellor Merkel sought and obtained the support of President Sarkozy for treaty change to create a permanent bailout fund. Using the simplified revision procedure, the European Council adopted Decision 2011/199/EU to amend Article 136 TFEU to allow Eurozone states to create a permanent financial support mechanism. The Decision states that it shall enter into force on 1 January 2013 provided all the domestic instruments of ratification have been received by then.

Decision 2011/199/EU, therefore, requires ratification by all Member States in accordance with their domestic constitutional traditions. This is the first test of the United Kingdom’s new ‘referendum lock’ under the European Union Act 2011. Section 3 of the European Union Act provides not just for an Act of Parliament to approve the European Council decision but also for a referendum to be held unless the ‘exemption’ or ‘significance’ conditions are met. The circumstances leading to a referendum are laid out in section 4 of the Act. The exemption condition (s.3(3)) applies where the Act states that the decision does not fall within the scope of section 4. The significance condition (s.3(4)) is to the effect that while technically within the scope of section 4, its effect for the UK is not significant. A European Council Decision amending Article 136 TFEU which applies only to Eurozone members would prima facie meet the exemption test being an amendment that applies only to Member States other than the UK and so not within section 4. By the same token it could be said that the Decision was not, therefore, significant for the UK. In short, it would not appear that ratification of the ESM Decision requires a UK referendum.

As for the choice of instrument with which to establish the ESM, whereas the EFSM was established via an EU instrument – a Council Regulation – the ESM is to be established by way of an international treaty adopted by Eurozone states. With the deepening of the crisis throughout 2011, the original treaty text  agreed in July 2011 was reopened for negotiation with a view to the ESM coming on stream earlier than initially proposed. Overcoming potential Finnish constitutional objections, agreement on a new text was reached at an ‘intergovernmental ministerial meeting’ chaired by Eurogroup President Jean-Claude Juncker on 23 January 2012 and signed by the ambassadors of participating states on 2 February 2012.

In process terms, the adoption of an international treaty circumvents the procedures both for the adoption of revisions to the EU treaties as well as the EU’s own legislative processes. And while there is an obvious desire to bring the ESM on-stream quickly, the choice of instrument – an international treaty – makes that more difficult. Whereas the Council Regulation establishing the EFSM entered into force within a matter of days of the Commission’s formal proposal – with a legal basis of Article 122(2) TFEU, it only required the Council to adopt a Commission proposal with the EP only having the right to be informed – the ESM Treaty requires domestic ratification before it enters into force. In this way, not only will the European Council Decision amending Article 136 TFEU require ratification (by all EU states), the ESM Treaty will need the domestic approval of Eurozone states. However, there is an apparent conflict in that the date of entry into force of the European Council Decision is 1 January 2013, but the mechanism for which it apparently makes provision is intended to be operational from July 2012.

All in all there is a rather uneasy relationship between the invocation of the simplified revision process to amend Article 136 TFEU to create a permanent financial support mechanism and the use of an international treaty with which to create that mechanism. It is one thing to need a legal basis in the EU treaties for the creation of an institution if that body is established under, and exercises powers through, EU legal instruments; it is another if that body acquires its legal powers and status under an international treaty from which its authority derives. To the extent that the European Commission and European Central Bank act on behalf, or at the behest, of the ESM’s Board of Governors and Directors, it is as result of the ESM treaty and the shadowy authorisation given by EU Member States to the Contracting Parties at a meeting on 20 June 2011 (of which there is no obviously available published decision).

With all the focus on the turn to international law under the CSG Treaty and the apparent wielding of the British ‘veto’, it is tempting to view the ESM Treaty as a mere technical revision. Yet it ought to be apparent from the discussion above that it raises its own legal difficulties and begs important questions as to the relative use of treaty and legislative procedures in constructing the EU’s economic governance architecture.

5 thoughts on “Responding to the Economic Crisis: Public Law in a Post-Lisbon Age

  1. Two points, if I may.

    Firstly, while the EFSM was created through the Council Regulation, arguably misusing Article 122(2) TFEU, there seems to be no identifiable EU legal basis for the EFSF.

    The preamble to the EFSF Framework Agreement states:

    “On 9 May 2010 a comprehensive package of measures has been decided including (a) a Council Regulation establishing the European Financial Stabilisation Mechanism (“EFSM”) based on Article 122(2) of the Treaty on the functioning of the European Union and (b) the EFSF in order to financially support euro-area Member States in difficulties caused by exceptional circumstances beyond such euro-area Member States’ control with the aim of safeguarding the financial stability of the euro area as a whole and of its Member States.”

    Read quickly and carelessly that could leave the impression that the Regulation established the EFSF as well as the EFSM, but that is not the case and the two Decisions relating to the EFSF – the first by just the eurozone governments, and the second by all EU member state governments – cite no legal base.

    Secondly, what would happen if one or more EU member states failed to ratify European Council Decision 2011/199/EU?

    • On the question of what happens if one or more Member States fail to ratify Decision 2011/199, the first point to make is the obvious one namely that the revision to the treaty would not happen. But as my article hints, the issue is whether that would actually be fatal to the ESM itself.

      For Eurozone states, ratification of the Decision and the ESM Treaty is likely to go hand in hand and so if one of those states failed to ratify the Decision they would likely not ratify the ESM Treaty. This would not necessarily be fatal to the ESM Treaty itself as its entry into force is not reliant on unanimity. In essence one or more states that make only a very small contribution to the ESM fund could fail to ratify and the ESM Treaty would still come into force provided states representing 90% of the total subscriptions required by the Treaty did ratify the treaty. If a non-Eurozone state fails to ratify the Decision, this would not prevent the ESM Treaty entering into force as described above.

      We would then have the odd situation of the ESM Treaty being in force but not the treaty change to the TFEU.

      In the end, if you accept the argument that the ESM Treaty is legally distinct and could be operational as an international treaty without the need for specific authorisation via the change to the TFEU then the issue is more one of whether the ESM Treaty is ratified and failure to amend the TFEU would not itself be decisive. Certainly a non-ratification of the Decision would put at issue the very question of the legal relationship between the ESM Treaty and the European Council Decision which my contribution sought to highlight.

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