The European Stability Mechanism and the IMF: From the Enhanced Cooperation to Embedded Supervisor

This paper examines the role played by the International Monetary Fund (IMF) in the European Stability Mechanism (ESM), finding that the ESM has greatly expanded the IMF’s surveillance and oversight roles in the European Monetary Union (EMU). Building from a liberal intergovernmental framework of integration analysis, this paper argues that the IMF’s function as a de facto EMU supervisor in the ESM, a significant break from prior European integration, stems from the alignment of crisis response preferences amongst the EMU’s largest economies, the erosion of the credibility of the European Commission as an enforcer of structural reforms, and the IMF’s close fit with the preferred institutional arrangements that derived from the bargaining dynamics between euro members.
 
 Full text available at: https://doi.org/10.22215/rera.v12i1.1232

EU leaders have repeatedly congratulated themselves that crises—often caused by differences among EU members facing new challenges—have led to collective creativity and greater integration. In recent years this has not been the case, however. The European Union muddled through a decade of damaging debate about the institutional reforms needed to enlarge postcommunist Central and Eastern European countries, failed at establishing the ambitious foreign policy it had solemnly pledged to create, faced problems of low economic growth and high unemployment, and faced a drop in public support. Nothing has been as dramatic as the early-21st-century’s eurozone crisis, however. European Monetary Union (EMU), meant as a great leap forward in integration, brought a new single currency and a new European Central Bank (ECB) designed to prevent inflation and promote economic convergence among members (to date, nineteen of twenty-eight EU member countries). The experiment ran into stormy weather with the collapse of the global financial sector in 2008. Like the United States, eurozone countries, many having already indulged in unwise debt-fueled development strategies, then pursued expensive bailouts and stimulus plans to stave off the worst. Crisis induced lower growth, higher unemployment, and greater government spending, and then exposed them to further indebtedness. In 2009, after Greece confessed to lying about its deficits and debts, financial markets raised the country’s interest rates, pointing Greece toward national default and indirectly threatening the entire eurozone. After considerable confusion, richer EMU countries granted conditional loans to Greece (which to date has received over €320 billion), Ireland, Portugal, and Cyprus, and supported Spain’s faltering banks. Much was done by a hastily improvised European Financial Stability Fund (EFSF), succeeded by a permanent European Stability Mechanism (ESM), plus help from the International Monetary Fund (IMF). The loans obliged recipients to harsh austerity and structural reforms that further reduced growth, raised unemployment, and cut budgets. In the crisis years, the ECB has also stretched its legal prerogatives toward serving as the eurozone’s lender of last resort. EMU economic governance has been changed to address some of its founding flaws. Originally a single-currency area with few controls over its members beyond rules, there are now serious constraints on national budgetary practices, a new Banking Union, and a considerably reregulated financial sector. The eurozone crisis will eventually end, leaving a legacy of lower growth, higher unemployment, and other unpleasantness. In retrospect, however, crisis decision making has been slow and prone to mistakes, with outcomes most often dominated by economically more-powerful member states, and with Germany in the lead. Such things, plus the harshness of crisis loans, have hurt the European Union’s legitimacy, particularly in poorer, more peripheral, countries. Tighter economic governance systems have also accentuated differences between EMU “ins” and “outs.”

The Greek crisis started in 2009 as a result of the global financial crisis of 2008, and it officially ended in August 2018 when Greece exited the Third Economic Adjustment Programme that it had signed with its international lenders to avoid default. Greece had to seek help from international lenders, including the European Commission (EC), European Central Bank (ECB), International Monetary Fund (IMF), and, in the last program, the European Stability Mechanism (ESM), three times (2010, 2012, and 2015). The crisis soon spread to other European Monetary Union (EMU) countries—namely Portugal, Ireland, Spain, and Cyprus—and it was transformed into a Eurozone crisis, with some commonalities but with different characteristics in each case. The Greek crisis was a sovereign debt crisis that resulted from a continuous aggravation of the national economic indicators, such as growth, inflation, and unemployment, serious long term structural shortcomings, and the pressure from the global financial crisis. The economic crisis was soon translated into a political crisis that shook the Greek party system and strengthened more radical parties such as the left-wing Syriza and the neo-fascist Golden Dawn. Strong one-party governments became a memory of the past and were replaced by short-lived coalition governments. The economic pressure also led to a serious social crisis with rising poverty levels, unprecedented numbers of homeless, and a welfare system unable to cope with the increasing demands. It posed questions about the shape of Greece’s political and social institutions, its legal system and Constitution, and its public administration’s capability to cope with the crisis and implement the conditionality attached to the three economic adjustment programs. Last but not least, the Greek crisis brought into fore the weaknesses and discrepancies of the EMU and was the motive behind important structural reforms, such as the creation of new financial assistance and surveillance mechanisms, including the ESM, as well as the strengthening of informal institutions such as the Euro summits. The discussion was soon extended to a questioning of the viability of the European Union (EU) project, the role of Germany, and the changing Europeanization mechanisms. The bibliography about the Greek crisis developed quickly and covers economic, political, social, and legal issues concerning not only Greece, but also the EU as a whole, taking the case of Greece as a starting point.

There is no need for Europe to replicate the International Monetary Fund (IMF). The European Stability Mechanism (ESM) can provide the backstop for sovereigns, even without a financial contribution from the IMF. In this sense, the ESM already constitutes to a large extent a ‘European Monetary Fund’. Other IMF activities, such as surveillance and policy coordination should remain with the European Commission, the Eurogroup and other existing bodies. The financial resources of the ESM will be required as a backstop only intermittently, in times of great financial market instability. The need for this will evolve as a function of the nature of financial markets and their cross-border integration. It is not possible to forecast with any precision when the next financial crisis might break out and what form it will take. Any evolution of the ESM should thus aim at enhancing flexibility in its instruments while clarifying its overall mandate (financial stability), rather than changing the details of the rescue mechanism or its institutional structure. The financial stability function of the ESM should be extended to the central institutions of the Banking Union, with an ultimate backstop for the Single Resolution Fund (SRF). Moreover, the ESM should be viewed as the natural instrument for unifying the euro area’s representation in the IMF.

Fiscal Integration in an Experimental Union: How Path-Breaking Was the EU's Response to the COVID-19 Pandemic?

The paper discusses basic constitutional problems that remain in the series of EU and non-EU measures for managing the Euro Crisis adopted by the EU and its Member States. The measures discussed in the paper include the amendment of Article 136 TFEU, the European Stability Mechanism (ESM) Treaty, the Treaty on Stability, Coordination and Governance (TSCG), and the so-called 6 Pack and 2 Pack measures. The present paper classifies these measures according to their aims, contents and their legal forms (whether they are adopted within the EU legal system or not) in order to analyse their legal coherence to the existing EU legal system. Based on the classification and the analysis of the coherence, the paper argues that the ESM Treaty, above all, creates an anomaly to the basic principle of ensuring the effective democratic control and oversight over EU policy making: the ESM is created because it is indispensable to the stabilisation of the EU’s monetary policy (Euro) and yet the ESM is created outside of the EU legal system, and as a result, it is left effectively unaccountable to the EU institutions (especially to the European Parliament and to the European Commission). The anomaly is problematic in light of democratic development of the EU and its Member States: the ESM Council would impose strict conditions on a particular Euro Member State in assisting its budgetary crisis, and the conditions imposed would effectively restrict the Member State’s budgetary autonomy, while it would do so without any democratic accountability, neither at national nor European level. Although the fact that the Euro Member States managed to agree to establish the ESM itself may be taken as a sign of “solidarity” between the states, the paper argues that the ESM would not promote the sense of “solidarity” between the peoples of Europe; it would rather promote distrust among the peoples of Europe to the ESM and the Euro systems because the ESM institution is free from democratic control at national as well as at European level and yet the conditions it imposes would directly affect the lives of the peoples in the assisted and assisting states. Those who try to make an analogy of the ESM institution with that of the IMF to justify the technical rationality of the ESM are overlooking the political context of European integration in which the ESM and the Euro system are created and maintained. The system is not just for the economic stability but also for the promotion of peoples’ identity as living in a European public space. The paper stresses the anomaly in the ESM in order to indicate the constitutionally sound direction of reform for the EU in the near future.

The article is dedicated to approaches to assessing the effectiveness of re- gional insurance networks in comparison with classic financial institutions established under the auspices of the UN – International Monetary Fund and World Bank Group. On the basis of the evolution of the anti-crisis tools of international financial organisations, the place of regional financial mechanisms (regional insurance networks) is analysed as a new form of debasement of financial imbalances of the region, mitigating certain shortcomings of the IMF anti-crisis regulation model. Close attention is paid to the taxonomy of the Regional Financial Arrangements (RFA) in terms of forming a resource base and directions of the use of funds, their integration into global safety networks. The European Stability Mechanism is understood as a specified form of the RFA, which has the largest resources, the possibility of attracting them on a market basis and an extended range of areas of use. The author used specially tailored criteria to assess the effectiveness of the RFA in terms of lock of crisis events at the regional level. It is concluded that the RFA can only partially be considered as a lender of last resort for a group of major states, while a special model of the functioning of the European Stability Mechanism allowed to solve the tasks of anti-crisis regulation in the EU.

The nature, functions and structure of the monetary and financial mechanism of anti-crisis regulation in the EU are explored. In particular, the role of the European System of Central Banks and the European Commission in this mechanism is analyzed. The formation of a banking union in the EU and its components are also considered, with special attention being paid to the European Stabilization Mechanism. The conditions, stages and consequences of cooperation between the European Stabilization Mechanism and Greece are analyzed. The International Monetary Fund’s assessment of the austerity measures applied by the European Stabilization Mechanism for Greece and other countries is presented.

The paper presents a systemic explanation of the ongoing debt crisis in the European Monetary Union (EMU). The way monetary policy has been conducted in the eurozone as well as ineffective management of both public and private debt created a systemic risk that in 2010 turned into a full-fledged debt crisis. The author’s analysis of past EMU data, official internal and external forecasts and the way that debt negotiations have proceeded yield a number of conclusions. One of these is that the European Stability Mechanism (ESM) and the European Central Bank (ECB) are in a position to stabilize the debt situation for some time if they are flexible in their approach. However, this requires extensive cooperation between peripheral and central countries as well as within these groups. This condition is necessary but not sufficient to stabilize the EMU, the author says. As most of the EMU countries are heavily indebted (a situation that applies to both the public and private sectors), a new system of financial regulations must be hammered out, along with instruments to allow the peripheral countries to grow out of their debt problems. That will not happen without a partial debt reduction and external assistance, the author says, as the heavily indebted economies will not be able to adjust, because of economic as well as political factors. As in all past debt negotiations, conditionality, comparability of treatment and moral hazard problems will play a role, the author concludes.

Established at the height of the Eurozone sovereign debt crisis, the intergovernmental European Stability Mechanism (ESM) has, potentially, considerable influence over decisions on the provision of loans to Eurozone member state governments and on the recapitalization of banks. Legally and organizationally, the ESM is an international financial institution and thus its accountability can be compared to that of the International Monetary Fund (IMF) and other international financial institutions. However, the ESM's governance structure and decision‐making procedures show that it is deeply embedded in the Eurozone governance architecture, resulting in a dual institutional embeddedness. Focusing on vertical and horizontal accountability combined with a learning perspective on accountability, this article presents an assessment of the accountability mechanisms applicable to the idiosyncratic ESM and how these mechanisms work in practice.

The Interest Rate Parity Theorem: A Reinterpretation

The European Stability Mechanism (ESM) is the rescue fund that may grant loans to struggling euro zone governments by issuing bonds, collectively by the euro zone members. The implementation of the ESM spawned a lot of legal challenges brought to higher judicial authority in Ireland, Austria, Estonia, Germany and Poland. In the fall of 2012 the ESM was subject to legal analysis in the Estonian National Court, the German Constitutional Court, and in the European Court of Justice. Delivering much anticipated rulings in legal challenges to the legal provisions establishing the ESM, courts avoided upsetting the complex arrangements in question by producing legal decision of direct political import and letting EU bailout measures go forward. In looking over different critical responses, we have seen an argument raised by media and legal scholars, according to which courts’ capitulation before the power of financial markets in the EMS rulings represents “a sign of judicial crisis” that marks the weakness of modern European jurisprudence. In light of their importance, we undertake a preliminary semiotic analysis of the ESM rulings of the Estonian National Court, the German Constitutional Court, and in the European Court of Justice. Our analysis aims at discerning the crucial aspects of those rulings is performed on the basis of different semiotic methodologies combined with the refined ideas of the Scandinavian analytical school of the doctrinal study of law. In traditional legal studies there seems to be a taken for granted assumption that there is one analytical way to dissect judicial reasoning of the supreme courts. This paper argues that the manner of analyzing the constitutional reasoning needs to be congruent with the particular research methodology.

Relationship of international law and municipal law — Treaties — Treaty Establishing the European Stability Mechanism, 2012 — Article 4(4) — Emergency procedure — Callable capital stock — Estonia signing but not ratifying Treaty — Whether Article 4(4) of Treaty in conflict with Constitution of Estonia — Whether petitioner having competence to challenge Treaty — Principle of parliamentary democracy — Principle of parliamentary reservation — Budgetary powers of Parliament — Sovereignty clause in Constitution — Interpretation — Financial sovereignty — Whether State waiving part of its sovereignty in entering into international agreements — Democratic State subject to rule of law — Budgetary powers — Whether interference with constitutional principles permissible — Whether Article 4(4) of Treaty in conflict with Constitution of EstoniaTreaties — Treaty Establishing the European Stability Mechanism, 2012 — Whether satisfying requirements of Article 2(1)(a) of Vienna Convention on the Law of Treaties, 1969 — Article 4(4) of Treaty — Emergency procedure — Callable capital stock — Constitutionality of Treaty — Whether petitioner having competence to challenge Treaty — Financial sovereignty — Whether State waiving part of its sovereignty in entering into international agreements — Democratic State subject to rule of law — Budgetary powers — Whether interference with constitutional principles permissible — Whether Article 4(4) of Treaty in conflict with Constitution of EstoniaEconomics, trade and finance — Euro area — Economic and financial stability — European Stability Mechanism — Financial sovereignty — Treaty Establishing the European Stability Mechanism, 2012, Article 4(4) — Constitution of Estonia — Budgetary powers — Whether Article 4(4) of Treaty in conflict with Constitution of EstoniaInternational organizations — European Union — Treaties — Law of the European Union — Treaty Establishing the European Stability Mechanism, 2012 — Whether Treaty on European Stability Mechanism part of European Union lawTreaties — Treaty on European Union, 2009 — Treaty on Functioning of the European Union, 2009 — Further delegation of powers — Necessity of referendum on more extensive integration — The law of Estonia

During the dramatic negotiations over Greece’s third bailout package on 11–13 July 2015, Europe’s more than five-year-long euro-debt crisis took a significant turn, arguably changing the paradigm of the European Monetary Union (EMU). Spilling from the periphery over to the very core of the Eurozone, the Greek debt crisis triggered a larger conflict about whether the intractable problems of one of its member states could—in fact, needed to—be solved within the existing paradigm of the currency union or whether they made its break-off imperative. In fact, the German Finance Ministry claimed there were two alternatives: Either the Greek authorities guaranteed upfront ‘debt sustainability’ through a ‘credible implementation perspective’ of reforms aimed at financial market access after the new European Stability Mechanism (ESM) financial assistance programme was completed. Or, ‘a time-out from the Eurozone’ for Greece was the ‘only way forward (that) could allow for sufficient debt restructuring since this would not be in line with the membership in a monetary union’ (German Finance Ministry 2015). The Peterson Institute for International Economics was quick to warn against the risks of bringing a ‘Grexit’ up in Eurogroup dealings: ‘Doing so proved to be an extraordinarily effective negotiating technique.…At the same time, the spectre of a Greek exit undermined the sense of irreversibility in the euro area’ (Kirkegaard 2015). Former German Foreign Minister and Vice-Chancellor Joschkas Fischer advised not ‘to dismiss the fierce criticism of Germany and its leading players that erupted after the diktat on Greece’ (Fischer 2015). The spectre of the ‘ugly German’ foreshadowed what British historian Timothy Garton Ash has foretold for the European Union (EU) of the twenty-first century: ‘Europe is being torn apart—but the torture will be slow’ (Ash 2015). Finally, resistance on the part of France, Italy, Luxembourg and Greece itself—and the latter’s willingness to compromise—removed a ‘Grexit’ from the negotiation table. And despite the overwhelming majority of Greeks voting against the bailout conditions in the Greek referendum on 5 July, the Greek government committed to the Euro Summit’s conditions in exchange for a three-year financial assistance package. These obligations include Germany’s ‘upfront’ hard conditions, establishing a ‘privatization fund’, structural reforms and fiscal austerity under Troika control and acceptance ‘that nominal haircuts on the debt cannot be undertaken’. Yet, the creditors also pledge to boost growth and job creation and to ensure that Greece’s ‘gross financing needs remain at a sustainable level’ (Euro Summit Statement 12 July 2015). Nevertheless, over that haunting weekend in Brussels, EMU experienced a veritable, even if incomplete, paradigm change: Paradoxically, for the sake of fiscal stability it turned from an irreversible institution into a contingent, politically determined, more dynamic regime.

The European Union has recently implemented one of the biggest reform packages in its history. Developed solutions are designed to (1) strengthen EU’s resilience to shocks and (2) improve its shock absorption capabilities. It seems that so far the stress was mainly placed on the first objective. Among the reforms which satisfied the second objective the European Stability Mechanism (ESM) plays the key role. However, this is not the only solution. The European Union is also developing a fiscal capacity for the European Monetary Union (EMU). On the base of a subject literature study, I have developed a model with boundary conditions of fiscal federalism (FF), which then was compared to macroeconomic data for the EU. The results of my findings show that the European Union, and especially the euro area, share a lot of characteristics typical for fiscal federalism. The biggest difference between EMU’s structure and FF model is insufficient size of central budget. As a result, the euro area is not equipped with stabilization tools which could act on the very early stage of a crisis. From this point of view, implementation of fiscal capacity in the form of central budget could fill this gap. However, it could bring further fragmentation of economic integration process in the EU, which probably would not positively contribute towards the stability in the political sphere.