The UK liable for Euro bailouts until 2013

On 16 December, the European Council agreed that the Treaty should be amended. The EU leaders agreed, therefore, on the text of a draft decision amending Article 136 TFEU, which covers measures that solely apply to eurozone member states, so that “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 treaty amendment entails adding two sentences to the abovementioned Article to allow the creation of a permanent crisis mechanism. If there is a risk to the stability of the euro area as a whole, the euro area Member States may activate such a mechanism by mutual agreement, but it is specified, “The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.” The permanent European StabilityMechanism will replace the European Financial Stability Facility (worth €440bn) and the European Financial Stabilisation Mechanism (worth €60 billion), which will remain in force until June 2013.

As regards the specific details of the stability mechanism, the European Council asked the Commission as well as the Finance Ministers of the eurozone to finish their work by March 2011 and to integrate “the general futures” provided in the Eurogroup statement of last November, which has been endorsed by the European Council. According to the Eurogroup statement, the participation of private sector creditors on any future eurozone bailout would be decided on “a case by case” basis. If a country is considered to be insolvent by the Commission, the IMF and the ECB would have “to negotiate a comprehensive restructuring plan with its private sector creditors, in line with IMF practices with a view to restoring debt sustainability.” Then, “If debt sustainability can be reached through these measures, the ESM may provide liquidity assistance.” Private creditors would participate in future eurozone debt restructuring by collective action clauses annexed to eurozone government bonds issued after 2013.

As expected, the European Council has launched the simplified revision procedure provided for in Article 48(6) TEU. It was, therefore, able to avoid long negotiations among theMember States and between theMember States and with the European Parliament. Article 48 (6) allows Treaty amendments to be made, within the TFEU Part III “on internal policies and actions of the Union” solely by European Council, as long as there is unanimity and the amendments do not extend the competences of the European Union. The European Council’s decision amending the Treaty cannot enter into force until it is approved by the Member States in accordance with their respective constitutional requirements. All 27 Member States must transpose the Treaty amendment into national law. It does not require ratification in some Member States and it will be possible to avoid referenda.

According to the President of the European Council “This amendment will not increase the competence of the Union and only affect the members of the Eurozone themselves. That’s why everybody agreed to use a simplified revision procedure.” I am not convinced yet that the European Council decision to amend the treaty does not “increase the competences conferred on the Union in the treaties.” Moreover, I believe that any amend to the treaty intend to create a permanent crisis mechanism “to safeguard the financial stability of the euro area as a whole” is incompatible with Article 125 and with the principles of the EMU.

The European Council will formally adopt the decision in March 2011 and it is expecting member states to complete the procedures “for the approval of this Decision in accordance with their respective constitutional requirements” by the end of 2012 so that the Decision can enter into force on 1 January 2013. The European Stability Mechanism is just for Eurozone Member States and therefore the UK will not participate. According to the European Council’s Conclusions, Member States whose currency is not the euro, “may decide to participate in operations conducted by the mechanism on an ad hoc basis.” 

David Cameron said “Both the Council conclusions and the decision that introduces the treaty change state in black and white the clear and unanimous agreement that from 2013 Britain will not be dragged into bailing out the eurozone. At the UK’s request, the EU leaders agreed that Article 122 (2) (provision on natural disasters), once the new mechanism enters into force, will no longer be needed to safeguard the financial stability of the euro area. However, the future crisis mechanism will only be effective from 2013, so consequently, until this happens the UK will contribute to any Eurozone bailout through the European financial stabilization mechanism. In fact, David Cameron stressed, “…In the current emergency arrangements established under article 122 of the treaty, we do have such a liability (for bailing out the eurozone.)” Moreover, he pointed out “That was a decision taken by the previous Government, and it is a decision that we disagreed with at the time.

The Council established the European financial stabilisation mechanism through a Regulation adopted last May based on Article 122 (2) TFEU. The “difficulties caused by national disasters or exceptional occurrences beyond” a Member State control, foreseen in the Article, have been broadly interpreted to be also caused “by a serious deterioration in the international economic and financial environment.” Natural disasters are unforeseeable, however, we cannot say the same of debit crisis. Such argument is not clear at all, it is hard to understand how come the Greek, the Irish, the Portuguese, the Spanish crisis has been caused by “…exceptional occurrences beyond [their] control …” Such broad interpretation breaches the spirit of the Maastricht treaty and this provision can be ultimately interpreted by the ECJ. Brussels went much beyond the powers conferred by the treaties to provide a legal basis for the emergency funding. Such mechanism ignores the “no bailout” clause – Article 125 TFEU that forbids Member States for being liable for the debts of another.

The European stabilisation mechanism is therefore a violation of the non-bail out clause and a misuse of Article 122 (2), which is meant for national disasters. Under the European financial stabilization mechanism, the Council, acting by a qualified majority on a proposal from the Commission decides to grant financial assistance to member states in trouble, so consequently the UK cannot veto it. Hence, the emergency funds from the €60 billion pot are easier to release. Such a facility is guaranteed by the EU budget and all EU Member States, including the UK, are jointly liable for any payments due. Hence, if a beneficiary country fails to pay back the loan, all 27 EU Member States would have to pay into the EU budget to cover the default, as a result, British taxpayers would be liable for over 10% of it.

The UK is not part of the eurozone but even so is trapped in the European financial stabilization mechanism, as it is required to contribute to it. Having Article 122(2) as the legal basis, the UK would be required to contribute to a eurozone bailout on the basis of the qualified majority voting system. British taxpayers might be asked to pay for other eurozone bailouts. As Bill Cash pointed out “… much could happen over the next two or three years, between now and 2013, while the mechanism …which I believe to be unlawful, continues…

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