The Economic Crisis within the EU- The European Stability Mechanism as a current legal challenge Dominika Majorowski1 Salzburg Centre for European Union Studies Version April 24, 2017 1. Introduction The Eurozone crisis was triggered by the US subprime crisis and later evolved into a Global Crisis2 which hit the European Union (EU), especially the Eurozone, without warning in 2009. In comparison to the EU the United States (US) recovered much faster due to the institutions that already existed3 which took up the role of lenders of last resort4. The first EU countries to be affected by the crisis were Portugal, Ireland, Italy, Greece and Spain. Some experts argue that the causes of the crisis lay within the asymmetric structure of the EMU. The crisis can be seen as an asymmetric shock itself that hit the Member States differently due to their structural differences.5 Foreign lenders stopped investing during the Global Crisis thus triggering the rising risks within the periphery nations. The balance of payment crisis turned into a public debt crisis due to the fact that these periphery countries were producing big deficits and some governments had to take over their bank’s debt.6 1 Doctoral Student at the University of Salzburg; [email protected]; This paper has been presented at the EUSA Conference 2-4 May 2017, Panel 8L Trade, Business and Financial Integration Through Internal and External EU Law and Policy. 2 Baldwin/Beck/Bénassy- Quéré/Blanchard/Corsetti/De Grauwe/den Haan/Giavazzi/Gros/Kalemli- Ozcan/Micossi/Papaioannou/Pesenti/Pissarides/Tabellini/Weder di Mauro, Rebooting the Eurozone: Step1- agreeing a crisis narrative, CEPR Policy Insight No 85, 2015, 7; they argue that the crisis became a Global Crisis after Lehman Brothers failed. 3 Such as the US Federal Reserve and Treasury, which established crisis resolution measures. 4 Contrary to the Eurozone governments in trouble which had no lender of last resort; see Baldwin/Gros, What caused the eurozone crisis?, CEPS Commentary 2015, 3: According to Baldwin and Gros the Eurozone Membership was also a crisis amplifier; see also Talani, Introduction: Europe in Crisis: A structural Analysis, 3 in Talani, Europe in Crisis- A Structural Analysis 2016: argues that the US came out of the crisis much stronger in monetary, economic and political terms than the EU and the Eurozone. 5 See Talani, Introduction: Europe in Crisis: A structural Analysis, 4-5 in Talani, Europe in Crisis- A Structural Analysis 2016; see also http://voxeu.org/article/causes-eurozone-crises: This asymmetric structure can be outlined by the fact that core countries (such as Germany France and Netherlands) were investing heavily in periphery countries (such as Ireland, Portugal, Spain and Greece); see Baldwin/Gros, What caused the eurozone crisis?, CEPS Commentary 2015, 2; see also Nelson/Belkin/Mix/Weiss, The Eurozone Crisis: Overview and Issues for Congress, Congressional Research Service 2012, 4: They argue that this would not state an issue unless the periphery countries were relying on the foreign lenders. 6 Baldwin/Gros, What caused the eurozone crisis?, CEPS Commentary 2015, 2; see also Baldwin/Beck/Bénassy- Quéré/Blanchard/Corsetti/De Grauwe/den Haan/Giavazzi/Gros/Kalemli- Ozcan/Micossi/Papaioannou/Pesenti/Pissarides/Tabellini/Weder di Mauro, Rebooting the Eurozone: Step1- agreeing a crisis narrative, CEPR Policy Insight No 85 November 2015. 1 According to some scholars the closer interconnection between banks and national governments within the Eurozone led to a further spread of the crisis as they argue that after the entry into the euro area borrowing costs were lower due to the large intra-eurozone capital flows.7 Furthermore, this strong interconnection between banks and governments had a strong potential for a vicious cycle between these two actors. This vicious cycle also operated the other way round as the banks heavily lend to their governments.8 Another reason to be outlined is the issue of responsibility of regulation which was left at the national level, while monetary policy was an issue of the ECB. At that time no supervision or resolution mechanisms for banks existed.9 Scholars argue that the crisis was caused by common challenges, like the ones mentioned above, as well as by factors specific to each country.10 Concluding, we can say that the crisis did not evolve out of one specific reason but was caused by several, general and specific reasons. As we know now, the efforts made before were not sufficient and the criteria were frequently violated. 11 Therefore a strong necessity grew for further mechanisms and institutions. The crisis exposed that it was necessary to enforce fiscal discipline more effectively, so to say, by adopting more fiscal rules which were both stricter and more likely to be enforced.12 The Six-Pack13, the Two-Pack14 and the Treaty on Stability, Coordination and Governance in the EMU (also called the Fiscal Compact15) brought improvements in regard to fiscal policies within the EMU.16 7 see https://economics.rabobank.com/publications/2015/december/the-eurozone-debt-crisis--causes-and- crisis-response/; http://voxeu.org/article/causes-eurozone-crises (02.01.17); Mundell, A Theory of Optimum Currency Areas, The American Economic Review 1961: OCA developed by Robert Mundell in 1961 argues that the optimum area for a common currency is to be highly economically integrated, which means free flows of goods and services, financial and physical capital and workers/labor; see also McKinnon, Optimum Currency Areas and the European Experience, Economics of Transition 2002, 343-364: Frankel argues that there is a loss of ability to respond to national economic conditions via an independent monetary policy which leads us to the assumption that the common currency is taken as one of the reasons why some Member States are hit harder by the crisis than others. Another reason can be found in the fact that the Eurozone Member states do not meet the criteria for an optimum currency area. 8 Baldwin/Beck/Bénassy- Quéré/Blanchard/Corsetti/De Grauwe/den Haan/Giavazzi/Gros/Kalemli- Ozcan/Micossi/Papaioannou/Pesenti/Pissarides/Tabellini/Weder di Mauro, Rebooting the Eurozone: Step1- agreeing a crisis narrative, CEPR Policy Insight No 85 November 2015, 2. 9 http://voxeu.org/article/causes-eurozone-crises (03.01.17); see also Baldwin/Beck/Bénassy- Quéré/Blanchard/Corsetti/De Grauwe/den Haan/Giavazzi/Gros/Kalemli- Ozcan/Micossi/Papaioannou/Pesenti/Pissarides/Tabellini/Weder di Mauro, Rebooting the Eurozone: Step1- agreeing a crisis narrative, CEPR Policy Insight No 85 November 2015, 12. 10 Nelson/Belkin/Mix/Weiss, The Eurozone Crisis: Overview and Issues for Congress, Congressional Research Service 2012, 3-4. 11 http://voxeu.org/article/causes-eurozone-crises (03.01.17): Member States did not stick to the rules established by the Maastricht Criteria, furthermore, did not stick to the Stability and Growth Pact as it did not have any teeth and credibility. 12 Hinarejos, Fiscal Federalism in the European Union: Evolution and Future Choices for EMU, CMLR 2013, 1629. 13 Regulations 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011 and Directive 2011/85/EU. 2 Additionally, several crisis resolution mechanisms have been inaugurated along with these rules. The first mechanism to be established was the Greek loan facility agreement. As it became clear that Greece was downgraded and could not finance itself any more on the markets the Head of States or Governments decided to assist Greece with coordinated bilateral loans which were supplemented by the IMF.17 Soon it became clear that this crisis was not confined to Greece but that other Member States were also affected. On the Commission’s initiative the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF) were established in 2010.18 The EFSM was based on Art 122(2) TFEU. The money available for this mechanism was limited to the money available within the Union’s budget. This led to the establishment of the EFSF outside the legal framework of the EU. It was incorporated as a public company under Luxembourg law. Within this mechanism, as shareholders, the euro area Member States might grant assistance of up to 440 billion euro. Together the EFSM and the EFSF formed the rescue umbrella which was established for a special period of time and expired in 2013. 2. The ESM as a crisis resolution mechanism Contrary to the EFSM and the EFSF the European Stability Mechanism (ESM) was established as a permanent crisis resolution mechanism. It was created by the Member States outside the legal framework of the EU as an intergovernmental organization under public international law, located in Luxembourg. Its purpose “shall be to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen to the benefit of ESM 14 Regulation 473/2013 and Regulation 472/2013. 15 The Treaty on Stability, Coordination and Governance in the EMU, also called the Fiscal Compact was established as an intergovernmental treaty outside the EU legal order. It sets further rules on fiscal stance that states should implement on national level; The Fiscal Compact was signed by all EU Member States except the UK and the Czech Republic; The full Treaty can be found at: http://europa.eu/rapid/press-release_DOC-12- 2_de.htm (09.01.17); An analysis of this treaty can be found in: Griller, Zur verfassungsrechtlichen Beurteilung des Vertrages über Stabilität, Koordinierung und Steuerung in der Wirtschafts- und Währungsunion (“Fiskalpakt”), JRP 2012; Fabbrini, The fiscal compact, the golden rule and the paradox of European federalism, Boston College International and Comparative Law Review 2013; Editorial, The fiscal compact and the European constitutions: Europe speaking German, EuConst 2012. 16 Juncker/Tusk/Dijsselbloem/Draghi/Schulz, Completing Europe’s Economic and Monetary Union, „Five- Presidents Report“, 14.