This guest post, by Kenneth Armstrong, Professor of European Union Law at Queen Mary, University of London, originally appeared on EUtopialaw and is cross-posted here with permission. Of interest to network members, Prof. Armstrong will serve as the Senior Emile Noël Fellow at NYU Law School in the spring 2013 term. Not reproduced here but also perhaps of interest is an exchange of comments between Prof. Armstrong and network member Peter Lindseth in response to his original post on EUtopialaw.
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The Court of Justice has delivered its much anticipated ruling in the challenge brought by Thomas Pringle to the legal provisions establishing the European Stability Mechanism (ESM). In dismissing the challenge, the European Court of Justice – convened as a Full Court of all twenty-seven judges – became the latest court to deal with the legal fall-out from the Eurozone crisis. Constitutional challenges in national courts, including Germany and Estonia, have, this far failed to create significant legal obstacles to the structures put in place by EU states in their attempt to manage the crisis and to provide financial support to Eurozone states.
Although the challenge before the CJEU failed, the Court reiterated that while Member States are free to establish mechanisms like the ESM outside of the structures of the EU treaties, the exercise of their powers through such structures must be consistent with and not incompatible with their continuing obligations under EU law.
The challenge turned on three main questions: (1) had there been an improper use of the simplified revision procedure (introduced by the Lisbon Treaty) to adopt a European Council Decision amending the Treaty on the Functioning of the European Union (TFEU) to make provision for a stability mechanism; (2) was the ESM Treaty in conflict with the obligations of the Member States and EU institutions under the EU treaties; (3) was the entry into force of the ESM Treaty dependent upon the ratification and entry into force of the TFEU treaty amendment?
The case had been dealt with using an accelerated procedure in response to a request made by the Irish Supreme Court for a ruling on the legal issues surrounding the establishment of the ESM.
In its earlier response to the crisis, the Council of Ministers had created the European Financial Stabilisation Mechanism using Article 122(2) TFEU as a legal basis. It had also established the European Financial Stability Facility as a company under Luxembourg law. But under pressure from turbulent bond markets, EU political leaders decided to send a signal to those markets by using the simplified revision procedure to amend the treaties to make provision for a permanent stabilisation mechanism. The resulting European Council Decision 2011/199/EU amending the treaties and the ESM Treaty creating the new stabilisation mechanism both required ratification by Member States.
The ratification of the ESM Treaty required the approval of the Eurozone states (albeit that it could enter into force when ratified by Eurozone states representing 90% of the required funding). The ESM Treaty was duly ratified and came into force for 26 state on 27 September 2012 (Estonia ratified in early October following a narrow Supreme Court rejection of a legal challenge). The ESM became operational on 8 October 2012.
By contrast, as an amendment to the TFEU, the European Council Decision required ratification by all twenty seven Member States. If ratified, the amendment would enter into force on 1 January 2013 (several months after the ESM became operational). Indeed by the 8th of October, three Member States had still not ratified (the UK and Poland eventually notified its ratifications in mid November leaving the Czech Republic as the remaining state yet to ratify).
It is against this background that Thomas Pringle TD launched his legal challenge in the Irish courts.
Pringle in the Irish Courts
On 13th April 2012, Thomas Pringle TD – a member of Dáil Éireann – brought legal proceedings before the Irish High Court challenging both the validity of the European Council decision amending the TFEU and the ESM Treaty itself. Pringle argued inter aliathat the amendment of the treaties ought to have been undertaken through the ordinary and not the simplified revision procedure and so the European Council Decision was not validly adopted. As for the ESM Treaty, as well as arguing that it violated provisions of the Irish Constitution, Pringle alleged that it was substantively incompatible with economic policy provisions of the treaty; used the institutions of the EU in a manner incompatible with their obligations under EU treaties; interfered with the allocation and division of competence in economic and monetary policy; violated EU Charter of Fundamental Rights guarantees of effective judicial protection; breached the principle of legal certainty and breached the duty of sincere cooperation.
In her judgment of 17th July 2012, Ms Justice Mary Laffoy dismissed the arguments relating to the validity of the European Council Decision (she considered the provision to be valid and hence did not require a reference to Luxembourg) and the alleged incompatibility between the ESM Treaty and EU law. Nonetheless, the issue remained whether the lawful operation of the ESM Treaty was itself dependent upon the entry into force of the European Council Decision, something which Ms Justice Laffoy believed ought to be referred to the Court of Justice of the EU.
Mr Pringle appealed to the Irish Supreme Court repeating his arguments about the invalidity of the European Council Decision and the incompatibility between the ESM Treaty and the obligations of Eurozone states under the EU treaties. Whereas the High Court had dismissed these arguments and only considered referring a relatively narrow question, the Irish Supreme Court took a much broader approach in asking the Court of Justice to rule on: (a) whether the European Council Decision had been validly adopted via the simplified revision procedure (b) whether the obligations of EU Member States under the EU treaties prevented a Eurozone state from entering into and ratifying the ESM Treaty; (c) the question of whether the capacity to incur obligations under the ESM Treaty was subject to the entry into force of the European Council Decision amending the treaties.
The Ruling of the Court of Justice
On the first question of the validity of the European Council Decision, the use of the simplified revision procedure under Article 48(6) TEU is justifiable subject to the conditions that it relates to Part III of the TFEU (relating to EU policies) and does not increase the competence of the Union. As an amendment to Article 136 TFEU, the Decision was formally an amendment to Part III, but it was contended that insofar as the measure impacted on the competence of the EU in economic and monetary policy it might also impact on Part One as well as potentially increasing the competences of the Union. Much of the Court’s analysis focused on whether the European Council Decision purported to give Member States competence in an area of monetary policy which was within the exclusive competence of the EU. For the Court, the ESM Treaty established a stabilisation mechanism as a complement to its structures for economic governance. While the stability of the Euro might have implications for the monetary goal of price stability, this did not make the ESM a monetary policy instrument. The Court also concluded that the Decision did not affect the competence conferred under the TFEU in economic policy, dismissing suggestions that a mechanism could have been created out of existing legal bases including Article 352 TFEU.
However, in establishing a parallel stabilisation mechanism, the Court warned that the exercise of powers by Member States via the ESM Treaty could not disregard the obligations of Member States under EU law (Article 13(3) ESM Treaty requires that any Memorandum of Understanding concluded with a state in receipt of stability support must be compatible with EU law). Thus, in allowing Member States to establish mechanisms outside of the structures of the EU treaties, the Court repeatedly emphasises the obligation on Member States to act in a manner consistent with EU law.
As to the compatibility of the ESM Treaty itself with the obligations of states under EU law, the Court addressed the contention made by Mr Pringle’s counsel that the ESM Treaty was in conflict with Article 125 TFEU (the no bail-out rule). Article 125 TFEU inhibits the EU and the Member States from taking on the commitments of other Member States. Mr Pringle’s Counsel has suggested that either the ESM Treaty was incompatible with Article 125 TFEU or an attempt to evade it. However, for the Court, the objective of Article 125 TFEU is to ensure fiscal discipline by ensuring that states remain responsible for their own debts. In that regard, the stabilisation mechanism establishes new loans and lines of credit for which recipient states remain legally responsible. As such, there was no conflict with Article 125 TFEU.
The Court equally dismissed suggestions that the obligations of the European Commission, the ECB and the Court itself under the ESM Treaty were incompatible with EU law. The Court noted that the ECB and Commission could be entrusted with tasks by Member States provided they did not alter the essential character of the power conferred on those institutions. Moreover, the ESM Treaty did not give these institutions the power to make decisions on their own.
Other arguments that the ESM Treaty was incompatible with obligations under the EU Treaties were dismissed.
Where the Court is at its most Delphic, is its handling of the question of whether the ESM Treaty could enter into force prior to the entry into force of the European Council Decision amending the TFEU. This was the question which the Irish High Court had focused upon. The Court simply states that the treaty amendment “confirms the existence of a power possessed by the Member States” and did not confer any new power. This is essentially code for the conclusion that no treaty change was itself necessary and that the Member States were free to establish the ESM without any reference back to the EU treaties. This point had been made by the UK’s Financial Secretary to the Treasury in a letter to the Chairman of the House of Commons European Scrutiny Committee where he noted that; “It is not legally necessary for the Article 136 Treaty change to have been made before the ESM can come into force”.
It is perhaps not wholly unsurprising that Mr Pringle’s challenge failed. But the litigation did shed light on the legal response to the Eurozone crisis. Worryingly it has highlighted the manner in which EU Member States embraced treaty change in a manner that turned out to be wholly unnecessary and which was undertaken for purely political ends to send messages to nervous markets. Member States are clearly free to use other vehicles and structures outside of the EU to exercise their powers provided that in so doing they do not conflict with their obligations under EU law. On the one hand, this may give states – particularly Eurozone states – a desirable legal flexibility. But on the other hand, it does beg questions as to whether acting outside of EU structures diminishes the centrality of the EU itself as the focal point for European cooperation.