Leiden Law Blog

Expansion of the ESM powers: Treaty change or not?

Posted on by Michal Diamant in Public Law
Expansion of the ESM powers: Treaty change or not?

The ESM Treaty has not yet entered into force, but the powers of the European Stability Mechanism (ESM) have already been expanded. At the Euro summit of 28 and 29 June 2012, the Eurozone leaders decided to provide the European Stability Mechanism with the possibility to inject funds into banks directly instead of loaning the bailout aid to national governments - the initial aim of the ESM. As a conditionality there will be a single banking supervisory mechanism established.

What still remains unclear is whether the current (text of the) ESM Treaty allows for such aid directly to banks. The European Commission - without further explanation -  thinks it does. I think it doesn’t.

Article 12 of the ESM Treaty – which lays down the principles of the ESM aid – states that aid will be provided to an ‘ESM member’, using one of several instruments laid down in articles 14 to 18. The ministers of finance can unanimously decide to review and change these instruments (article 19). In order to achieve the plans made at the Euro summit, one could imagine that they could make changes to article 15, which allows funds to be injected to banks indirectly through the member states.

However, changing the recipient of the aid and not the instrument through which the aid is provided is not consistent with article 12. Above all, direct aid to banks is contrary to the spirit of the ESM Treaty. As a condition to providing direct aid to banks, a single banking supervisory mechanism will be established. In the Treaty, there is no mention at all about such a mechanism of supervision, only of supervision of the member states. This affirms the statement that direct support to banks was not envisioned under the current ESM Treaty.

To be clear: the ESM Treaty as it stands can and should be ratified by all national parliaments. But if the ESM will be expanding its powers in a way that was obviously not provided for when the member states agreed upon the ESM Treaty, national parliaments, whether or not it in the form of a new ratification, have to approve the new measures to ensure democratic influence. Especially because the European Parliament is being sidelined as it is an intergovernmental - non EU - Treaty. In any case, the Dutch minister of Finance, De Jager, has already promised to present a final agreement about direct bank aid to Parliament to ensure parliamentary approval.

It is not yet clear when the ESM Treaty will enter into force. This depends on the ratification of the Treaty in Germany – which contributes more than 27% of the capital of the ESM. This ratification however has stumbled upon some delay. So long as the law ratifying the Treaty is still under review of the Bundesverfassungsgericht, the German president Glauck has agreed to wait to formalize the ratification process. On 10 July the Bundesverfassungsgericht will decide whether to grant the injunction against the ESM Treaty.

To be continued…

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