Structure of the EMU:
The Euro currency was first introduced in a dozen member states; now 19 EU member states use the Euro. Eventually, the aim is for every member state to adopt the currency (except Denmark due to opt-outs).
By creating a common currency and displacing national currencies, the Euro shows the strong pull of European integration. The journey to that state, however, was not without contention.
Origins and Design:
Early initiatives to establish a common currency were unsuccessful.
The European Monetary System and Exchange Rate Mechanism were established in 1979. Their function was to ensure the exchange rates between member states did not fluctuate too much so that there was economic stability.
Momentum gained for the EMU during the late 1980s due to the completion of the single market, the reunification of Germany (creating social and economic pressures), and symbolism within a period of ‘Europhoria’.
Challenges:
Monetary (purely financial) policy: actions aimed at controlling how much money is within an economy (euros in circulation), regulating interest rates etc., usually controlled by governments.
Tax-and-spend (economic) policy: raising money through taxes to fund certain projects.
Although they ought to be distinguished, there is an inherent link between monetary and tax-and-spend policies. They have an effect on one another. Therefore, if the EU only has control over one of these policy fields, the question arises as to whether the EU is addressing purely political or economic questions.
Compromise:
The creation of the common European currency (the Euro) and the EU’s monopoly on monetary policy, along with the creation of a central European bank, was the compromise sought.
Member states retained competence to adopt tax-and-spend policies.
Essentially, the EU controls monetary policy, while the member states are retaining economic policy. While this has protected national interests, it has also created further tension.
Solution:
European Central Bank
The ECB has a monopoly on setting interest rates and a mandate to guarantee price stability.
Convergence Rules
Member states must avoid excessive public deficit / spending (3% annually or 60% of national GDP). This is enforced by the Stability and Growth Pact.
Market Discipline Rules
A prohibition on ‘monetary financing’ by the ECB (ECB cannot put money into member state’s economies).
A prohibition on bailouts (no member state or the ECB can pay out for the debt of another member state).
Crisis:
Euro-Crisis:
The Euro-crisis marked the first time the EU had to deal with a financial crisis. The crisis showed the EU wasn’t really up to the challenge.
The crisis started in America in 2007 and caused the collapse of several financial institutions. It quickly spread to become a global financial problem, impacting EU member states most significantly in 2009.
This global financial crisis triggered a European debt crisis. There was a sudden stop of foreign capital, which was a problem for member states with large public deficits that depend on this foreign capital.
Worst affected: Greece, Italy, Spain, Portugal and Ireland.
There was initially hesitation as to whether, and how, the EU should respond.
EU’s Response:
Financial aid.
The EFSF, EFSM and ESM gave conditional financial aid to struggling member states in the short-term.
ESM (European Stability Mechanism):
Art 3 – purpose ‘to mobilise funding and provide stability support under strict conditionality… to the benefit of ESM members which are experiencing severe financing problems, if indispensable to safeguard the financial stability of the euro area’.
Recipients: Greece, Ireland, Portugal, Spain and Cyprus.
A Board of Governors comprised of member states had votes based on their financial contributions to the EU.
The ESM is an international treaty since it was outside the competence of the EU. Despite this, the ‘Troika’ (Commission, ECB and IMF) controls agreement and conditionality.
Preventative arm.
Macro-Economic Imbalance Procedure (MEIB):
The focus here was on the identification of ‘developments that have the potential adversely to affect the functioning of an economy of the EU or the Eurozone’.
The Commission kept a scoreboard on a range of areas. Overall, there was coordination but little sanctioning power.
European Semester:
The provision allowed the Commission to control the budgets and economic policies of member states. The Commission can issue Country-Specific Recommendations about policies set by member states.
Country-Specific Recommendations are highly descriptive and carry soft-power. As their usage increased, so did the length and depth of recommendations being made.
Most recommendations have been to spend less and protect more. [1]
Corrective arm.
Excessive Deficit Procedure:
Member states must avoid excessive public deficit / spending (3% annually or 60% of national GDP). States surpassing this could be sanctioned under infringement proceedings.
In 2010, this applied to 23 of 27 member states due to the crisis.
Fiscal Compact (TSCG):
The compact is an intergovernmental treaty signed by all the member states (therefore outside of the EU and the Treaties). This was a separate agreement because the member states were unsure whether it would breach the TEU and TFEU.
It establishes stricter rules on public deficits and established the Eurogroup as a steering institution.
Strengthening the EMU.
Banking Union:
The union was created to prevent private debt from leaking into public debt (since governments would have to bail out too-big-to-fail institutions). A stress-test was introduced to monitor large financial institutions.
Member states have to pay into a shared fund under the shared liability mechanism. Financing can be paid out of this fund where it is necessary to protect public interests.
Outright Monetary Transaction (OMT) Programme:
OMT created a bond-buying mechanism for the ECB on a secondary market.
The then ECB President Draghi stated that the ECB would do ‘whatever it takes’ to save the Euro. This statement restored confidence in the financial market.
Quantitative Easing:
Pumping money into the Eurozone by purchasing sovereign and corporate debt.
Between 2015 and 2017, over €1.1 trillion was spent under this.
EG: PSPP (Public Sector Purchase Programme)
Critique and Legal Challenges:
Economic – the creation of austerity cannot produce growth.
Democratic – democracy appears to be the reward, not starting point (instead technocratic institutions are making the decisions).
Constitutional – EU is transformed post-crisis.
Legal – EMU rules introduced to deal with crisis seem to contradict Treaty rules.
In PRINGLE, the Irish SC questioned the legality of ESM rules. They submitted a request regarding the ‘no bailout clause’ and Art 125(1) TFEU.
The CJEU, using teleological reasoning, held that the EMU’s objective is to secure sound budget and budgetary discipline. The bailout and conditionality mechanisms secure this objective, so are valid because they strive to achieve this.
Arguably institutionalised austerity as an economic policy.
In OMT, the German FCC questioned the legality of the OMT programme. They regarded it incompatible with the prohibition on monetary financing. The FCC issues a warning that it is potentially ultra vires.
The CJEU held the programme is lawful, but the ECB must implement it in line with proportionality. FCC begrudgingly accepts, reaffirming their control.
In WEISS / PSPP, the German FCC questioned the legality of PSPP. They argued that the purchase of bonds issued by euro-zone governments violates the Treaty rules prohibiting the ECB giving out money.
The CJEU held that the programme is lawful (by finding PSPP to be within the ECB’s price stability mandate), and the ECB acted proportionately. The FCC find that the act, and subsequent CJEU ruling, is ultra vires as the programme violates the prohibition on monetary financing and the CJEU’s proportionality review was too weak.
The FCC effectively invalidated an act of EU law. Ruling received strong backlash for endangering European integration and the EMU. Just 14 days later, the COVID relief fund was announced.
Rodrik’s Trilemma:
The EU is trying to do 3 things at once with the EMU: Deep Economic Integration, Protecting National Sovereignty, and to be subjected to Democratic Politics.
The EMU struggles to balance these and Rodrik argues that only 2 of these can be achieved at the same time.
COVID-19 Pandemic:
Impact of COVID-19 varied significantly across EU member states. The EU’s response was quicker than that of the Euro-crisis.
Public Health Measures:
The Commission was in charge of coordinating health measures.
EG: purchasing PPE etc.
(Financial) Relief Programmes:
‘Escape Clause’ of the Growth and Stability Pact
Convergence rules temporarily disapplied.
Pandemic Emergency Purchase Programme (PEPP)
Created by the ECB in March 2020, PEPP established a temporary asset purchase programme for public and private sector securities.
Volume: initially €750b, later rising to €1350b
There remains an ongoing question of whether the legality of PEPP following the Weiss/PSPP ruling.
Next Generation EU
Agreed in July 2020, it is essentially a stimulus package aimed to help repair the economic and social damage caused by the pandemic.
Volume: €750b
€390b as grants.
€360b as loans.
NextGenEU introduced financial incentives for activities that promoted making Europe greener, more digital and sustainable.
Member states must comply with milestones and recommendations to receive money. The Commission has the power to approve national recovery plans. This is subject to Commission investigations and has allowed the Commission to engage in policymaking by withholding funds.
EG: has been used to prevent disbursement of funds to Hungary in Nov 2020; it must ‘reinforce the anti-corruption framework’ and ‘strengthen judicial independence’.
The scheme is financed through issuance debt by the Commission on the EU’s behalf. This allows the EU to borrow funds on capital markets for the first time ever. This debt is to be repaid by 2058.
For the first time, the EU took on common debt. Arguably, this creates a new level of EU financial autonomy due to the unprecedented volume of the programme (57% of the EU budget).
However, the fund is intended to be temporary and limited to light the effects of COVID-19. Whether this will be the case is yet to be seen.
Constitutional Problems:
Stretching EU competences (especially Art 122 TFEU).
Violations of budgetary rules (Art 310 TFEU).
‘Constitutional change without constitutional change’.
‘does not manifestly exceed the current European integration agenda’.
Rule of Law Conditionality
There has been pressure to adopt safeguards to prevent the rule of law backsliding in certain member states .
Regulation 2020/2092:
The Regulation establishes a ‘general regime of conditionality for the protection of EU budget’.
If rule of law breaches compromise the management of EU funds, payments to member states can be withheld. This covers individual and systemic breaches.
Enforced by qualitative majority voting by the Commission and Council vote.
Problems:
Too little?
Management of EU funds is limited; must be affected in a ‘sufficiently direct way’.
Too late?
Commission President (Von der Leyen) stated that the regulation would not be enforced before CJEU ruled on its legality. During this time, the rule of law has continued to backslide.
Oct 2021: EP initiated proceedings against the Commission for its failure to act.
Feb 2022: CJEU confirms validity.
April 2022: Commission initiates proceedings against Hungary.
Resources:
References:
[1] Haas et al, Economic and Fiscal Policy Coordination After the Crisis: Is the European Semester Promoting More or Less State Intervention? (2020)
Cases Mentioned:
Case C‑370/12, Thomas Pringle v Government of Ireland
Case C-62/14, Peter Gauweiler v Deutscher Bundestag; BVerfGE 134, 366 Outright Monetary Transactions (‘OTM’)
Case C-493/17, Weiss
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