Breaking the link between Governments and the Banks: Tales from Statusquoland

The Irish Taoiseach, Enda Kenny, is in Brussels at the European Council with 2 aims: (1) ensure that Ireland has access to an emergency line of credit (the "Enhanced Conditions Credit Line") with as few conditions as possible to smooth Ireland's exit from the bailout programme, and (2) to have the European Council re-agree what they agreed back in June 2012.

That's right: a major win for Kenny would be the re-agreement of something that the European Council already agreed over a year ago! I'm not joking.

Back in June 2012, the European Council agreed that a Banking Union was the way forward (PDF). The banking debts had to be severed from sovereign debts because Member State governments cannot bear the cost of this most Europeanised of market sectors. The Banking Union should also create a way for banks to be re-capitalised or wound up on a Eurozone basis, so that the debt crisis would not happen again. The European Council even decided to review the case for breaking the link between sovereign debt and existing bank debt - something that would do wonders for the balance sheets of the Irish and Spanish governments and ease the burden on their people considerably

This outbreak of good sense didn't last very long. In September 2012, Germany, along with The Netherlands and Finland, declared that not only will past banking debt not be severed from sovereign debt, but the European Stability Mechanism would not recapitalise banks instead of governments. Instead the order for recapitalising banks in the future would be: private funds, then Member State governments, and only then would the ESM step in. So three Member States had decided to completely void European policy agreed between 27 countries just 3 months ago, and they completely ruined the idea of a Banking Union. Why should countries bankrupt themselves saving banks, for the Eurozone to help out the banks directly more than the countries? It would be pure madness.

So now Kenny wants to return to the June Agreement:

"Speaking at an event in the National Gallery in Dublin celebrating the 50th anniversary of charity group Chesire Ireland, Mr Kenny said he would again urge European leaders to fulfil their pledge to break the link between sovereign and bank debt.

“One of the failings or inadequacies of the European Council over the years has been an inability to actually complete programmes where decisions are made,” he said

“In this regard, I refer to the decisions that were made last year in respect of banking union. For Ireland and for other countries, it is absolutely critical that we follow those things through to completion before moving on to any other agendas.”"

It's a farcical position to be in and it shows how little progress is being made, and it shows that Merkel is perhaps the most conservative Chancellor ever: she literally does not want to change anything, and will only sanction limited change if its aim is to make sure things stay the same. Once, Merkel described the internet as Neuland - "New Land" - but even as  the digital agenda is being discussed in Brussels, it feels like Europe is stuck in the twilight of Statusquoland. Even the German powerhouse economy can only expect 0.5% of growth this year.

So as Ireland, the Eurozone's star pupil, is preparing to leave the bailout programme, it's hard to be optimistic. Austerity has hardly worked wonders on the Irish economy, with government debt higher than at the start of the progamme, and employment soaring after 5 years of cuts. Without even the rewards of agreed Eurozone reform, many question how worthwhile the status of "star pupil" really is.

Statusquoland: If at first you don't succeed, apply the same rules more strictly.

European Stability Mechanism before the ECJ

Irish independent TD (MP) Thomas Pringle’s case against the European Stability Mechanism has reached the Court of Justice in Luxembourg, referred there for interpretation on 3 questions by the national court. The 3 questions, are:



(1) Whether the European Council Decision 2011/199/EU of 25th March 2011 [PDF] breaches the EU Treaties or general principles of EU law (i.e. is it valid law?);

(2) Whether Eurozone Member States are entitled to enter into extra-EU Treaties on the Euro, and if this infringes on the EU’s exclusive competence over the Euro; and

(3) If, should the European Council decision be ruled valid, Member States are only allowed to enter into (ratify) the ESM Treaty following its entry into force (1st January 2013)?


The case will be very important for 3 reasons. First, it will help decide if the stability mechanism is compatible with EU law; second, if non-EU treaties can be used to change the governance of the Eurozone or if the EU’s exclusive competence over the Euro means that the EU treaties would have to be changed; and third, the extent to which the European Council can amend the EU Treaties. All obviously important not just for solving the economic crisis, but for how the EU and the Eurozone is governed generally.


RTÉ has reported that all 27 of the court’s judges will sit on the panel for this case – an unprecedented for a case referred to the court by a national court. On the proceedings before the court, RTÉ reported:

“Michael Cush SC for Ireland said the ESM amendments were "fully compatible with the treaties".

He countered that the ESM "will not affect the union's exclusive competence regarding monetary policy for the euro area nor will it increase the limited competence that it has in respect of the coordination of the member states' economic policy."

Thomas Henze, a lawyer for the German government, said there was no indication of any infringement of EU law.

He countered Mr Rogers' assertion that the ESM should not have been ratified when the relevant treaty, the Fiscal Treaty, did not come into force until January.

[...]

After three hours and 30 minutes of questioning, the ECJ Judges asked legal representatives to stand over their statements.

Most of the questioning of the bench was focused on the oral statements from the European Commission and the European Counsel, although Mr Rogers was called to clarify and justify his arguments on several occasions.”

The ruling is expected by the end of the year in what could be a landmark judgment.

ESM to be examined by the European Court of Justice

The Irish Supreme Court, following a challenge by independent TD Thomas Pringle, has referred 3 questions on the European Stability Mechanism to the ECJ in Luxembourg to test its compatibility with the EU Treaties. Given that securing access to the permanent bail-out fund was the main reason most Irish people voted Yes to the Fiscal Compact, it has the potential to cause severe economic and political fallout.

The questions are:

"1.Is the EU Council decision of March 25th 2011 to amend article 136 of the TFEU valid and does it violate treaty or EU law principles?


2.If the decision of March 25th 2011 is valid, is a member state entitled to join the ESM before the decision comes into force?

3.Is the terms and operation of the ESM Treaty compatible with the principles and provisions of the EU Treaties?"

As far as I know, this is the first time that either the Fiscal Compact (not included in this challenge because the referendum changed the constitution to permit ratification) or the ESM Treaty will be examined by the ECJ for compliance with the EU Treaties. The Supreme Court has asked for a quick answer from the ECJ given the seriousness of the matter (The Journal.ie reports that a full panel of seven Supreme Court judges heard the case).

Even should the Treaty prove to be in compliance with the EU Treaties, it still needs to be decided by the Supreme Court whether or not it violates the Irish Constitution.

A very reluctant Yes on the Fiscal Stability Referendum

This is the fourth time I've written out this post. Over the last 2 months I've painfully shifted from a pretty definite No to a reluctant Yes on the Irish Fiscal Stability Treaty referendum.

I really don't like this treaty. It's clear that it will neither have prevented the crisis (if preventing excessive borrowing was the problem, the pre-crisis surpluses in Ireland and Spain would have meant those countries wouldn't be in the mess they're in), nor will it do anything to solve it. As I've pointed out before, the Treaty is 90% existing EU law, since the European Parliament has passed the "six-pack" of legislation last year. It's already mostly in force - it has caused political complaints in Belgium, and was part of the reason for the collapse of the Dutch government this year.
For these reasons I originally wanted a No vote as a political message against austerity and to promote a more balanced approach at the European level. I don't oppose some level of collective budget discipline nationally if it leads to a positive reform of the Eurozone: Eurobonds, the ECB becoming the lender of last resort, a banking union so that banking problems will not be localised and made the problem of one or two Member States, etc. But it should come as part of a grand bargain where it's not simply about the core and the periphery, but about building a working Euro-system. Suggestions that ratifying the FST would give Germany enough confidence in the Eurozone to sign up to Eurobonds "sometime in the future" did not comfort me.

So why have I moved towards a Yes? Two main reasons: the European Stability Mechanism (Treaty here: PDF) and the direction of Hollande.

Only Member States who have ratified the FST will have access to the ESM for future bail-outs. Given the extent to which the IMF has lent to Ireland more than it would have already if we hadn't have been part of a European bail-out programme, I have not been convinced by the No side's arguments that we will find another bail-out somewhere. It's argued that we'll get something from the IMF (which I doubt since we've already been lent 15 times our normal share), or that we will still be given access to the ESM despite being excluded from it since Eurozone politicians will not want to risk the stability of the Euro. I'm not convinced by these arguments: they require a political leap of faith, and for such a leap to be worthwhile, there needs to be the plan and the tactics behind it, not to mention the opportunity for it to work.

Hollande's election earlier this month may have raised the prospect that such a strategy might pay off, but it's clear from the news and the outcome of the summit on the 23rd May, that any progress on the Eurozone will be in addition to the FST, rather than going back to the drawing board - and an Irish rejection won't change that. The best we can hope for by rejecting the FST is to be faced with the FST plus some sort of growth treaty (or plus a growth protocol to the original treaty). There's little payoff for risking the uncertainty over Ireland's access to the ESM in my opinion, and I do not want to take the risk of greater austerity by Ireland being unable to access any fund. And on the "No to Austerity" platform of the No side, it doesn't really fit in with the state of existing law and Eurozone rules. The Treaty itself won't add any more to austerity in law, but it will impact on the confidence needed for any further steps in economic union.

I also can't see any Eurozone vision or strategy on the No side that could form the basis of working toward an alternative. It's very much of the "reject, and then let the rest of the Eurozone come up with a better deal to sell us" variety, and it smacks too much of populism for my political taste. So despite the almost equal bankruptcy of political vision on the Yes side, I have to reluctantly support a Yes vote.