IN the midst of a sovereign debt crisis, the Eurozone created in 2010 two emergency mechanisms to provide financial support to euro area countries in difficulties: the European Financial Stability Mechanism (EFSM), a loan facility within the EU system; and the European Financial Stability Fund (EFSF), a loan vehicle created on an intergovernmental basis. Countries struggling to re-finance their debt could, after detailed negotiations and under strict conditions, receive funds from both mechanisms, as well as from the International Monetary Fund.
This, however, was not sufficient to reassure the markets. Both the EFSF and the EFSM were temporary in nature, and had limited lending power. There were also doubts as to the legality of these facilities. In particular, it was questionable whether they were compatible with the “no-bailout clause” in Article 125 TFEU, which states that a Member State's debt shall not be assumed by either the Union or other Member States. Some interpreted this clause as a ban on any form of financial assistance, including the creation of loan facilities.
In March 2011, the Member States amended Article 136 TFEU using the simplified procedure and introduced a new paragraph (3) that affirmed their power to create a stability mechanism. Even before this amendment was ratified, the Member States had already signed an international agreement creating the European Stability Mechanism, or ESM. This is a permanent and more powerful intergovernmental mechanism, established outside the framework of the EU Treaties, that may grant financial assistance to countries in difficulties, subject to stringent conditions. Several challenges at the national level delayed the entry into force of the ESM Treaty until 27 September 2012 for 16 signatories to the Treaty, and a few days later for Estonia.
One of the challenges to the legality of the ESM Treaty was brought by Mr Pringle, a member of the Irish Parliament. Mr Pringle argued, among other things, that the simplified procedure should not have been used to amend the TFEU, and that the ESM Treaty itself was contrary to several EU Treaties provisions, mostly concerning the Economic and Monetary Union. The Irish Supreme Court decided to make a reference for a preliminary ruling to the Court of Justice of the European Union. In an unsurprising but momentous judgment, the CJEU sitting in full court—which is exceedingly rare—rejected all challenges and confirmed the legality of the ESM Treaty. The Pringle decision (Case C-370/12 Pringle v Ireland, Judgment of the Court of Justice of 27 November 2012, not yet reported) is significant for various reasons. First, it clarifies, to a degree, the relationship between an intergovernmental mechanism such as the ESM and the EU Treaties. Secondly, it sheds light on whether the Member States can allocate tasks to the EU institutions outside the EU framework. Finally, it provides a purposive and dynamic interpretation of the EMU provisions; most importantly, of the no-bailout clause.
The first question posed to the Court of Justice concerned the use of the simplified procedure to amend the TFEU. This procedure can only be used to amend Part III of the Treaty, and the court had to consider whether the amendment, formally of a provision within that Part III, nevertheless affected in substance the nature and scope of the Union's competence in monetary and economic policy (set out in Part I of the Treaty). The court decided that the ESM fell outside the EU's exclusive monetary policy because of its different aim and instruments. The ESM seeks to safeguard the stability of the euro area, whereas the objective of the Eurozone's monetary policy is price stability; moreover, the ESM would operate through the granting of financial assistance, which is not an instrument of monetary, but economic policy.
Having decided that the ESM was an instrument of economic policy, the court went on to find that this mechanism complemented the EU's competence in economic policy without encroaching on it. This is because the Union only has a coordinating competence in the area, and it would lack the power to establish a permanent emergency mechanism like the ESM. However, Member States are able to create such a mechanism themselves, as long as they comply with EU law in doing so. The court was satisfied that this compliance with EU law is ensured by the fact that financial assistance from the ESM will only be granted following compliance with strict conditions by the relevant Member States. The court also concluded that the TFEU amendment did not grant any new powers to the EU – something that could not have been done through the simplified procedure either. In the court's view, Article 136(3) TFEU simply clarified a pre-existing competence of the Member States.
Next, the court had to deal with a series of questions concerning the compatibility of the ESM Treaty itself with several provisions of the EU Treaties.
The court reaffirmed its position that the ESM would not subvert the EU's coordinating competence in economic policy. It considered the ESM a financial mechanism, not a mechanism for the coordination of economic policies; and that the aim of the conditionality attached to ESM assistance is not to coordinate national economic policies, but to ensure compliance with EU law—more specifically, with the EU's coordinating economic measures, and with the EU Treaties' no-bailout clause.
This brings us to one of the most difficult questions that faced the court: whether the no-bailout clause in the TFEU precluded the creation of a mechanism of financial assistance such as the ESM. The court adopted a purposive reading of the no-bailout clause. This provision, according to the court, has two aims: the first one is to encourage prudent budgetary policy in the Member States by ensuring that they remain responsible to their creditors, thus submitting Member States to market discipline. The second, more general aim is to safeguard the financial stability of the euro area.
The court inferred from this that the no-bailout clause does not cover all forms of financial assistance; more specifically, it does not preclude a mechanism such as the ESM as long as it is only activated when necessary to safeguard the financial stability of the euro area as a whole, the Member State that receives assistance remains responsible to its creditors, and the assistance is subject to conditions that prompt the Member State to implement a prudent budgetary policy.
The court also had to consider the legality of the allocation of new tasks to the EU institutions outside the framework of the EU, particularly as the ESM Treaty allocated new tasks to the European Central Bank, the Commission and the court itself. The court concluded that this allocation was not problematic, so long as it was not done in an area of exclusive EU competence and did not alter the essential character of the institutions' powers under the EU Treaties. Interestingly, the court did not mention the consent of all Member States as a requirement for this use of the institutions. Furthermore, it had been argued that Member States should only be able to allocate tasks to EU institutions when using the enhanced cooperation mechanism set out in the EU Treaties. The court rejected this argument, at least as regards cases such as the present one, where enhanced cooperation cannot be used because the EU does not have the pre-requisite competence to act. This leaves open the question of whether it is possible to confer powers to the EU institutions outside the framework of enhanced cooperation in an area of (non-exclusive) EU competence.
In addition, it had been argued that placing the ESM outside the EU framework breached the right to legal protection, guaranteed in Article 47 of the EU Charter of Fundamental Rights. The court's response was that, when creating the ESM, the Member States were not implementing EU law, and thus acting outside the scope of the Charter. Questions remain as to application of the Charter to the EU institutions in the ESM context.
Finally, the Irish court asked whether the failure of the Member States to wait until the amendment of the TFEU entered into force before signing and ratifying the ESM Treaty affected the legality of the latter. The Court of Justice answered in the negative, because Member States had always had the power to create a mechanism such as the ESM. Accordingly, the new paragraph added to Article 136 TFEU simply clarified the existence of such power, but did not give rise to it.
Overall, the Pringle judgment brought few surprises. Some of the measures intended to address the euro area crisis may have been adopted in a legal grey area, but few would argue that they were unnecessary. Similarly, while the ESM may not be perfect, few expected the Court of Justice to dismantle an emergency mechanism that had broad political support, and whose demise would likely have sent the euro area back into the acute phase of the crisis. The degree of deference shown by the court to the political process in Pringle is not surprising, and it is arguably justified in such exceptional circumstances. The Economic and Monetary Union provisions in the Treaties were designed to prevent a crisis, but not to manage one; as such, they needed to be interpreted in a purposive and dynamic manner to ensure that the EU's legal framework does not become obsolete and that the Eurozone is capable of dealing effectively with this crisis of confidence. This was the role of the court, and one that it discharged well.
