European Stability Mechanism Research Articles

Potential Hidden Losses for Slovakia as a Member of the European Monetary Union

Abstract Aim of this paper is to evaluate solutions for European crisis in context of Slovak participation in rescue mechanisms. The most evident element is the European stability mechanism. There is no problem with estimation of the potential losses caused by the eurozone break-up for the Slovak Republic regarding ESM. But there are other mechanisms used mainly by the ECB as monetary instruments for stabilization of the financial markets. ECB via these instruments bears potential risk of losses regarding default of the member state(s) that could damage its balance sheet. The Protocol on the statute of the European system of central banks and ECB says that losses from the common mechanisms should be borne by eurozone member states according to their share in the ECB´s capital. It is inevitable for the Slovak Republic to realize the size of its exposure via European programmes on the peripheral economies to maintain appropriate attitude as far as the eurozone issues are concerned. The author therefore tries to reveal potential hidden losses for Slovakia as a member of the European monetary union that are not explicitly seen.

German Constitutional Foundations of, and Limitations to, EU Integration: A Systematic Analysis

The relationship between EU law and German constitutional law, and the respective dialogue between the ECJ and the German Federal Constitutional Court (FCC), have considerably shaped the EU integration process by creating fields of tension and demarcating possible legal boundaries. The decisions of the German Federal Constitutional Court and the European Court of Justice concerning the European Stability Mechanism are only the most recent examples of this phenomenon. These developments have, of course, spilled over to other EU Member States. The German constitutional bases of, and limits to, EU integration—especially as articulated in the relevant decisions of the German Federal Constitutional Court—have therefore become a field of particular interest for EU and public lawyers. This article gives an up-to-date overview of relevant constitutional rules, court decisions, and the academic debate in Germany. It does so by systematically distinguishing between an analysis of the German constitutional foundations of EU integration (section B.), constitutional limits to the further transfer of powers to the EU through amendments of EUprimarylaw (section C.I.), and the constitutional confines for the legal effects of EUsecondarylaw in Germany (section C.II.).

The European Monetary Fund

The deepening of the debt crisis in the euro area is due to three systemic causes which national governments are not able to overcome on their own. First, being members of a monetary union euro states cannot dampen or even reverse the rise in public debt through devaluations. At the same time, they have no access to funds from a national central bank. Second, under “finance-capitalistic” framework conditions, speculators systematically exploit and strengthen the fiscal troubles in the weakest countries by driving up CDS premia and interest rates to unsustainable levels. This development might transform a liquidity crisis into a solvency crisis. Third, these speculative activities widen the interest rate differentials within the euro area drastically thereby endangering the economic and political cohesion of the EMU and even of the EU.A systemic solution which restores the primacy of politics over speculation needs to stabilize interest rates for all euro countries. It is proposed to transform the European Stability Mechanism (ESM) into an agency for financing euro states, the European Monetary Fund (EMF). It would provide governments with financial means by selling Eurobonds. These bonds are guaranteed by all euro countries to an unlimited extent. The EMF would stabilize Eurobond interest rates at a level slightly below the level of medium-term economic growth (in nominal terms). The Eurobonds are held by investors with the EMF, they are not tradable but can be liquidated at any time. The EMF helps to restore sound public finances in euro countries in close cooperation with the ECB, the European Commission and national governments. To this end, the EMF provides funds for the euro states according to clear criteria (“conditionality”) which are not exclusively restrictive.JEL Classification: E000, F330, G280.

Contradiction, Circumvention and Conceptual Gymnastics: The Impact of the Adoption of the ESM Treaty on the State of European Democracy

This paper makes the claim that the legal framework governing the European Stability Mechanism (ESM) is contradictory, conceptually incoherent and may be characterized as a circumvention of Union law. It is further claimed that such circumvention, and the resulting establishment of a significant permanent institution outside and beyond the scope of the Union legal order, represents a challenge to European democracy and to the principle of respect for the rule of law.

The Perspective of a Small Member State to the Democratic Deficiency of the ESM

The adoption and ratification process of the Treaty establishing the European Stability Mechanism (ESM Treaty) has produced deep debates about this process and the European Union; about the (lack of a) link between the two; about democratic processes which allegedly have been short-circuited in the rush to a political/financial mechanism; about the rule of law and the rule of finance and expediency.Three decades ago, Estonia was part of a different constellation. Now, a part of the EU for the better part of the last decade, the debate about small versus large, about rules for all and procedures for some raise issues which touch not only Estonia; they are ones which can cross the borders into other economic associations and unions, such as the CIS or the Eurasian Economic Community (EAEC or EurAsEC).The authors of this article seek to address some issues regarding the democratic legitimacy of the ESM Treaty. Several of the legislative choices made in the ESM Treaty have passed without sufficient public debate or transparency. A thesis is presented here that some solutions adopted by the ESM Treaty have a dubious value in the context of EU law as well as in the progress of democratization of the EU. The article pinpoints a shift in the voting powers to the detriment of smaller Member States. Above all, the legal foundations of judicial review by the Court of Justice of the EU (CJEU) are questioned. The article reaches a generalized conclusion that deviation from the current decision processes and standards of democracy can be justifiable only if such a change is supported by the general public.

Book Reviews

Nikolaos Vettas of Athens University of Economics and Business and CEPR reviews, “The Greek Economy and the Crisis: Challenges and Responses” by Panagiotis Petrakis. The EconLit Abstract of this book begins: “Considers solutions to the problems of the Greek economy and its growth conditions. Discusses the responsibility of knowledge, challenges, and responses; the changing world and the Greek economy before the crisis; the precrisis growth of the Greek economy; the question of growth; human capital—education, innovation, and health; cultural values, stereotypes, and historical evolution; idiosyncratic economic institutions; political institutions and the distribution of income; human incentives; the 2008–2010 crisis and the European stability mechanism; the deeper causes of the Greek economic and social problems; the Greek economy and the crisis; the effectiveness of economic adjustment interventions; and the medium-long term outlook of the Greek economy. Petrakis is Professor in the Department of Economics at the National and Kapodistrian University of Athens. No index.”

Trwałość UGiW zależy od powodzenia EMS w rozwiązaniu kryzysu zadłużeniowego

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.

Watching Karlsruhe/Karlsruhe Watchers

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, more commonly known as the Fiscal Compact, and the Treaty establishing the European Stability Mechanism (ESM) are closely linked in several ways. Both treaties are formally placed outside the European Union framework, but substantively govern Union matters. Together they are designed to combat the sovereign debt crisis which has been ravaging the European Union for years now. The Fiscal Compact does so by enhancing and sharpening budgetary discipline in the Eurozone states, the ESM Treaty by offering assistance to Eurozone states in financial distress. To receive financial aid from the ESM, states not only need to have ratified the Fiscal Compact, but also to have implemented a balanced budget rule in their national law in the way the Compact demands. Apart from combating the crisis, the Treaties also bring reforms to the Eurozone; they express the wish of the signatory parties to share their destinies in new ways.

The New Financial Stability Mechanisms and Their (Poor) Consistency with EU Law

This working paper examines the institutional reaction to the sovereign debt crisis in Europe. The response has so far consisted of three new financial mechanisms: the European Financial Stabilisation Mechanism, the European Financial Stability Facility, and the European Stability Mechanism. These have each a different legal basis and a specific regime. They display a varying degree of compatibility with EU law. The institutional quick fix employed by Eurozone countries was essentially a resort to private law and traditional international law techniques. This constitutes a setback from the evolution of the EU, at the expense mainly of the European Parliament and the Court of Justice.

The Eurozone in 2011

The year 2011 saw the eurozone sovereign debt crisis go from bad to considerably worse. Although budget deficits fell in almost all Member States, continued concerns over debt sustainability and the fragility of eurozone banks contributed to a sharp slowdown in economic growth, which, in turn, cast doubt on the credibility of further fiscal consolidation. These tensions came to a head in Portugal in March 2011 after the government failed to win approval for its deficit reduction plans against the backdrop of a double dip recession. Rising interest rates on government debt and downgrades by the three major ratings agencies saw Portugal become the third eurozone member, after Greece and Ireland, to seek financial support from the European Union (EU) and the International Monetary Fund (IMF) – a package of loans worth €78 billion being agreed in May 2011. Greece’s precarious public finances remained a real and present danger for the eurozone in 2011. Facing widespread social unrest over the scale of budget cuts and a deepening recession, the authorities in Athens struggled to stick to the terms of the EU–IMF financial support package agreed in May 2010. A round of further expenditure cuts and emergency revenue-raising measures in 2011 ensured that this support continued to flow, but it was by now clear that more needed to be done to avoid a disorderly default by Greece with potentially disastrous consequences for the rest of the eurozone. The tentative offer of a second round of EU–IMF loans, combined with a preliminary deal on private sector involvement in debt restructuring, failed to convince financial markets, with only George Papandreou’s resignation as prime minister in November 2011 and the appointment of a caretaker government led by former European Central Bank (ECB) Vice-President Lucas Papademos bringing some semblance of calm. Running reforms to eurozone governance were another feature of 2011. In January, the new European Systemic Risk Board (ESRB) held its inaugural meeting, thus beginning a bold new experiment in pan-European financial supervision. In February, the heads of state or government signed a treaty establishing the European Stability Mechanism (ESM) – a permanent successor to the ad hoc Financial Stability Facility (ESFS) created in May 2010. This was followed in March 2011 by a final agreement by the European Council on changes to Article 136 of the Treaty on the Functioning of the European Union (TFEU) to ensure the legality of the ESM. November 2011, meanwhile, saw the entry into force of the so-called ‘Six Pack’ – a set of six legislative reforms designed to reinforce the Stability and Growth Pact and other aspects of eurozone governance. Within a month, all EU Member States (except the United Kingdom and the Czech Republic) had agreed on an additional, intergovernmental treaty – the Fiscal Compact – designed to reinforce Member States’ commitment to fiscal discipline and foster closer economic policy co-ordination. JCMS 2012 Volume 50 Annual Review pp. 178–194 DOI: 10.1111/j.1468-5965.2012.02270.x bs_bs_banner

The Sovereign Debt Crisis in Europe, Save Banks Not States

The European central bank is a bank of banks but not a bank of states. This reduces the capabilities of member states to finance deficits. The role of the central bank to cope with the debt crises is institutionally more limited than in most other Western countries. The European Stability Mechanism has not enough financial power to bail out all distressed countries in the Eurozone. Eurobonds could increase lending capacities but would require a change of the European treaty, which is not in sight. They violate the no bail out clause of Art.125 of the Treaty on the Functioning of the European Union. The policy option is therefore debt restructuring of distressed countries and a bailout of financial institutions to avoid conflagration. This option would also shift some of the burden to creditors outside the Eurozone rather than to shift all risk on the people in solvent countries within the Eurozone.

Alternativen zum ESM – konstruktive Wege für die Zukunft des Euroraums

A sovereign debt crisis develops when lenders doubt that outstanding nominal debt is backed by the present value of future primary budget surpluses. The European Stability Mechanism hopes to prevent default by promoting structural adjustments which improve primary budget surpluses. The author discusses inflation and an orderly default as alternative solutions to the debt problem. Inflation is shown to postpone rather than solve the debt problem, entailing severe macroeconomic distortions. An orderly default following proper recapitalization of vulnerable banks induces only moderate costs to public households, solves the debt problem and may well bring about the real depreciation necessary to balance the current account. This, ultimately, allows the insolvent country to stay in the currency union.

The EU Architecture to Avert a Sovereign Debt Crisis

This paper analyses what has been the EU institutional reaction to the Euro-area sovereign debt problems, focusing in particular on the new architecture designed to avert a financial crisis. It analyses i) the European Financial Stabilisation Mechanism (EFSM), an EU financial assistance feature available to all 27 member states; ii) the European Financial Stabilisation Facility (EFSF), a temporary credit-enhanced Special Purpose Vehicle (SPV) with minimal capitalisation created to raise funds from the capital markets (via an investment grade rating) and to provide financial assistance to distressed euroarea Member States (EAMS) at comparatively lower interest rates; and iii) the European Stability Mechanism (ESM), an intergovernmental organisation under public international law. Finally, some concluding remarks are provided.

EU Federalism in Crisis

In the run-up to this week’s European Council, Karel Lannoo offers his assessment of what has been put on the table so far in response to the euro crisis – and what more needs to be done. He starts with an assessment of the measures taken in the ‘six-pack’ and the debate on the Euro-plus Pact and then addresses some operational elements of the European Stability Mechanism and the question whether the EU is, as often alleged, a transfer union. The CEPS Chief Executive concludes his brief by proposing a pragmatic agenda of items on which the EU could advance towards a more federal economic union.

The Optimal Size of the European Stability Mechanism: A Cost-Benefit Analysis

This study presents a core-periphery model to determine the optimal size of the European Stability Mechanism (ESM), building on Jeanne and Ranciere (2011). While the periphery is subject to a probability of losing access to external credit, the core's incentive for setting up an ESM stems exclusively from the spillover effects present in the case of periphery default. The model develops regional best response functions, determining a set of feasible ranges for the total ESM size, given optimal regional contributions. The model is then calibrated to the European Economic and Monetary Union. If costs from default are reasonably high, the probability of the periphery not having access to external credit is sufficiently large, and spillover effects to the core are present, both the core and the periphery have an interest in contributing to the ESM. Calibration and sensitivity analysis suggest that the optimal ESM size is between the current and twice the size of the agreed-upon ESM.

From Fiscal Compact to Fiscal Union? New Rules for the Eurozone

AbstractAs a consequence of the British veto a reform of the EU Treaty, with the aim to strengthen the stability of the eurozone by transferring new competences in the field of fiscal and economic policies, became impossible. Therefore an international Treaty, the so called Fiscal Compact, was concluded among 25 Member States of the EU. The contribution deals with the complex relationship between both Treaties, especially with the institutional arrangement. It argues that the Fiscal Compact is in comparison to the adopted secondary legislation, the so called Six Pack, of a rather symbolic nature. The more important is the legal link between Fiscal Compact and the European Stability Mechanism (ESM), which makes stability a precondition for European solidarity. European control of stability might interfere with the budget sovereignty of national parliaments but as stability is, since the Treaty of Maastricht, a legally binding principle of the European Monetary Union, its more efficient control is in line with former transfer of competence. Not least budget sovereignty is lost if an over-indebted Member State’s choice is just between sovereign default and financial aid by the ESM. A fully fledged European control of the national budget is therefore in the last resort legitimate.

From Fiscal Compact to Fiscal Union? New Rules for the Eurozone

Abstract As a consequence of the British veto a reform of the EU Treaty, with the aim to strengthen the stability of the eurozone by transferring new competences in the field of fiscal and economic policies, became impossible. Therefore an international Treaty, the so called Fiscal Compact, was concluded among 25 Member States of the EU. The contribution deals with the complex relationship between both Treaties, especially with the institutional arrangement. It argues that the Fiscal Compact is in comparison to the adopted secondary legislation, the so called Six Pack, of a rather symbolic nature. The more important is the legal link between Fiscal Compact and the European Stability Mechanism (ESM), which makes stability a precondition for European solidarity. European control of stability might interfere with the budget sovereignty of national parliaments but as stability is, since the Treaty of Maastricht, a legally binding principle of the European Monetary Union, its more efficient control is in line with former transfer of competence. Not least budget sovereignty is lost if an over-indebted Member State’s choice is just between sovereign default and financial aid by the ESM. A fully fledged European control of the national budget is therefore in the last resort legitimate.

External Representation of the Euro Area

Commissioned by the European Parliament, this study outlines concrete options for improving the external representation of the euro area in international institutions such as the IMF, the World Bank and the G-20. The study proposes a two-stage process, the first of which requires the creation of a permanent subcommittee of the Eurogroup Working Group (EWG) to elaborate common positions at international level. A second step, taken in the longer term, would consist of creating a single-member position in the IMF and World Bank by merging national quotas via the European Stability Mechanism (ESM). For the G-20, a single membership of the euro area could create inconsistencies with the European Union membership. However, a euro area membership could be envisaged if a more economically and financially integrated euro area were to develop.

Der Beitrag der Verwaltung zur Konsolidierung der Staatsfinanzen

<bold>The Contribution of the Administration to the Consolidation of Public Finances</bold> Considering Germany's large amount of explicit and implicit public debt, its newly introduced and very ambitious constitutional “debt brake” as well as the not yet exactly measurable extent of its obligations under the European Stability Mechanism, the consolidation of public finances will be the most important topic in financial politics over the next years. So far, the academic discussion has concentrated mainly on the legislator's possibilities to reduce public spending (especially in public welfare) and to raise tax revenue. This article takes a different perspective and asks for the administration's opportunities to contribute to budget consolidation. In the first part of the study, the author looks at ways to reduce the executive branch's costs. He analyses the extent to which administrative discretion, privatization, public procurement decisions, management of property and solvency, and public-private-partnerships should be used to achieve this target. This includes a close look at possible negative consequences. The importance of a system of risk management for the avoiding costs is emphasized. The second part of the article shows possible ways for the administration to increase its income. On the one hand, it deals with classic forms of public fundraising such as taxes, other public charges and fines. On the other hand, ways of earning money through financial investments, selling public assets (including sale-and-lease-back-procedures and cross-border-leasing), and other economic activities on the private market are discussed. The article's third part covers general organizational and budgetary requirements for the administration's contribution to budget consolidation. Arguments against the concept of a “new public management” are also analyzed. Towards the end of the essay, the significance of an adequate “human resource management” is emphasized. The author also stresses that citizens – who are expected to bear a higher load today in the interest of future generations – should be included directly into the process of consolidating public finances.

Does the Treaty Amendment on the European Stability Mechanism Require a Referendum in Ireland?

The Treaty of Lisbon entered into force on 1 December 2009. Less than two years later, however, the process of amending the constitutive treaties of the European Union as they have stood since then is already well under way. At its meeting on 24-25 March 2011, the European Council unanimously adopted a decision under Article 48(6) of the Treaty on European Union amending Article 136 of the Treaty on the Functioning of the European Union. The decision – which enters into force only when approved by the member states in accordance with their respective constitutional requirements – provides that the following paragraph shall be added to Article 136 of the Treaty on the Functioning of the European Union.The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.This article examines this amendment and the question of whether its adoption requires a referendum in Ireland.