Original Sin: the EU tampering with the right to property in Cyprus is an unprecedented departure from EU norms and shared constitutional rights

Anastasios A. Antoniou

The facts are well-settled by now and the majority of us know that on the evening of 15/3/13, Eurozone finance ministers agreed on an extraordinary course of action in response to Cyprus’ request for a bail-out of the State and its banking sector, both on the brink of apparent collapse. The political agreement reached at the ministers’ Eurogroup configuration, seeks to impose a levy on deposits with Cypriot banks, catching both Cypriot and foreign depositors (hereinafter referred to as ‘the Decision’).

Developments are of course constantly unfolding. Following fierce reactions to the Decision, the Eurogroup held an urgent teleconference on 18/3/13, resulting in a statement by its president, Jeroen Dijsselbloem. The statement sought to assure that deposits under EUR100.000 would be fully guaranteed in what is presented as an upholding of the Eurogroup’s ‘view’ that ‘small depositors should be treated differently from large depositors’. The issue is that the Eurogroup never expressed such a view in the first place. Nor did it bother itself with revisiting the various legal anomalies emanating from what it wants to present as a political decision enjoying the consensus of all Eurozone member states, but has in fact been a catastrophic step, irrespective of whether it is eventually passed into law by the Cypriot Parliament. Continue reading

The Cyprus Bailout, Deposit Guarantees, and the Single Market (Updated)

lindsethProf. Peter Lindseth

 [This is a slightly updated and modified version of a post that appeared on europaeus|law over the weekend.  It is cross-posted here with permission.]

We’re all monitoring the intense fallout from the announcement by the Eurogroup that the Cyprus bailout will be conditioned on an “upfront one-off stability levy” on deposits in Cypriot banks.  The levy – 9.9% on bank deposits exceeding 100,000 euros and 6.7% on anything below that – will take place on Tuesday after a bank holiday on Monday.

There will no doubt be much more to be said about this in the coming days and weeks, but we note the general expectation that the levy, as structured, will hit small depositors in Cyprus banks especially hard.  Moreover, we want to point out the potential impact that the bailout conditions will have on the single market, notably harmonized deposit guarantee schemes.  As Open Europe asked on its blog:

Does this move break EU rules on capital controls and/or deposit guarantees? As noted above, it seems that depositors will be blocked from withdrawing their funds from banks. For other EU depositors this surely amounts to a form of capital control – strictly forbidden under the EU Treaty. Furthermore, as Sharon Bowles MEP has been tweeting, this move makes a mockery of the current EU rules on deposit guarantees below €100,000. The Eurozone may protest that the bank shares given in exchange are of the same value, but this is a very thin argument. Either of these issues could be challenged at the European Court of Justice.”

Bowles, a Lib-Dem MEP and chair of the EP’s Economic and Monetary Affairs Committee, has now issued a press release entitled “The Cyprus bailout deal is a disaster for EU rules andSingle Market principles“.  She writes:

“This grabbing of ordinary depositors’ money is billed as a tax, so as to try and circumvent the EU’s deposit guarantee laws. It robs smaller investors of the protection they were promised. If this were a bank, they would be in court for mis-selling.

“The lesson here is that the EU’s Single Market rules will be flouted when the Eurozone, ECB and IMF says so. At a time when many are greatly concerned that the creation of the ‘Banking Union’, giving the ECB unprecedented power, will demote the priorities of the Single Market, we see it here in action.

“Deposit guarantees were brought in at a maximum harmonising level so that citizens across the EU would not have incentive to move funds from country to country. That has been blown apart.

“What else will be blown apart when convenient? All the capital requirements we have slaved over, what about the new recovery and resolution rules? What does this mean for confidence in cross-border banking and resolution and preventing the fragmentation of the banking sector?

“When the dust has settled on this deal, which I hope it never does, we will see that the Single Market has been sold down the river for a shoddy price. All the worse as the consequences for Cyprus of the Greek bond haircuts were obvious.”

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Breaking the Sovereign-Bank Link…Not

Prof. Peter Lindseth

This can be brief. Readers may recall how, with great fanfare, the June 2012 European Council Summit (or, more specifically, the Euro Area Summit) announced that it was ‘imperative to break the vicious circle between banks and sovereigns’. This raised the possibility that the European Stability Mechanism (ESM) might be used to recapitalize distressed banks, an idea that the summit conclusions specifically discussed. Peripheral countries were obviously overjoyed at the prospect that they might be relieved on the fiscal burden of recapitalization, thus breaking the dreaded ‘sovereign-bank link’ that were driving them into insolvency.

As many readers know, disappointment soon followed.  In a joint statement in September (previously discussed on this blog here), the finance ministers of Germany, the Netherlands, and Finland made clear that, in their view, ‘the ESM can [only] take direct responsibility of problems that occur’ after a country has relinquished fiscal control under an ESM bailout and supervision memorandum. Otherwise, ‘legacy assets should be under the responsibility of national authorities’.

So the announcement this week, that Eurozone finance ministers are considering whether to cap the total amount of direct assistance for bank recapitalization at €80 billion, should probably not come as a surprise.  As Reuters reports:

German Finance Minister Wolfgang Schaeuble said the ESM should ideally not be used at all and stressed that funds for banks were limited already.

“The ESM is primarily there in order not to be used, but to create confidence, and for that it needs a certain level of lending capacity,” Schaeuble told reporters after a meeting of euro zone finance ministers.

“Therefore what can be used for banking capitalisation is limited anyway, especially as we know that the funds used for banking recapitalisation must be backed by more capital.”

Commenting on a similar report in the FAZ, Wolfgang Münchau noted on his newsletter (alas, sub. req.): Schaeuble’s position ‘contains a whole number of outrages. It is clear, by now, that the June EU summit’s statement to separate the sovereign and banking risks is currently being turned into a straight-forward lie …. An €80bn allocation could be used up by a single bank rescue’.  Little more need be said, apart from quoting a previous statement by Münchau in the FT last week, noting ‘the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures’.

Interdependence, Political Will, and Morality: Banking Union Version

10-lindseth-008 (cropped  touched)Prof. Peter Lindseth

In reflecting on the muddled and (to many observers) disappointing outcome of last week’s European Council summit on banking union—‘yes’ to a not-insignificant Single Supervisory Mechanism (SSM) within the European Central Bank (ECB) but ‘no’ to any significant fiscal shock absorber in the form of resolution fund or common deposit-guaranty scheme—I couldn’t help but think of the late, great Alan Milward, perhaps the most influential of all historians of European integration.

As many readers will know, Milward was the author of the classic history of the origins of the integration process, The European Rescue of the Nation-State (1992; 2d. 2000).  And it was Milward, perhaps more than any other observer of European integration, who consistently reminded us that integration has always been a political choice rather than an inexorable consequence of growing ‘interdependence’ or some of other functional factor.  Because integration has been a political choice, its direction has also never been beyond political negotiation or even outright resistance or rejection. This insight is important to keep in mind as we reflect on the outcome of last week’s summit on banking union.

Compelling functional demands, such as managing interdependence or maintaining Europe’s geopolitical influence on the global stage, undoubtedly feed the process of European integration, Milward acknowledged.  But these demands do not necessarily determine the course of integration in a linear, strongly causal sense. Explanations of the process relying primarily on such functional explanations, most importantly the growing interdependence of the European economy, were, from Milward’s historical perspective, ‘shallow and implausible’ (ERNS, p.7).   Continue reading

Leaving Berlin (Part II): The Power of the European Idea

Prof. Peter Lindseth

This is the second of a two part series of reflections upon the completion of my Daimler Fellowship this spring at the American Academy in Berlin.  The first part, offering thoughts on the constitutional dimensions on the Eurozone crisis in Germany, can be found here.  This second part reflects on the ‘power of the European idea’, not merely in relation to the Eurozone crisis but also my own scholarship on the EU.

I am writing this post at 35,000 feet over the Atlantic, on a flight back from Germany to the United States. While I may be leaving Europe for the moment (in fact I’ll be returning at fairly regular intervals), I will hardly be leaving the Eurozone crisis behind.  Who could? The current crisis is of tremendous significance for the United States and indeed the world economy, as the recent G8 meeting made clear.  People outside Europe obviously ignore it at their peril.

But even if the ramifications of the Eurozone crisis are potentially global, the crisis itself remains, at its core, very much a European phenomenon.  Indeed, in its particulars (I am speaking more of politics and culture rather than technical economics), the crisis is also perhaps something that is not well understood even by close observers outside of Europe. In a commentary last month following a trip to the US, Martin Wolf, the FT’s outstanding economics columnist, noted how even ‘informed Americans’ almost all uniformly believed ‘that the eurozone will not survive’ the current crisis.  The pessimism was based on an appreciation of the very same ‘centrifugal forces’ that Wolf himself so penetratingly described in his column.  But, in contrast with these ‘informed Americans’, Wolf concluded that ‘the eurozone may yet survive’.  Why?

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Daimler Lecture at the American Academy in Berlin

Prof. Peter Lindseth

I wanted to alert readers that my Daimler Lecture at the American Academy in Berlin, which I gave on February 8, is now available online here, along with a brief summary written up by the Academy.  The event was graciously moderated by Prof. Ingolf Pernice of Humboldt University, whose excellent work on the EU (quite in tension with my own, I should add) is no doubt familiar to many readers.  The lecture touches on many of the topics that my recent posts have also been addressing:  the administrative character of the EU, the challenge of reconciling democracy and integration, the ‘no demos’ problem in relation to the Eurozone crisis, and much else besides.  I thought it might be of interest to readers.

Stability, Coordination and Governance: Was a Treaty Such a Good Idea?

Prof. Kenneth A. Armstrong

In the margins of the European Council meeting on 2 March, the leaders of twenty five European states formally signed the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the SCG Treaty aka ‘Fiscal Compact’ Treaty). When compared with the rancour of the December European Council summit which saw the UK Prime Minister block a direct revision to the EU treaties, for President Van Rompuy– celebrating his re-election as European Council President and appointment as the new Euro Summit President – the Spring European Council was conducted in a “team spirit”. More importantly, for Commission President Barroso, the treaty signalled the “irreversibility” of the Euro and underpinned its credibility.

As with my earlier contribution on the European Stabilisation Mechanism (ESM) Treaty, I want to reflect on this turn to treaties as a response to the economic crisis. As is by now well known, the unwillingness of the UK government to negotiate a revision to the EU Treaties without obtaining certain ‘safeguards’ for its financial services sector prompted other EU states to turn to the vehicle of an international treaty to enshrine in law a ‘fiscal compact’ among participating states. In the end, the Czech Republic also decided that it would not participate, leaving it to the remaining 25 EU states to agree a treaty amongst themselves.

There is much that has already been, and will be, written on the SCG Treaty. The issue of the very legality of the Treaty has itself been discussed with UK MP Bill Cash succeeding in obtaining an emergency parliamentary debate on the issue. For the moment, there are three main issues I want to illustrate. The first is the necessity of treaty reform. The second is the consequence of bypassing the mechanisms and processes for EU treaty reform. The third is the role played by domestic constitutional requirements.

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National Parliaments in European Integration: Europeanization, Renationalization, or Reconciliation?

Prof. Peter Lindseth

As many readers already know, the German Federal Constitutional Court (FCC) handed down another important decision on Tuesday regarding national parliamentary oversight in the Eurozone crisis.  The Court’s official press release is here, and the full decision is here (both in German). Der Spiegel’s English language website provides an overview of the basic elements of the Court’s ruling here, along with some excerpts from the German media commentary.

The ruling deals with the unconstitutionality of the special nine-member committee established last fall to serve as the Bundestag’s oversight mechanism for Germany’s participation in the European Financial Stability Facility (EFSF), the Eurozone’s temporary bailout fund.  (The EFSF is supposed to be replaced by, or perhaps even merged into, the permanent European Stability Mechanism (ESM) later this year, depending on how things develop.)  As discussed previously on this blog, the FCC last October issued a preliminary injunction against the operation of this committee pending final decision.

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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.

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The Eurozone Crisis and Europe’s Persistent ‘No-Demos Problem’

Prof. Peter Lindseth

As usual, things are moving so quickly in the Eurozone crisis that pressing controversies one day seemingly become old news the next.  In the lead up to this week’s EU summit, for example, Germany caused a stir by calling for the appointment of an external commissioner with the power to veto the Greek budget because of Greece’s inability to meet its budgetary commitments.  We’ll see where that leads, but outrage in Athens was the predictable result. The Greek finance minister reportedly said: ‘Whoever puts before a people the dilemma of choosing between financial assistance and national dignity disregards basic historical lessons’.  In the overheated world of contemporary Eurozone commentary, one observer called the proposal ‘Anschluss economics’.

But as readers of this blog well know, Germany has its own worries about the Eurozone crisis and what it portends for that country’s own historically hard-won democracy.  These worries arguably animate, for example, the recent jurisprudence of the German Federal Constitutional Court, as some of my earlier posts have outlined.  From the German perspective, recourse to Eurobonds as a means of addressing the crisis (in which other member states might add to Germany’s debt obligations without a vote of the national parliament) would almost certainly be seen by the Court as a violation of the Bundestag’s historical control over the national purse, and therefore also an affront to the democratic identity of the German constitution.

These two contrasting (Greek and German) expressions of concern over the fate of national democracy in the face of the current crisis, however, are suggestive of a deeper challenge for European integration.  I am referring not merely to the Eurozone’s seeming lack of financial solidarity among its member states—that, in fact, is merely a symptom.  Rather, I am speaking of the notorious lack of a coherent ‘demos’ for the EU as a whole—what we academics have long called the ‘no-demos problem’.

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