The Pringle case (Case C-370/12 Pringle) decided today is arguably the case of the year. In an accelerated procedure, the full court (all 27 judges!) answered a number of questions referred by the Irish Supreme Court on the competence of EU Member States under EU law to conclude the ESM Treaty. The ESM Treaty is a treaty under public international law concluded by the members of the eurozone to create a permanent crisis mechanism to safeguard the stability of the euro area. It is the latest answer to the ongoing sovereign debt crisis (dubbed the ‘eurocrisis’) experienced by a number EU Member States that have the euro as a currency.
Despite the good intentions of its creators, the idea of setting up a permanent international body competent to grant financial assistance (amongst other things) to eurozone members in financial difficulties goes somewhat against the foundations of the Economic and Monetary Union, which aims at ensuring price stability through sound government budgets. It is thus not surprising that a case was brought before the CJEU so that the latter had to rule on whether Member States can actually do this under EU law.
There was perhaps little doubt about the outcome of this case. The stakes are too high for the CJEU to send the ESM back to the drawing table. Yet, the CJEU had to engage in some serious legal acrobatics to confirm the competence of the EU Member States to conclude the ESM Treaty. The judgment has many very interesting aspects (especially as regards the competence of Member States to conclude international agreements), but I’ll focus in this post on the one that’s politically the most fun: the compatibility of the ‘no bail-out’ clause (article 125 TFEU) with the ESM (‘bailout?’) Treaty.
In the one corner we have article 125 TFEU (‘the no bail out clause’) which states:
The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.
According to the CJEU, the aim of the article ‘is to ensure that the Member States follow a sound budgetary policy’, and the prohibition contained therein is to ensure that Member States ‘remain subject to the logic of the market when they enter into debt, since that ought to prompt them to maintain budgetary discipline. Compliance with such discipline contributes at Union level to the attainment of a higher objective, namely maintaining the financial stability of the monetary union.’ Accordingly, Member States are prohibited by article 125 TFEU from granting financial assistance to other Member States where this would result diminish the recipient Member State’s incentive ‘to conduct a sound budgetary policy’ (paras. 135-136).
In the other corner we have the ESM Treaty. The ESM, with its initial lending capacity of €500 billion, can provide various forms of funding and financial support to contracting parties that are having severe financing problems. Such support is, however, subject to strict conditionality (in the form of macroeconomic adjustment programmes), and can only be granted if it is indispensable to safeguard the financial stability of the eurozone as a whole. Thus, the ESM provides for funds to those members whose budgetary policy has not been particularly sound. But at the same time, the ESM does try to ensure that their policies get back on track. Is such a system compatible with article 125 TFEU?
The CJEU first held that article 125 TFEU does not in principle prevent Member States from granting any form of financial assistance to another Member State, but that ‘the activation of financial assistance by means of a stability mechanism such as the ESM is not compatible with Article 125 TFEU unless it is indispensable for the safeguarding of the financial stability of the euro area as a whole and subject to strict conditions.’
The CJEU continued:
However, Article 125 TFEU does not prohibit the granting of financial assistance by one or more Member States to a Member State which remains responsible for its commitments to its creditors provided that the conditions attached to such assistance are such as to prompt that Member State to implement a sound budgetary policy.
According to the CJEU, this was the case with the ESM Treaty. First of all, the instruments of the ESM ‘demonstrate that the ESM will not act as guarantor of the debts of the recipient Member State. The latter will remain responsible to its creditors for its financial commitments.’ The granting of financial assistance in the form of a credit line does not imply assumption of debts by the ESM, but rather ‘amounts to the creation of a new debt, owed to the ESM by that recipient Member State, which remains responsible for its commitments to its creditors in respect of its existing debts’. Nor does the buying of state bonds amount to the assumption of debt, since the recipient Member State will still have to ‘repay the debts in question’. To that the CJEU added, quite remarkably, that the price of those bonds ‘may be significantly different from the value of the claims contained in those bonds, since the price depends on the rules of supply and demand on the secondary market of bonds issued by the ESM Member concerned.’ And of course, the ESM has no influence on those prices….
In any case, the CJEU continued by emphasising that stability support is only granted subject to strict conditionality and when such support ‘is indispensable to safeguard the financial stability of the euro area as a whole’. In the CJEU’s view, the measures are designed to make sure that the receiving Member State implements sound budgetary policies. The CJEU also stated that in relation to the measures on capital calls, ESM Members remain bound to pay their part of the capital.
Despite these crystal clear statements made by the CJEU, the question is whether this is in fact the reality as many have argued that the debts of eurozone members in difficulties should be forgiven or will be forgiven. The CJEU says that there is no assumption of debt whatsoever of the part of the ESM and the receiving Member States are subject to strict conditionality. If the governments of Greece, Spain, Ireland and Portugal are reading the judgment, they have been thoroughly warned that the CJEU is not on the side of those who believe that their debts should be forgiven. The CJEU is seems clear on what the obligations under the ESM Treaty entail, and litigators will have this judgment to remind the CJEU of it.