Eurozone Watch

For a few weeks now, the debate about whether a bail out of an EMU country is a likely option has accelerated. A few days after we had argued in a syndicated piece for Project Syndicate which was printed by a number of papers across the world that the no-bail-out clause has no relevance in the current crisis and EU member states would bail out a EMU member with solvency or liquidity problems. Germany’s Finance Minister recently added flavour to the debate. Only yesterday, it was reported that Steinbrück confirmed that EMU countries might bail-out a fellow euro-area country (read for instance Bloomberg on this).

Now, discussions are picking up, which form a possible bail out could take. The question is not only which instruments could be used to raise money (for instance a Eurobond), but also which legal base could apply.

The EC Treaty contains two articles on financial assistance in emergency cases.An analysis published this week argued that Article 119 could effectively serve as a bail out rule for the EMU. This was not the first time I heard the idea that the legal base upon which the balance of payment loans for Hungary and Lithuania are granted, could equally apply for financial assistance to an EMU country. This is in fact wrong.  

Article 119 states in section 2 that: “if a country has severe balance of payment problems – the Council, acting by a qualified majority, shall grant such mutual assistance; it shall adopt directives or decisions laying down the conditions and details of such assistance, which may take such forms as:
(a) a concerted approach to or within any other international organisations to which Member States may have recourse;
(b) measures needed to avoid deflection of trade where the State which is in difficulties maintains or reintroduces quantitative restrictions against third countries;
(c) the granting of limited credits by other Member States, subject to their agreement.”

Section 2(c) is may seem to provide the legal base for a bail out of an EMU country. But if you read on, you come across section 4: “Subject to Article 122 (6), this Article shall cease to apply from the beginning of the third stage”.

And Article 122(6) then reads: “Article 119 and 120 shall continue to apply to a Member State with a derogation”.What this means is the following: Article 119 should normally cease to apply as soon the third stage of EMU starts – which it did on 1.1.1999. (This is why article 119 is part of a Treaty chapter called: “Transitional Provisions”.) But, as not all EU members would automatically and immediately be EMU members as well, article 122 states that article 119 would continue to apply to those EU members who have a derogation to join EMU (either because they did not fulfill the convergence criteria or because they opted for not joining).

Council Regulation (EC) No 332/2002 of February 2002 spells out Article 119, establishing a facility providing medium-term financial assistance for Member States’ balances of payments. In other words: it outlines the instrument to grant credits to member states with balance of payment difficulties according to Article 119. Again, this Council Regulation only refers to countries which have not adopted the Euro. By the way, the same regulation also reduces the overall amount of loans that can be granted to member states under this facility from 16 bn € to 12 bn € because “the introduction of the single currency has led to a substantial reduction in the number of Member States eligible for the instrument” (Council Regulation (EC) 332/2002, (8)).

Hence, Article 119 and the related Council Regulation can (and will probably further) be used for financial assistance to EU but non-EMU countries. But it cannot be used as the legal base for financial assistance to a fellow EMU member. Nevertheless, there is a legal base in the Treaty upon which financial assistance to an EMU member state could be granted.

Let us, first of all, reframe the issue. If an EMU member country heads for a situation in which it cannot refinance its debt, it may not need a full bail out, but would indeed need financial assistance. For such an emergency action, Article 100 TEC, section 2 could be used as a legal base:  “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision to be taken.”

The fact that EU member countries and the EU as such is not liable for the commitments of other member states (as stated in Article 103), hence does not imply that the Treaty assumes that fellow member states should go bankrupt.

The next question then is where the money for financial emergency assistance should come from. Above, I argued that Article 119 as such does not apply to EMU. But what is interesting about the Article and the respective Council Regulation: they constitute the legal base for the issuing of Eurobonds (in this case they can only be issued upon decision of the Ecofin on balance of payment loans. It is indeed very interesting to discuss whether bond-financed loans could and should be used in order to financially assist EMU member countries that have come under serious pressure. The experience with the balance of payment loans issued by the European Commission (e.g. the 6.5 bn € emission for Hungary as decided by the Ecofin in November 2008) for that matter should be studied closely as an example.

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