Europe's Quest for a Response to the Financial Crisis

JURIST Guest Columnist Alina Christova of the Institute for European Studies, Vrije Universiteit Brussel says the European Stabilization Mechanism, recently agreed upon in the European Union, is a welcome step towards a permanent, crisis-management system, but that additional measures must follow...
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Last month, Heads of State or Government of the European Union agreed on tougher eurozone rules by amending the Treaty of Lisbon, which came into force only in December 2009. This is a welcome step towards the creation of a much needed, crisis-management mechanism because of the recent financial and currency crisis and the necessity to support the budgets of South European Member States, especially Greece, Italy, Portugal, Spain and Ireland. In 2013, the permanent, crisis-management mechanism will replace the emergency, rescue package to bail out EU Member States threatened by the "Greek crisis," which was adopted in May 2010, for the period of three years.

The rescue package or European Stabilization Mechanism is based on Art. 122 of the Treaty on the Functioning of the European Union (TFEU). The purpose of the Stabilization Mechanism is to preserve the stability, unity, and integrity of the European Union by providing assistance to any Member State that experiences or is seriously threatened by a severe economic or financial disturbance caused by exceptional occurrences beyond its control. That way, the EU is aiming at preventing further speculations on the financial markets regarding the bankruptcy of EU Member States, which had endangered the Euro.

The Stabilization Mechanism is based on four pillars. First, the EU budget allocated up to 60 billion euros of loans or credit lines. Second, the Stabilization Mechanism included bilateral credit guarantees of Member States of the Euro-group of up to 440 billion euros if the amount of 60 billion euros turns out to be insufficient. According to Art. 125 TFEU, a Member State shall not be liable for or assume the commitments of another Member State (the "no bailout" principle). This provision has been used as an argument for a general prohibition of any kind of financial support within the eurozone. However, Art.125 TFEU only states that there cannot be an obligation of a Member State to assume financial responsibility for another Member State, but cannot be seen as a prohibition of taking over such responsibility on a voluntary basis. A general prohibition would mean that an EU Member State would be in a position to grant financial support to any country in the world except its partners in the eurozone, which cannot be the aim of the provision. Third, the International Monetary Fund guaranteed additional credit lines of up to 250 billion euros.

Last but not least, the European Central Bank backed up the aid package with the purchase of government bonds of Member States of the eurozone. However, Art. 123 (1) TFEU prohibits the direct purchase of debt instruments by the European Central Bank and, therefore, sets out a ban on financing the budgets of Member States through the European Central Bank. Because of this provision, the European Central Bank did not buy government bonds directly from the issuers on the capital market. Critical voices have raised concerns regarding the question whether a country heavily in debt and incapable of paying back its current obligations can be tackled by granting additional credits and hereby increasing this debt. Instead critics have suggested the option of cutting the debts by partial waivers by the debtees.

The rescue package was followed by a variety of legislative proposals by the European Commission to improve the shortcomings of the current, economic governance system of the EU and its instruments. Improvements include proposals for regulations on speeding up and clarifying the implementation of the excessive deficit procedures, direct enforcement of budgetary surveillance in the eurozone, and on the prevention and correction of macroeconomic imbalances.

It is important for Member States of the eurozone to show solidarity in times of crisis. However, it is also of crucial importance to revise the existing, legal framework and adapt it to the latest developments in order to prevent similar crises in the future. A major step in this regard is the treaty change proposed by the last European Council, the highest political institution of the EU. The key aspect regarding this change is the simplified treaty revision procedure set out in Art. 48 (6) of the Treaty of the European Union, which would allow changes through unanimous decision of the Member States and a mere consultation of the European Parliament, without the need to call in a constitutional convention. However, the treaty revision would need to be ratified by Member States to enter into force. The President of the European Council, a post newly created by the Treaty of Lisbon, together with the European Commission is tasked with the preparation of these treaty changes by December 2010. However, the envisaged treaty change triggered negative comments and concerns, especially in view of the almost ten years needed to finally adopt the Treaty of Lisbon.

Finally, there is a heated debate on potential sanction mechanisms, including automatic sanctions or the suspension of voting rights of Member States in breach of the Stability Mechanism. This measure will also be on the agenda of the task force of the President of the European Council. While the December deadline does not apply to the question of sanctions, nonetheless, a system of effective sanctions is crucial to the enforcement of the Stability Mechanism. These sanctions should not be dependent upon political decisions and should be capable of preventing Member States from seriously violating the basic principles of the Economic and Monetary Union. However, getting all 27 Member States to agree on future steps and then making a legal commitment to them is another matter.


Alina Christova is the E-learning & Training Researcher for the E-Learning Team at the Institute for European Studies, which provides interactive, e-course offerings for anyone involved in policy, research, or business concerning the EU.

Suggested citation: Alina Christova, Europe's Quest for a Response to the Financial Crisis, JURIST - Forum, Nov. 15, 2010, http://jurist.org/forum/2010/11/europes-quest-for-a-response-to-the-financial-crisis.php

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