Integration without Ratification

Integration without Ratification

by The YULR Editorial team

The European debt crisis, ushered in by the American recession after the 2008 collapse of Lehman Brothers, arrived on European shores with Greece’s near-default in May 2010, exposing a fundamental weakness in the legal underpinnings of the EU. The Treaty of the Functioning of the European Union (TFEU)1 failed to provide a fast fix to the crisis, as the political decision-making procedures that it prescribed turned out to be too complex and sluggish to enable quick, concerted action. As a result, political leaders carved out new avenues for taking joint action that circumvented the provisions of the TFEU. In other words, the European debt crisis has furthered European integration, but it is an integration that is unfolding in a legal no-man’s land.

Fiscal Policy Shortcomings in the EU Core Treaties
European integration skidded to a screeching halt in 2005 when the European Constitution failed to gain approval in the Dutch and French referenda. What was supposed to be a major step to a federal state of Europe ended in the watered-down Treaty of the Functioning of the European Union, approved in 2009. Although the TFEU strengthened the European Parliament,2 sovereignty over crucial policy areas remained scattered among the member states.3 European integration via the route of treaties had been shot down.
The structure set out in the TFEU proved to be entirely unworkable in a crisis that required a swift and coordinated response. Article 294 of the TFEU sets out the so-called co-decision process,4 an intricate procedure in which the European Commission (the executive arm of the EU) initiates legislative proposals that have to pass through the European Parliament and the European Council (the second legislative chamber after Parliament). The Parliament gives the Commission’s proposal a “first reading,” forms an opinion on it, and sends it to the Council. The Council may accept the Parliament’s position (in which case the proposal becomes law) or reject it. In the latter case, the Council sends its own position to the Parliament. This procedure can repeat itself quite a few times, and may bring a Conciliation Committee and the Commission to the table if no compromise is reached. During every reading, the relevant party has three months to adopt a position.5 This messy and drawn-out decision-making process can severely delay effective policy-making.
On sensitive issues, such as giving up fiscal sovereignty, member states – represented in the Council – become strongly protective of their national interests. Not surprisingly, the Parliament and the Council ran into a deadlock when the Commission proposed tighter fiscal integration. On September 29, 2010, the Commission drew up a package of six legislative proposals—dubbed the “Six-Pack”—aimed at centralizing budgetary surveillance,6 allowing the Commission greater access to national macroeconomic data,7 and, most notably, equipping the Commission with an enforcement mechanism if national governments repeatedly failed to address excessive macroeconomic imbalances. With this last tool, delinquent national governments, with approval of the Council, could ultimately be forced to pay a yearly fine of 0.1% of its GDP.8
On June 22, 2011, the Council and the Parliament clashed over the voting procedure that would authorize the Commission to use its enforcement mechanism: Should the Council have to put up a qualified majority vote (55% of EU member states, representing 65% of the EU population) to block or to approve the 0.1% fine? The Six-Pack went into a second reading and, as of late August 2011, has been stuck in legislative mire for almost a whole year. The legislative structure put in place by Art. 294 TFEU proved to be utterly incapable of effectively dealing with the swiftly developing European debt crisis.

The European Financial Stability Facility: Outside the Architecture of the Treaties
As a result of its inefficient procedures, the TFEU has occupied a strange position since the inception of the debt crisis—the players and instruments aiming to resolve the crisis are no longer relying on the treaty’s provisions for procedural guidance, but are now working their way around them before tackling the problems.
The European Financial Stability Facility (EFSF), the credit facility created in 2010 to help out Greece and other struggling Eurozone countries, is a prime example of an entity edging its way around the TFEU to properly address the crisis. Legal scholars and observers have expressed concerns that the EFSF is in violation of Art. 125(1), Sentence 2 TFEU, which states that “a Member State shall not be liable for or assume the commitments of central governments … or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.” With the second Greek bailout in July 2011, several academics9 filed a claim before the German Constitutional Court, making precisely that claim.
The Constitutional Court rejected the complaint that the rescue package for Greece violated Art. 125 TFEU on September 7, 2011.10 The decision is not surprising, since European lawmakers guarded themselves against such a claim by relying on Art. 122(2) TFEU to create the EFSF: “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the Member State concerned” (emphasis added). The EFSF is a separate legal entity that consists of bilateral guarantees among Eurozone member states to loan money to each other if a country requests it. In the words of Thomas Klau, Editorial Director of the European Council of Foreign Relations and co-founder of the Financial Times Deutschland, “The EFSF is outside of the architecture of the EU treaties.”11 With an expanding fiscal crisis, the powers of the EFSF have only grown to meet the new challenges. When Spain and Italy – economies too large to be saved by the EFSF – faced contagion from the crisis during the summer of 2011, EU leaders convened to increase the EFSF’s powers and enable it to act preemptively: The EFSF could now buy sovereign bonds on the secondary market, grant loans to countries that had not officially requested a bailout, and recapitalize teetering banks.12 All of this was legally possible because the EFSF had carved out its legal niche under the protection of Art. 122(2) TFEU.
Lawmakers have stretched the TFEU to create a Limited Liability Company that is now taking the role of a political actor. The EFSF financed the bailouts of Ireland, Portugal, and the second bailout of Greece13 in exchange for harsh economic austerity measures, largely dictated by Germany. The EFSF, despite operating outside the scope of the EU’s governing treaty, has transferred large segments of Greek, Irish, and Portuguese budgetary policy under EU jurisdiction. Instead of relying on transparently negotiated treaties that pass popular approval, European integration has taken the route of backroom politics that circumvents, rather than utilizes, EU core treaties.

The European Central Bank: Intervening in National Fiscal Policy
Shortly after the EU leader summit in July 2011, sovereign bond yields of Spain and Italy jumped above 6%, a rate which investors and analysts viewed as unsustainable.14 To shield Spain and Italy from difficulties in accessing financial markets, the EFSF would had to have purchased Italian and Spanish bonds to lower the yield rate. It was unable to do so, as Eurozone member states’ national parliaments had not yet approved this new power of the EFSF.
The only institution with the financial firepower to jump to the rescue was the European Central Bank (ECB). On August 4, 2011, the ECB announced that it would revive its Securities Markets Programme and purchase Spanish and Italian debt.15 This measure raised concerns over a possible violation of Art. 123(1) TFEU,16 which dictates that “overdraft facilities or any other type of credit facility with the European Central Bank … in favour of … central governments … shall be prohibited, as shall be the purchase directly from them by the European Central Bank … of debt instruments.” This article was intended to keep the ECB out of interfering directly in member states’ national budgetary policies. The ECB usually takes government bonds as collateral for loans it offers to a national government—purchasing bonds to keep their yields stable thus creates a legally questionable circularity. Hence, there was much skepticism when the ECB bought Spanish and Italian debt.
The concern that the ECB’s purchase violated Art. 123(1) TFEU is, however, unfounded. The Central Bank was circumspect enough not to run into such a legal trap; it purchased Spanish and Italian bonds from the secondary market, meaning that it bought bonds from investors who were holding them—a move which is not prohibited by Art. 123(1) TFEU.17 Nonetheless, the move reflects that the ECB had to carefully consider how to work its way around the TFEU.

Conclusion
The bonds purchase killed two birds with one stone in that it furthered European fiscal integration while circumventing the TFEU. As in the case with the EFSF, the ECB did not breach the core EU treaty. All these approaches to solving the Euro crisis are legal, but will likely create a fundamental problem in the future. The TFEU has, at best, been an obstacle in saving the Eurozone and has thus been denigrated in the process. Approaches to solving the crisis have been made in legal no-man’s land, leading to a more strongly integrated fiscal structure. At the same time, European integration has come to a halt on the conventional treaty track. If the current mess that is the European Union is to be set straight, the legal underpinnings need to quickly catch up with the developments of recent months.

1 More commonly known as the Treaty of Lisbon.
2 Treaty of the Functioning of the European Union, Articles 223-234; cf. European Parliament, http://www.europarl.europa.eu/parliament/expert/displayFtu.do?language=en&id=73&ftuId=FTU_1.3.2.html (accessed August 20, 2011)
3 Cf. e.g. Articles 145-150 TFEU (employment policy), Articles 151-161 TFEU (social policy): http://europedia.moussis.eu/discus/discus-1283276094-529725-4160.tkl (accessed August 20, 2011)
4 Cf. Art. 294 TFEU: Consolidated Version of the Treaty of the Functioning of the European Union, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:115:0047:0199:en:PDF (accessed August 20, 2011)
5 In the later stages of the process, each party has six weeks to reach a decision.
6 European Commission. “EU economic governance: the Commission delivers a comprehensive package of legislative measures.” Sep 29, 2011. http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/1199&format=HTML&aged=0&language=EN&guiLanguage=en (accessed August 20, 2011)
7 Ibid.
8 Ibid.
9 Full names of the five professors and the full text of their complaint are available in German: http://www.asm-ev.de/upload/pdfs/Texte/Klage_KAS%20insg_%20endg_vom%2005_07_10.pdf (accessed August 20, 2011)
10 http://www.bundesverfassungsgericht.de/pressemitteilungen/bvg11-055en.html (accessed September 14, 2011)
11 Personal interview, July 25, 2011
12 Joshua Chaffin. “Bail-out fund bolstered.” Financial Times, July 22, 2011. http://www.ft.com/intl/cms/s/0/1a3679b0-b3b3-11e0-855b-00144feabdc0.html#axzz1VboW2Y4v (accessed August 21, 2011)
13 The bailouts occurred in November 2010, May 2011, and July 2011, respectively.
14 Brian Blackstone. “ECB Takes New Steps to Rein In Crisis.” Wall Street Journal, August 5-7, 2011. http://destinationsmedia.newspaperdirect.com/epaper/viewer.aspx (accessed August 21, 2011)
15 The Central Bank had done this once before during the time of the first Greek bailout in May 2010, raising equally loud voices of concern, especially from the German Bundesbank.
16 Alexander Thiele. “EZB Anleihenkäufe: Jetzt auch noch Spanien und Italien.” Legal Tribune Online, http://www.lto.de/de/html/nachrichten/4005/ezb_anleihekaeufe_jetzt_auch_noch_spanien_und_italien/ (accessed August 21, 2011)
17 Cf. ibid.

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