Bailouts, Borrowed Institutions, and Judicial Review: Ledra Advertising

Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective 

One of the features of the response to the euro area crisis has been the resort to intergovernmental arrangements that largely avoid judicial and parliamentary control at the EU level. The paradigmatic example has been the European Stability Mechanism (ESM), created by the euro area countries in order to provide financial assistance to countries in difficulties, subject to conditionality. The ESM was created through the adoption of an international agreement, the ESM Treaty; it is an intergovernmental mechanism created outside the framework of the EU, but with significant links to it. Most importantly, the ESM ‘borrows’ two EU institutions, namely the Commission and the European Central Bank (ECB), in order to carry out its functions. (Those two bodies, along with the International Monetary Fund, constitute the so-called ‘Troika’ which oversees the controversial bail-out processes).

The nature of the ESM and the way it operates raises important questions regarding judicial protection. As mentioned above, ESM financial assistance is granted after strict conditions have been negotiated and agreed in a Memorandum of Understanding. These conditions typically require the Member State in receipt of assistance to adopt ‘austerity’ reforms that have an impact on its citizens—understandably, these citizens may wish to challenge the validity of these conditions, often questioning their compliance with the EU Charter of Fundamental Rights.

In Pringle, the Court stated that Member States were not within the scope of application of the Charter of Fundamental Rights when creating the ESM, or presumably when acting within its framework. This meant that their actions could not be reviewed for accordance with the Charter (although they can still be reviewed in national courts for compliance with purely national law, or in the European Court of Human Rights for compliance with that treaty). This, however, left open the question of whether, or in what form, the Charter applied to the EU institutions—the Commission and the ECB—when operating under the ESM. This is the question that the Court of Justice had to answer in the Cyprus bailout cases (Ledra Advertising and Mallis).

Cyprus wrote to the Eurogroup in 2012 to request financial assistance, and it was in receipt of ESM assistance from 2013 until 2016. The country had to recapitalize its biggest bank and wind down its second. The Memorandum of Understanding stipulated that bondholders and depositors would bear part of the cost. As a result, the applicants suffered substantial financial losses and turned to the EU courts: first to the General Court, and then on appeal to the Court of Justice. They were challenging the validity of the Memorandum of Understanding (Ledra Advertising), as well as a Eurogroup statement that referred to the conditions attached to the bailout (Mallis); they also asked for damages. In their view, the involvement of EU institutions—the Commission and the ECB—in the adoption of these measures meant that it should be possible for individuals to challenge their validity at the EU level; they also argued that these institutions’ involvement should trigger the EU’s non-contractual liability.

The General Court dismissed all complaints as inadmissible. It decided that neither the Memorandum of Understanding nor the Eurogroup statement could be the subject of an action for annulment; the former because it is not a measure adopted by an EU institution, the latter because it is not intended to produce legal effects with respect to third parties. It considered that the involvement of the Commission and the ECB in the adoption of these measures was not enough to attribute authorship to them, or to trigger the non-contractual liability of the Union.

The Court of Justice agreed, in part, with the General Court: neither the Eurogroup statement (Mallis) nor the Memorandum of Understanding (Ledra Advertising) can be the object of an action for annulment. The Court insisted again on its finding in Pringle that ESM acts fall outside the scope of EU law; the involvement of the Commission and the ECB does not change this, and is not enough to attribute authorship of these acts to them for the purposes of judicial review.

Yet the Court goes on to reveal a twist in Ledra Advertising: even if they are not its authors, the involvement of the Commission and the ECB in the adoption of an ESM Memorandum of Understanding may be unlawful, and thus able to trigger the non-contractual (damages) liability of the EU. The Commission, in particular, retains its role as ‘guardian of the Treaties’ when acting within the ESM framework. As a result, the Commission should not sign an ESM act if it has any suspicions as to its accordance with EU law, including the Charter.

The Court repeated the usual rules for the EU institutions to incur non-contractual liability: (a) they must have acted unlawfully, (b) damage must have occurred, and (c) there must be a causal link between the unlawful act and the damage. Not just any unlawful act gives rise to damages liability: there must be ‘a sufficiently serious breach of a rule of law intended to confer rights on individuals’. While the right to property enshrined in the Charter was a ‘rule of law intended to confer rights on individuals’, that right is not absolute: Article 52 of the Charter allows interference with some Charter rights. Applying that provision, the Court came to the conclusion that the measures contained in the Memorandum did not constitute a disproportionate and intolerable interference with the substance of the applicants’ right to property, given ‘the objective of ensuring the stability of the banking system in the euro area, and having regard to the imminent risk of [greater] financial losses’.

So individuals can challenge the EU institutions’ bailout actions by means of an action for damages (non-contractual liability), but not by means of an annulment action. It is useful to remember that the rules on access to the EU courts as regards those two types of remedy are quite different. The standing rules are more liberal for damages actions: it’s sufficient to allege that damages have been suffered as a result of an unlawful act by the EU, whereas it’s much harder to obtain standing to bring annulment actions. The time limits are more liberal too: individuals have five years to bring damages cases, but only two months to bring actions for annulment. On the other hand, the threshold to win cases is much higher for damages cases: any unlawfulness by the EU institutions leads to annulment of their actions, but only particularly serious illegality gives rise to damages liability.

In any case, we know from the Court’s ruling that breaches of at least some Charter provisions within the ESM framework could potentially give rise to damages liability. In the anti-austerity context, it should be noted that social security and many social welfare claims fall within the scope of the right to property, according to the case law of the European Court of Human Rights. In the case at stake, the Court did not discuss the proportionality of the interference with the applicant’s rights at much—or any—length, but it is clear that future applicants will face an uphill struggle.

On the whole, Ledra Advertising is a welcome change from other cases concerning measures adopted as a result of a bailout, where the Court’s approach had been to deny the existence of any link to EU law. Indeed, it seems unavoidable that the EU should bear the appropriate degree of responsibility when allowing its EU institutions to operate within the ESM framework. This is not to say that it will be easy for individuals to be awarded damages; as this case illustrates, the threshold is extremely high. Moreover, while a significant aspect of the role of the EU institutions within the ESM has been clarified, questions remain concerning the judicial and democratic accountability of this mechanism. Overall, however, Ledra Advertising is a step in the right direction.

Barnard and Peers: chapter 19, chapter 8

Photo credit: www.newsweek.com

Pulling the rug from under Mario’s feet: the BVerfG and the ECB’s OMT programme

Ioannis Glinavos (@iGlinavos), Senior Lecturer, University of Westminster

A key decision relating to EU economic and monetary union will be delivered by the German Constitutional Court (Bundesverfassungsgericht, “BVerfG”) next week (Tuesday June 21). That court will be deciding on the case of Gauweiler (C-62/14), where it had asked the European Court of Justice (CJEU) for an opinion (preliminary reference) on the legality of the European Central Bank’s (ECB) Outright Monetary Transactions (OMT) programme after 37,000 plaintiffs questioned the legal basis of the ECB’s scheme. It is notable that Jens Weidmann, Bundesbank president, had voted against the OMT programme and Eurozone Quantitative Easing (QE). The Court referred two questions to the CJEU in what it classified as an ultra vires review of acts of the European Union.

In summary, the BVerfG wanted to check whether the ECB had transgressed the limits of its powers derived from the EU Treaties. If the ECB had, this would have consequences for the constitutional identity of Germany. Therefore, the BVerfG asked for clarification on whether the OMT programme was an economic rather than a monetary measure and whether the ECB had as a consequence exceeded its powers by establishing it.  Second, the BVerfG raised the question whether the OMT programme was not violating the prohibition of monetary financing of Member States.

The BVerfG set out the following specific conditions that could render OMT compatible with the German constitution: (1) OMT should not undermine the conditionality of the EFSF and ESM (‘bail-out’) programmes; (2) OMT should only be of a supportive nature to other economic policies; (3) any debt restructuring must be excluded (no pari passu for the ECB) (4) no unlimited purchases of government bonds and (5) avoidance of interference with the price formation on the market where possible.

Indeed, the ECB is not allowed to engage in economic policy, neither is it allowed to finance member states, as articles 120, 123, 127 TFEU (primarily) set out. On the face of it, the concerns of the claimants at the BVerfG seem justified. Let us therefore examine the nature of the complaint in some more detail. The OMT, announced in September 2012, is an initiative aimed to help struggling Eurozone economies by buying short-term government bonds on secondary markets. It is widely perceived as an important tool to calm markets. The way in which OMT offers relief to states experiencing funding difficulties is by opening an avenue to short term affordable liquidity. In a way, it allows funds to reach governments by creating demand for sovereign debts in secondary markets, therefore lowering the costs of borrowing overall. Its critics, however, have argued that OMT exceeds the ECB’s mandate and undermines the rules that keep the Eurozone from becoming a ‘transfer union’ where stronger members are constantly bailing out weaker ones.

These transfers are supposedly prevented by the fact that the OMT operates in conjunction with fiscal discipline measures in the affected countries. The ECB insists that a necessary condition for OMT is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full macroeconomic adjustment programme or a precautionary programme, provided that they include the possibility of EFSF/ESM primary market purchases. The ECB Governing Council considers OMTs to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected (which is why Greek government bonds are not included in the OMT shopping list), and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme. As to the transactions themselves, they are focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years. No ex ante quantitative limits are set on the size of transactions. In purchasing these bonds, which is likely to be a sticking point for the BVerfG, the ECB accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through OMT, in accordance with the terms of such bonds.

But how can the above transactions avoid violating the monetary financing prohibition? Benoît Cœuré (of the ECB) offers the following explanation for the actions of the ECB. He argues that the economic rationale of the monetary financing prohibition is clear, as central banks cannot ensure price stability if they have to permanently make up for weak performance in other policy domains. This is why Article 123 TFEU is central to the architecture of EMU. In the view of the ECB, the aim and design of OMTs fully respect this economic requirement, via the link to conditionality. As presented above, the link to policy conditionality of an EFSF/ESM programme ensures that central bank intervention via OMTs does not replace reform efforts in other policy domains. Rather, OMTs can only be complementary to national reform efforts. This is designed to prevent a scenario of harmful central bank support, or fiscal dominance over the central bank. 

Cœuré continues by arguing that OMTs would never be used to indiscriminately push down government bond spreads. By contrast, spreads should continue to reflect the underlying country-specific economic fundamentals, fiscal positions and market risk perceptions that incentivise governments to engage in sustainable fiscal spending and competitiveness-enhancing structural reforms. The aim of OMT is therefore not to reduce yields below the fundamentally justified level so as to preserve debt sustainability despite weak policy performance, but to aim at that portion of the bond yield spreads that is not fundamentally justified and based on undue risks of a euro area break-up. In other words OMT deals with market anxiety over Eurozone wide systemic risks not linked to the underlying fundamentals of Member State economies (at least as those are understood by the ECB). This is perhaps because central bank independence and a clear focus on price stability are deemed necessary but not sufficient to ensure monetary dominance. The ECB maintains the position that by creating the right environment and providing appropriate incentives for governments to take action to ensure fiscal solvency, OMTs create the conditions to affirm the monetary dominance regime, which is at the heart of the Treaty.

The European Court of Justice seems to be largely in agreement with the above. In its 2015 judgment in Gauweiler, it ruled that a plan by monetary policy makers to buy government bonds, even in potentially unlimited quantities, was legal. The court found that Mario Draghi’s pledge in the summer of 2012 to do “whatever it takes” to save the region from economic ruin through OMT, complied with EU law. “The programme for the purchase of bonds on secondary markets does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing in member states,” the ECJ declared, offering an important win to Draghi against German opposition to ECB attempts to stave off a Eurozone financial crisis. This decision is also perceived as shielding monetary policy makers from legal attacks on their landmark €1.1tn QE package, unleashed in 2015.

Alicia Hinarejos writes that the CJEU has recognized the broad discretion of the ECB to make complex economic assessments and technical choices, while at the same time striving to discharge a meaningful and necessary role. The Court clearly does not want to be seen to be second-guessing the other institution’s policy choices, so it focuses on procedural requirements and applies a light-touch review when it comes to assessing the proportionality of the scheme. This is most evident in the final part of the judgment, where the court assesses the compatibility of the OMT programme with the ban on monetary financing. Here the Court seeks to apply (and be seen to be applying) a coherent, rigorous-enough-yet-within-judicial-boundaries compatibility test. 

The CJEU found (para 103-5) that the ESCB is entitled to purchase government bonds — not directly, from public authorities or bodies of the Member States — but only indirectly, on secondary markets. Intervention by the ESCB of the kind provided for by a programme such as OMT thus cannot be treated as equivalent to a measure granting financial assistance to a Member State. The Court recognised however that the ESCB’s intervention could, in practice, have an effect equivalent to that of a direct purchase of government bonds from public authorities and bodies of the Member States. This could happen if the potential purchasers of government bonds on the primary market knew for certain that the ESCB was going to purchase those bonds within a certain period and under conditions allowing those market operators to act, de facto, as intermediaries for the ESCB for the direct purchase of those bonds from the public authorities and bodies of the Member State concerned. However, the ECB convinced the Court that the implementation of a programme such as that announced in September 2012 must be subject to conditions intended to ensure that the ESCB’s intervention on secondary markets does not have an effect equivalent to that of a direct purchase of government bonds on the primary market.

The decision can be said to continue in the Pringle vein of ratifying a move away from a rules-based EMU to a policy-based one in the wake of the crisis, with the CJEU limiting its role of review to a strictly formalist position. This can be seen in the fact that the discussion (like the AG’s Opinion before it) does turn on the specific features of the OMT programme rather than on more abstract questions such as the nature of EMU, its evolution, and the role of solidarity within its constitutional framework. 

Will the BVerfG decide along the same lines? Analysts at Société Générale model three possible outcomes. In the best case scenario, the BVerfG will simply find the OMT in line with the German Constitution based on the ECJ preliminary ruling. At the opposite end of possibility, the BVerfG could find the participation of the Bundesbank in OMT incompatible with German constitutional law or even declare German participation in ESM programmes that are supported by OMT incompatible. Such a ruling would then require German primary law to be changed to allow the Bundesbank to participate in an eventual OMT programme. A middle position is in effect more likely, with the BVerfG tinkering with some aspects of the programme (such as pari-passu for instance) and linking the operation of the OMT with ECB’s QE by highlighting the issue limits of QE as an important feature to respect under OMT. Such a move would address the concerns of Germany at being pushed under OMT to take on uncapped risks towards other euro area sovereigns, and assuage the fears of other EU members as to violations of Article 123 TFEU. At the same time, the BVerfG seems keen to avoid becoming an instrument of politics and is unlikely to allow itself to be used as a tool for the transmission of political concerns over ECB decision-making onto the constitutional law domain.

Will Mario find himself on the floor on June 21st? This is unlikely to happen, but considering the British are holding the Brexit referendum on the 23rd of the month, anything other than total support from the BVerfG to the architecture of Eurozone rescues is likely to cause a noticeable wobble.

Art credit: David Simonds

Barnard & Peers: chapter 19 

Further development of the EMU – should legitimacy come first or last?

Päivi Leino-Sandberg: Adjunct Professor of EU Law, Academy of Finland Research Fellow, University of Helsinki

The June 2012 European Council adopted a report setting out ‘four essential building blocks’ for the future Economic and Monetary Union (EMU): an integrated financial framework, an integrated budgetary framework, an integrated economic policy framework and, finally, strengthened democratic legitimacy and accountability.[1] In its discussions, the European Council stressed that:

Throughout the process, the general objective remains to ensure democratic legitimacy and accountability at the level at which decisions are taken and implemented. Any new steps towards strengthening economic governance will need to be accompanied by further steps towards stronger legitimacy and accountability.[2]

But while the European Council has repeatedly expressed its concern about the legitimacy problems of the EMU, the tools proposed for tackling these problems have remained extremely modest. This trend continues in the recent Five Presidents’ Report adopted in June 2015 (discussed here and here), which again includes a brief concluding section on ‘Democratic Accountability, Legitimacy and Institutional Strengthening’, but manages to discuss the topic without any tangible results. For many readers of the Five Presidents’ Report, it might not be evident that a further centralization of power to EU institutions will automatically bring about greater legitimacy. After all, in many cases the democratic guarantees continue to function best at national level.

There are various legitimacy related challenges that should be addressed if there indeed is a wish to make the EMU more sustainable. For example, think about the blurred division of competence between the EU and its Member States especially in the area of economic governance. While the Treaties still specify economic and fiscal policy as falling under Member State competence, the six-pack and the two-pack have increased EU level steering, and in practice turned EU recommendations binding by introducing sanctions for non-compliance. Since all EU institutions agreed on the necessity of these amendments, their significance for the division of competences between the EU and Member States has been subject to very little public discussion.[3] Many of the reforms are legally problematic, but a formal Treaty amendment reassessing the nature of Union economic policy competence was not deemed possible within the timeframe that has been deemed necessary. Ambiguity in drafting the rules has in many ways been intentional, but it has also contributed to blurring responsibilities between the EU and national level. The complexity of rules has increased, which in its turn has strengthened the discretion of the Commission in implementing the rules, and weakened faith in them. At the same time, Member States have needed to embark on numerous ‘solidarity operations’. In addition, the strict conditionality attached to financial assistance has had major implications for the policy choices of programme countries. As a result of the crisis and the way in which it has been dealt, Europe is effectively divided into creditors and debtors. Very few see the EMU as treating them fairly.  This has contributed little to the aim of improving the legitimacy of decision-making, and is probably the strongest motivation for the need to reform the EMU. An arrangement that is widely experienced as being unfair cannot be sustainable in the long run.

Second, thinking how many of the problems relating to the euro-crisis are connected with a lack of transparency when making past decisions, one would think that European decision-makers would now hurry to do what they can to improve openness. In April 2011 the President of the Euro Group, today the President of the Commission, Jean-Claude Juncker, was quoted as stating that when it came to economic policy, he was ‘for secret, dark debates’.[4] Even the more minor steps are still to be taken, such as the formal extension of the scope of Regulation No 1049/2001 on public access to documents to those held by the European Council; however, almost six years after the entry into force of the Lisbon Treaty stipulating such an extension, the amendment is still to be made. Most decisions aiming at curing Europe’s economic crisis are characterised by a lack of procedural transparency. Proposals have been made late; this sets clear limitations on national discussions,[5] as well, since they are then conditioned by the fear that the EU would – in particular in case national debates proved substantial and required amendments - not be capable of taking the necessary decisions in a timely manner. Again, this has not contributed to a stronger legitimacy of decision-making.

Last week, on 21 October 2015, the Commission adopted a package of proposals intended to implement the first stage of proposals included in the Five Presidents’ Report. In many ways, these proposals take the development to the completely wrong direction with respect to the concerns expressed above. The Commission Communication ‘On steps towards Completing Economic and Monetary Union’ once again includes the compulsory final section on ‘Effective democratic legitimacy, ownership and accountability’. It repeats the old ideas of dialogue with and debates in national parliaments, without adding anything new.

In fact, when reading the Commission Communication, there is fairly little to add to what the Grand Committee of the Finnish Parliament already commented to similar proposals in its Statement 4/2012:

“It is dangerous for democracy to adopt quasi-democratic rules that offer the appearance but not the reality of democratic legitimacy. […]The committee considers that respect for the treaty is a minimum requirement for the EU’s democratic legitimacy. […] The measures taken to control the economic crisis leave something to be desired in this respect, as regular procedures have been waived and serious doubts have been voiced about whether these measures are consistent with the treaty. […]Finally, the committee wishes to point out that democracy also requires that the principles of transparency and public access to documents are realised in the development of EMU.”

In short, the place of legitimacy and democracy seem to be exactly the same as they were in 2012.

As far as the trend of blurring competences is concerned, the package includes 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. While being somewhat out of touch with reality (in the form of decision-making rules in the IMF, and the modalities for amending them), the reading of Union competence reflected in the proposal is fundamentally flawed. The proposal refers to how the recent measures of economic governance

“have integrated, strengthened and broadened EU-level surveillance of Member State policies in essential areas of macroeconomic and budgetary relevance. The European Stability Mechanism was established as the permanent crisis resolution mechanism for the countries of the euro area. The Union has also put in place a Banking Union with centralized supervision and resolution for banks in the euro area and open to all other Member States. At the same time, the external representation of the euro area has not kept up with those developments. The progress that has been achieved on further internal integration of the euro area needs to be projected externally […].”

While unified representation does not necessarily mean a shifting of competence, in the view of the Commission, there is in the IMF context an obligation of “full coordination” of national positions. The proposal does not stipulate what happens if a shared position cannot be found. Considering that economic and fiscal policy remain national competence, as does the ESM, one wonders whether this new attempt to blur the division of competence further does anything to strengthen the voice of the euro group in the IMF, or whether actually the opposite is the case.

The new package also includes a Commission decision establishing an independent advisory European Fiscal Board, which many European actors have seen necessary in  limiting Commission discretion in the application of the rules of economic governance and making the monitoring exercise more objective. The Board set up by the Commission based on its own decision, and applicable as of 1 November 2015, now has the task of contributing ‘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’. For this purpose it shall provide to the Commission an evaluation of the implementation of the Union fiscal framework, advise it on the prospective fiscal stance appropriate for the euro area as a whole based on an economic judgment; cooperate with the national fiscal councils, and on the request of the President, provide ad-hoc advice.

While all of these are undoubtedly noble and necessary tasks which could contribute to strengthening the credibility of EU rules, the public is not to enjoy from information concerning them any more than the Member States are, since information provided by the Board is to remain primarily a Commission prerogative. The decision stipulates that the meetings of the Board shall not be open to the public. And as far as transparency is concerned, the Commission decision is rather straightforward:

Article 6 Transparency

The Board shall publish an annual report of its activities, which shall include summaries of its advice and evaluations rendered to the Commission.

It is of an interest that the Commission sees it fit to set up a body for assisting itself in exercising its Treaty-based tasks, administratively attached to the Commission's Secretariat General, but without a trace of the Treaty-based transparency obligations that apply to the Commission itself: the presumption of openness, and the principle that access to documents can only be limited on a case by case basis, based on Regulation No 1049/2001, which includes an exception to be invoked in case of harm to the financial, monetary or economic policy of the Union or a Member State. Instead of providing access as the main rule, apart from summaries published at a later stage, only the Commission is to know what the European Fiscal Board advices. While this would also seem to be contrary to the Treaty, such an arrangement does little to increase faith in the objectivity of decision-making or the legitimacy of the exercise. Instead, it seems to be nothing than a new way of buttressing the Commission’s own position in the application of rules by offering it the opportunity to justify its position with reference to unpublished advice by an independent Board.

At the same time, the Treaty of Lisbon would already offer a number of solid tools specifically aimed at tackling the Union’s well-known problems relating to democratic legitimacy, through improved openness and wider citizen participation in decision-making, and a clearer division of competence between the EU and its Member States. None of these reforms are as much as mentioned in any of the high-level reports. And yet, they would provide a number of concrete means for many of the problems illustrated above. The most recent Commission package yet again demonstrates a complete failure to grasp what legitimate decision-making is about. It matters how decisions are taken, and what their outcomes are. Therefore, instead of treating the questions relating to legitimacy and democracy as an appendix or afterthought in the style of the recent reports, these should be the questions that are tackled first. An economic policy that is not experienced as legitimate is seldom effective. This would be useful starting point for the further development of the EMU.

Barnard & Peers: chapter 19

Photo credit: voxeurop.eu

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[1] Towards a Genuine Economic and Monetary Union. A report prepared by Herman Van Rompuy, President of the European Council in close collaboration with José Manuel Barroso, President of the European Commission; Jean-Claude Juncker, President of the Eurogroup and Mario Draghi, President of the European Central Bank, 5 December 2012. See also European Council conclusions on completing EMU adopted on 14 December 2012. 

[2] December 2012, para 14; European Council conclusions on completing EMU, adopted on 18 October 2012, para 15.  For a discussion, see e.g. Päivi Leino and Janne Salminen, Should the Economic and Monetary Union Be Democratic After All? Some Reflections on the Current Crisis, 14 German Law Journal (2013) 844–868. 

[3] See Päivi Leino and Janne Salminen, “Going ‘Belt and Braces’ – Domestic Effects of Euro-crisis Law”, EUI Working Paper LAW 2015/15.

[4]“Eurogroup chief: 'I'm for secret, dark debates'”, published by euobserver on 21 Aril 2011, available at https://euobserver.com/economic/32222 .

[5] For a discussion, 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?’, 9 European Constitutional Law Review (EuConst) 3/2013 451–479.  

The European citizens’ initiative and EU competence over Greek debt ‘haircuts’

Professor Daniel Sarmiento, Professor of EU Law at the University Complutense of Madrid*

EU competence is a touchy area of EU law. It has become very complex, together with the also intricate case-law on legal bases, which, after several decades of case-law, is not always easy to follow. After the entry into force of the Lisbon Treaty, EU competence has become a major domain for EU constitutional lawyers and it deserves very careful attention. The fact that the Treaties now include a typology of EU competences and enumerate them is a sign that many future battles in EU law will be fought in this terrain.

Furthermore, cases like Pringle, Gauweiler (discussed here) or Vodafone prove that issues of competence and legal bases are not the exclusive domain of institutional litigation, but areas that can be brought to the courts by private parties too. The Court of Justice has always been sensitive to these cases and it has dealt with them with utmost care, mostly in Grand Chamber formation.

Last week a rather surprising route for EU competence litigation came under the radar. In the case of Anagnostakis (no English version available, I’m afraid), the General Court ruled on an action of annulment brought by a private party against the decision of the Commission to reject, on the grounds of lack of competence, a European citizens’ initiative (ECI). Mr. Anagnostakis, together with more than a million supporters, brought a proposal pursuant to Article 11.4 TEU (which provides for the existence of ECIs) and Regulation 211/2011 (which sets out the detail of the ECI process), demanding that the Commission introduce in EU legislation “the principle of state of necessity, according to which, when the financial and political subsistence of a State is at stake due to its duty to comply with an odious debt, the refusal of payment is necessary and justified”. According to the promoters, the legal base of the initiative was to be found in Articles 119 TFEU and 144 TFEU.

The Commission did not seem very impressed and, pursuant to Articles 4(2)(b) and (3) of Regulation 211/2011, it refused to register the proposal, based on a lack of competence.

Mr. Anagnostakis introduced an action of annulment before the General Court, attacking the Commission’s Decision for breach of Articles 122(1) and (2) TFEU, 136(1) TFEU and rules of international law.

The General Court dismissed the action, but it did not limit itself to scrutinizing the Commission’s duty to state reasons. Instead, the Court went into some detail in order to ascertain if haircuts in government debt are not only a competence of the EU, but also in conformity with EU Law. In a rather surprising format and procedural context, the General Court dealt quite openly with one of the Union’s hottest potatoes at the time: the unsustainable Greek public debt.

It is true that the judgment is quite laconic in its reasoning, but it relies several times on Pringle and Gauweiler when interpreting Articles 122 and 136 TFEU. But no matter how laconic it may be, the judgment makes an assertion that will probably not go unnoticed when the Greek public debt becomes politically toxic again. In paragraph 58 of the judgment, the General Court states that “the adoption of a legislative act authorizing a Member State to not reimburse its debt, far from being a part of the concept of economic policy guidelines in the sense of Article 136.1.(b) TFEU […] it would have the effect of substituting the free will of the contracting parties by a legislative instrument allowing for a unilateral abandonment of public debt, which is clearly not what the provision allows” (free translation).

The assertion might be formally correct in light of the limited scope of Article 136(1)(b) TFEU, but the language of the judgment is politically explosive. Even in legal terms, one wonders if Pringle was openly precluding any kind of haircut of government debt by any means. After reading the General Court’s decision in Anagnostakis, it seems that haircuts will be mission impossible in the future, despite the circumstances, the consensus among Member States (the IMF has been explicitly positive about a future Greek haircut) and, above all, the terms and scope of the haircut.

But of course, this judgment could be just a superficial decision undertaking a superficial degree of scrutiny due to the peculiar procedural context of the case. It could be argued that highly contested issues such as the EU’s competence in the area of EMU is something should be left to the Court of Justice, but not to the General Court in the circumstances of a case like Anagnostakis. The General Court might be aware of this and thus the brief and straight-forward reasoning of the decision. However, after reading the judgment several times, the more I read it the more explosive it sounds to me.

*Reblogged from the Despite our Differences blog

Barnard & Peers: chapter 5, chapter 19

Photo credit: www.thenation.com

National parliaments and the “Five Presidents’ Report’: The long road towards the democratization of EMU

Ton van den Brink, Associate Professor, University of Utrecht

The recent ‘Five Presidents’ Report’ contains far-reaching proposals to deepen the EU’s Economic and Monetary Union (EMU), which have been analyzed here. These proposals also have far reaching consequences for national parliaments. The much needed democratization of the EMU requires national parliaments to be assigned with stronger rights than the proposed intensification of ‘dialogues’.

What is at stake for national parliaments? The report proposes to come to a ‘system of further sovereignty sharing within common institutions’ (p. 5). This system would include, inter alia, a further Europeanization of economic policy coordination, aimed at economic convergence of the Euro area. To that end, the European Semester would be restructured and national ‘Competitiveness Authorities’ would be set up in the Eurozone Member States. The proposals to establish a Fiscal Union include the creation of an advisory European Fiscal Board and a common macroeconomic stabilisation function to ‘better deal with shocks that cannot be managed at the national level alone’. This last element is similar to the tax authority proposed by German Minister Gabriel and French Minister Macron as part of their plea for a radical integration of the Eurozone. It is unclear, however, how the more long term perspective of creating a European treasury would relate to national treasuries.

There are more unclarities which make it difficult to assess how national parliaments would exactly be affected. The European Fiscal Board would, for instance, only have an advisory role. The general direction of the proposals is, however, clear. The proposals would increase control of EU institutions over national policies. Thus, a further Europeanization of economic policy making would be the result. Second, the technocratic nature of decision making would be strengthened. The further expansion of ‘rule-based cooperation’ and the mandates of the new bodies would significantly contribute thereto.

Europeanization and technocratization pose challenges for national parliaments. These are not addressed, even though the report underlines that democratic legitimacy and accountability should be the corner stones of the EMU. The proposals in this regard do not add much to the already existing ‘six-pack’ and ‘two-pack’ arrangements and in any case do not extend beyond ‘streamlining’ procedures and the strengthening of ‘dialogues’.

The answer to these challenges cannot be the European Parliament, at least not the European Parliament alone. It is true that the executive federalism that may be witnessed in the field of economic policies requires a better position for the European Parliament as well. But the European Parliament cannot substitute national parliaments in economic policy making. First, there is no real solution for the role of the European Parliament - representing citizens from 28 Member States - in decision making on measures that are limited to the Euro area. Second, a substantial part of economic policy making is country specific. This will remain so, even though the Five Presidents’ report contains proposals to strengthen the euro area wide dimension of economic policy making. National parliaments certainly qualify as the most obvious institutions to exercise democratic control over the country specific part of economic policy making in the EU. Thirdly, national parliaments’ constitutional rights are affected in a very concrete manner by the proposals. Thus, strengthening their role would also contribute to compensating that loss.

Taxation and budget rights are among the most concrete constitutional rights that are at stake for national parliaments. The right to decide on the national budget implies budget autonomy. The German constitutional court, in its decision on the constitutionality of the ESM-Treaty, ruled that: ‘Deciding on public revenue and public expenditure is a fundamental part of the ability of a constitutional state to democratically shape itself. In this context, the right to decide on the budget is a central element for shaping opinions in a democratic society’. 

Thus, the German constitution (as well as the constitutional systems of many other Member States) would not allow the national budget right to be relinquished altogether. Although the German constitutional courts accepted the possibility of – even significant – limitations to national budget autonomy, a suspension thereof for at least a considerable period of time, would be considered unconstitutional by the German constitutional court. The creation of a Macroeconomic Stability Function would need to pass this test before it could be created. What is more, the Court made it clear that it had formulated only minimum conditions and stressed the discretion of the German legislature ‘to weigh whether and to what extent, in order to preserve some discretion for democratic management and decision-making, one should enter into commitments regarding future spending behaviour and therefore – correspondingly – accept a restriction of one’s discretion for democratic management and decision-making in the present’.

Closely related (but in various constitutional systems recognized as a separate right) is the right to decide on taxation. The constitutional significance of this right, as well as its “sovereignty-sensitivity” have made it impossible thus far to come to supranational taxes. The feasibility of a Euro area wide treasury – whatever its exact form – is, thus, highly questionable.

The position of national parliaments is also at stake with regard to macroeconomic policies, which have redistributive effects. Specific national constitutional guarantees are generally lacking in this area, but a Europeanization of these policies is still particularly troublesome. This has to do with the lack of common substantive principles or rules. Unlike fiscal policies – which are ‘rule-based’, such as the 3% rule - macroeconomic policies are essentially political decisions, e.g on how labour markets and pension systems must be reformed and whether and how national investment climates must be improved.

In this light, the proposals from the Five Presidents’ report are too meagre for national parliaments to ensure effective democratic control. It has to be acknowledged that - should all of the plans indeed be realized - national parliaments would be limited in their national decision making capacities on fiscal and economic policies. This limitation of decision-making power should be compensated by adequate accountability rights. It would therefore be far from sufficient to organize plenary debates between the EP and the Commission and streamline the interaction between the Commission and national parliaments and between the European Parliament and national parliaments.

The relationship between the Commission and national parliaments should be the starting point for strengthening the position of the latter. It is one thing to get the EU Commissioner to the national parliament to discuss country-specific recommendations, but without the possibilities of sanctions this remains an empty shell. The rules that have been developed in the context of EU legislative procedures (most notably with regard to subsidiarity scrutiny) may offer inspiration here. The right to make the Commission reconsider a legislative proposal could, for instance, be applied in the context of economic and fiscal policies as well: the national parliament at issue could be empowered with the right to object to country-specific recommendations which would lead to obligation for the Commission to reconsider these. In case of the macroeconomic stabilisation function the existing mechanisms of cooperation between national parliaments in the context of subsidiarity scrutiny could offer inspiration. This could be linked to the right of assent for - a qualified majority of – national parliaments.

The exact shaping of national parliaments’ rights is, however, essentially a second order issue. To get to that issue, it first needs to be acknowledged that a genuinely democratic EMU requires national parliaments to have more at their disposal than the right to be informed and to take part in economic dialogues.

Barnard & Peers: chapter 19

Photo credit: www.clivebates.com

Is a temporary Grexit legally possible? EMU as the Hotel California

Steve Peers

According to press reports, while today’s Eurogroup meeting, called to consider a possible new bail-out plan for Greece, was taking place, the German government was leaking a plan for a ‘temporary Grexit’. Before considering the political or economic merits of this idea, there’s an obvious question: is this legally possible? In a word: No.

It’s not legally possible simply because a permanent Grexit isn’t legally possible, and so a temporary one isn’t either. I’ll briefly recap the reasons why, based on my recent blog post. There’s no reference in the Treaties to any power of a Member State to leave EMU once it joins, or of the EU institutions to remove that Member State from EMU, whether it agrees to that or not. A Member State can leave EMU by leaving the EU, but there’s no Treaty power to throw a Member State out of the EU, or to suggest that any Member State might ever be under the obligation to leave.

This week, Andrew Duff suggested that it might be possible to use the existing Treaties to arrange a Grexit. In his view, the power set out in Article 140(2) TFEU to decide on a Member State’s admission to the EU is reversible. However, this view is not legally tenable. Article 140(2) is only a power to join the euro, not to leave it. This interpretation is reinforced by Article 140(3) TFEU, which refers to the ‘irrevocable’ fixing of exchange rates. Overturning a decision made to join the euro by qualified majority vote (on the basis of Article 140(2)) would not be enough; it would also be necessary to overturn the exchange rate decision made by unanimity on the basis of Article 140(3). So Greece would have to consent – even if any of this were legally possible.

Some might suggest that the CJEU would simply ignore the plain words of the Treaty and accede to political reality, as it did in the cases of Pringle (on the ESM bail-out treaty), and Gauweiler (on ECB bond-buying). But those cases concerned measures which were intended to save monetary union, and which had broad support from Member States. A forced Grexit (temporary or not) would meet neither criterion. And much as many Germans hate to admit it, there is a textual basis to the rulings in Pringle and Gauweiler: the Treaty did not expressly ban loans to Member States, and it implicitly permits the ECB to buy government bonds on the secondary markets. The argument for a forced Grexit does not even have a fig leaf to hide its obvious illegality.

Nor can the Greeks be forced out by the actions of the ECB. The Treaty ban on forced exit from EMU must logically rule out measures which have the same result in practice. And even the measures which the ECB has taken to date (never mind others which it might take in future) are highly questionable, and are already being legally challenged, as I blogged earlier today. We can’t assume that the CJEU will always back the legality of the ECB’s actions: the UK won a case against it earlier this year, and the Commission beat it in court years ago as regards the application of EU anti-fraud law.

So can anything be done legally to change the current position? As I suggested in my earlier blog post, it would be possible to amend the Treaties, or to somehow engineer proceedings that challenged the legality of Greek EMU membership from the outset, or the legality of Greek debts; or (more precariously) to use Article 352 TFEU (the residual powers clause of the Treaties) to regulate the effects of a Grexit that had already taken place de facto.

But let me offer another suggestion: it could arguably be legal to adopt a measure based on Article 352 which nominally retains Greece’s status as an EMU member, but exempts it from some of the normal rules applicable to EMU members. This has the advantage of bending rules a little without breaking them entirely. Since Article 352 requires unanimous voting, it avoids the economic and political problem with Duff’s proposal: throwing a Member State out of EMU by a qualified majority would show the world that the EU’s monetary union is very fragile indeed. Using Article 352 would ensure that Greece consents to whatever happens to it.

I won’t thrash out the details now of what this might entail. But some have pointed out that, for instance, Scotland has no official legal tender, but pounds are simply accepted as currency in practice. It might similarly be arguable that the euro would remain nominally legal tender in Greece, but some sort of parallel currency, not formally legal but accepted for certain purposes, could be introduced for a limited period.

I’m not suggesting that this is the best solution, either legally, economically or politically. In my view, the least bad solution would be a fresh bail-out deal with rather less austerity, or (since that’s not realistic) acceptance of the current Greek offer (including debt restructuring) with an independent advisory board to oversee and make suggestions for its detailed implementation. Only if that idea fails (which currently seems possible) should a more radical fall-back position be considered.

Metaphors about Greece have been done to death (and I’m afraid I’ve contributed to this myself). So let’s sum this idea up with a lyric from a famous rock song: Greece can check out of EMU any time it likes, but it can never leave.

Barnard & Peers: chapter 19

Photo credit: The Eagles

The legal challenge to ECB restrictions on Greek bank accounts – and how you can help

Steve Peers

Many EU citizens have watched with sympathy and concern as Greek citizens have been limited to withdrawing €60 a day in the last two weeks. This restriction results from a restriction imposed by the European Central Bank (ECB) on the emergency liquidity assistance which it provides to Greek banks.  

Apart from the human impact, there are grave legal, political and economic doubts about the ECB’s action. One of the central purposes of a central bank is to function as a lender of last resort to banks – and the ECB is signally failing to do that here. Also, the ECB’s actions give the impression that it is trying to influence the Greek political debate on austerity and membership of the Eurozone – a role which is well outside the Bank’s remit. The banking restrictions obviously damage the Greek economy, and so limit its ability to pay back its creditors in future.  They have nothing to do with the Bank’s task of fighting inflation, and they undermine its broader role in supporting the EU’s economic growth. (For a fuller critique, see here (paywalled); on the legal background, see here). Arguably these restrictions – or further restrictions which the ECB might impose – could lead toward a de facto ‘Grexit’ from monetary union, which is ruled out by EU law (see my discussion here).

It’s possible to challenge the ECB’s actions via the national courts, which can refer the issue to the CJEU, such as in the recent Gauweiler case (discussed here). They can also be challenged in the EU courts, such as in the UK’s recent successful challenge (discussed here). The case law takes a broad view of what ECB acts can be challenged, except where it acts as part of the ‘Troika’ which negotiates bailout conditions, when neither the Bank nor the Commission can be challenged in the EU courts. But the ECB’s restriction of assistance to Greek banks did not fall within the scope of its role in the Troika.

National governments such as Greece can go directly to the EU courts to challenge ECB actions. Other challengers besides the EU institutions would have satisfy standing rules: ‘direct and individual concern’, or (if they are challenging a non-legislative act which does not entail implementing measures) ‘direct concern’. Arguably it would be easy for a Greek bank to satisfy those rules.

In the absence of a legal challenge from a Greek bank or the Greek government, an individual depositor has brought a legal challenge to the ECB’s recent actions before the EU General Court. You can find the full text of the claim here. The ECB might restore assistance if there is a deal in the near future, but it is still worth challenging its actions, so it cannot do this (or threaten to do it) in future.

Obviously there is a possible problem with standing, although a parallel challenge could be brought in the Greek courts. The plaintiff welcomes any advice or support – contact info@alcimos.com. Or you can leave comments on this blog post.

Barnard & Peers: chapter 19

Photo credit: www.2oceansvibe.com

The law of Grexit: What does EU law say about leaving economic and monetary union?

Steve Peers 

A Greek referendum on whether to accept its creditors’ offer is currently scheduled for next week. It’s not clear at this point whether the Greek voters’ refusal to accept the offer would necessarily lead to Greece leaving the EU or EMU, or at least defaulting on its debts. In fact, it is not clear what would happen if Greek voters decided to accept the offer, since it was still under the process of negotiation when the referendum was announced, and may no longer be on the table at the time of the referendum.

However, since a wide range of outcomes are possible, it’s useful at this stage to look at the legal framework for departure from economic and monetary union (EMU) – and in particular whether Greece would have to leave the EU if it left the single currency. (See also my previous blog posts, before and after the last Greek election, and Ioannis Glinavos’ recent analysis of whether Greece could be forced out of the euro).

The starting point is that the EU Treaties contain detailed rules on signing up to the euro, which apply to every Member State except Denmark and the UK. Those countries have special protocols giving them an opt-out from the obligation to join EMU that applies to all other Member States. (I’ll say that again, more clearly, for the benefit of those who claim otherwise: there is absolutely no way that the UK can be required to sign up to the single currency. That would not change in any way if British voters decided that the UK should stay in the EU).

But there are no explicit rules whatsoever on a Member State leaving the euro, either of its own volition or unwillingly, at the behest of other Member States and/or the European Central Bank (ECB).  There’s an obvious reason for this: the drafters of the Maastricht Treaty wanted to ensure that monetary union went ahead, and express rules on leaving EMU would have destabilised it from the outset. Put simply, legally speaking, Greece can’t directly jump or be pushed from the single currency.

In practice, though, its continued existence in the single currency could be made very difficult, as Ioannis Glinavos pointed out, either by the ECB restricting or ending emergency assistance (ELA) to Greece, or by the ECB limiting or removing Greek access to payment systems. It’s possible that any such moves would be legally challenged by the Greek government, and perhaps by other litigants too. It could be argued that they are in breach of EU monetary law as such, and/or that they breach an implied rule that Member States cannot be forced out of monetary union.

But let’s imagine that some sequence of events leads to Greek departure from the official legal framework for EMU nonetheless. This could lead to the fully-fledged introduction of a national currency (the ‘New Drachma’, or somesuch). It could instead lead to some informal link with the single currency – for instance a Greek ‘version’ of the euro, or the use of the euro as Greek’s official currency in practice without participating in the legal framework of EMU. Several countries outside the EU (such as Montenegro) take the latter approach. None of these actions are legal (for a Member State) as a matter of EU law.

For that matter, the less extreme possibility of Greece defaulting on Greek debts without leaving EMU (if that were feasible in practice) is not provided for in the Treaties either. Moreover, other Member States and the EU institutions are arguably legally obliged to refuse debt relief for Greece, in accordance with the Treaties’ no bail-out rule: as the CJEU said in Pringle, this rule allows Member States to loan money to Greece in return for conditions and an appropriate rate of interest. But they cannot simply assume responsibility for Greek government debts. Forgiving those debts would have the de facto result of assuming them – although it might be possibly argued that the letter (but surely not the spirit) of EMU law would allow this as long as the Greek debts were not formally transferred to the EU institutions or Member States. It might also be argued that a Greek default on such debt would be a situation of force majeure, which could be accepted by creditors without this amounting to a breach of the no bail-out rule.

However, the no bail-out rule does not apply to the private sector, which explains the ‘haircuts’ already imposed on private banks, or to international bodies or third States. So Greece could default on its loans to the IMF without infringing the no bail-out rule (although that would surely breach some other legal rule). Thanks to the gods of irony, the IMF is the biggest supporter of Greek debt relief. And equally, without infringing that rule, Greece could refuse to pay back any loans that Putin might be foolish enough to give it.

Of course, the reason we got to this position in the first place was a series of legal breaches: Greece joined the single currency on the basis of allegedly inaccurate economic data (for the debate on that issue, see here), and was not punished (as EU law provides for) when it started to run debts and deficits well above the legal limits of EU law.

So if Greece does leave the EMU framework, and/or default on its debts in violation of EU law, is it obliged to leave the EU, as some have suggested? On the face of it, it’s certainly illegal for a Member State to leave EMU unless it also leaves the EU. But having said that, there would still be no legal obligation for Greece to leave the EU if it defaulted or left EMU.

Why is that? The main legal reason is that the Treaties have a specific legal regime on withdrawing from the EU: Article 50 TEU, as discussed in detail here. Article 50 says that a Member State ‘may decide to withdraw from the Union, in accordance with its own constitutional requirements’. This is manifestly a voluntary choice. There are no rules in the Treaty stating that a Member State ‘shall’ withdraw from the Union in any particular circumstances.

Nor is it possible to throw a Member State out. Article 7 TEU allows a Member State to be suspended for breaching key principles such as human rights, democracy and the rule of law. But there is no provision allowing a Member State to be fully expelled from the Union against its will.

So implicitly but necessarily, the Treaties rule out any expulsion from the EU and any requirement to leave it, in any circumstances.  But the Treaty drafters didn’t provide for States to leave EMU and/or default on debts either. If those States can’t be forced to leave the EU in such circumstances, what is the legal way forward?

Solutions to the tragedy

Classical Greek tragedies often ended with a ‘deus ex machina’ (‘god out of the box’). The playwright had manoeuvred the characters into an impossible situation, and the only way to resolve the plot was by the introduction of a radically new plot element – a god or goddess who could use his or her divine powers to resolve all of the problems which the characters faced. The normal rules of narrative are suspended.

In my view, this is where we stand with Greek participation in the EU’s single currency. Whether or not Greece stays in EMU, a new approach to the legal framework is necessary to try and address the Greek position.

I see four main possibilities. First of all, the Treaties could be amended to try to regulate the situation, if necessary with some degree of retroactivity. There could, for instance, be a new general power for the Eurozone States in the Council and/or the European Council to adopt measures to address the legal consequences of Greece departing EMU. Legally, this is the tidiest solution; but politically, it’s the most difficult one, since the Greek issues would get bound up with the British ones. It’s possible that the Treaty amendment process would fail due to issues related to Greece, rather than the UK – or the other way around.

Secondly, it could be argued that the implied powers of the EU (most obviously, Article 352 of the TFEU) could be used to address the situation. This is a difficult argument since the Treaty drafters considered EMU to be ‘irrevocable’. However, the CJEU has taken a generous approach to measures aimed at saving EMU that many people believed were clearly ruled out: financial assistance in Pringle, and the ECB’s bond purchasing programme in Gauweiler (discussed by Alicia Hinarejos here). It might equally take a generous approach to the legality of any measures aiming to clean up the enormous mess that a ‘Grexit’ would make.

Thirdly, some Greek law-makers have suggested that the Greek debts might be illegal, on the basis of a theory of ‘odious debts’ that violate human rights. As noted above, though, the CJEU has insisted on the conditionality of financial assistance, and it has also repeatedly refused to answer questions from national courts about the legality of those conditions. So at first sight, it looks difficult for this argument to succeed as a matter of EU law, although the Court has not ruled on this issue as such yet.

Fourthly, there’s a novel argument that I haven’t seen suggested before: Greek participation in the euro was invalid in the first place, because of the allegedly inaccurate economic statistics used at the time. The CJEU could declare in the same ruling that all of the legal commitments relating to Greek participation in EMU in the past remain legal, so as not to disturb legal certainty (there’s plenty of precedent for CJEU rulings like that). There are two possible variations here: a) if Greece is still participating in EMU, its participation must be retained for the same reasons of legal certainty; or b) if Greece has left EMU, its departure is legal because the original participation was invalid.

But in either case, a crucial exception to the ‘legal certainty’ rule can justify debt relief for Greece. It’s arguable that due to the essential illegality of the legal framework in which Greek debts were incurred, the no bail-out rule did not fully apply, leaving the creditors and Greece free to negotiate a realistic amount of debt relief. (True, the no bail-out rule does apply to non-Eurozone States too; but Greece borrowed far more than it would have done due to its illegal participation in the euro). If Greece has left the euro already, it could in future benefit from the slightly different regime for financial assistance to non-Eurozone States.

Although Greece would still be formally required to try to join the single currency in future, the EU tends not to pressure countries (like Sweden) which have no real intention of joining. Realistically, no one would pressure it to join for a very long time.

All of these solutions provide, in one way or another, that ‘it was all a dream’: either the debt or the euro participation never existed in the first place, or the Treaty or EU legislation retroactively apply to address the issues, or the Treaty means something quite different from what it was generally thought to mean. It is always preferable to avoid such an approach to the law, but it’s hard to see how any other type of solution could work in this case. Legally, simply put: Greece allegedly should not have joined the euro; it should not have been allowed to run up huge debts; it cannot leave EMU; and it cannot be forced to leave the EU. Economically and politically: Greeks have suffered more than enough; Greece can never pay its accumulated debts while taking austerity measures which depress its economy; but taxpayers of other Eurozone States understandably would like to see their money back.  

These illegalities and economic and political conflicts cannot be resolved within the current framework, so we need to revise it radically. Of the suggestions considered here, the fourth solution has the most appeal: it is consistent not only with the classical tradition of Greek tragedy, but disturbs the current legal framework as little as possible while offering solutions (a fully legal Grexit, effective debt relief) that aim to resolve the situation as best it can be managed. It is impossible to find any solution that would satisfy every legitimate demand, but in my view this approach is the least bad alternative.

Barnard & Peers: chapter 19

Cartoon: Peter Schrank, Independent on Sunday