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Tuesday, September 20, 2011

Enhanced cooperation and the EFSF

We came across an interesting proposal today on Business Insider - that EFSF members could use the process of 'enhanced cooperation' to overcome their difficulties agreeing on the second Greek bailout (Finnish collateral demands) and ratifying the expanded role of the EFSF. We've sent a response through to Business Insider, suggesting that this isn't possible becasue the EFSF falls outside the EU treaties, to which enhanced cooperation applies. Unfortunately, there are no easy ways out of this situation.

(Enhanced cooperation - a procedure which allows at least 9 EU member states to push ahead with integration even if others decline to be involved.)

See below for our full response (we'd recommend reading the BI article as well):

The EFSF is not part of the EU Treaties and is a separate special purpose vehicle; therefore enhanced cooperation cannot apply to it. Since it is not technically an EU institution it does not fall into the jurisdiction of rules or procedures such as enhanced cooperation. The articles of incorporation for the EFSF highlight that it is a “public limited liability company” based in Luxembourg, not a formal EU body or institution.

This was an intentional move by eurozone countries to avoid a treaty renegotiation when setting up the EFSF, which would have been massively time consuming and may have failed to be approved. The EFSF grew from the intergovernmental loans given to Greece under the first bailout (although the two are still separate), therefore its basis has always been intergovernmental and not part of the EU Treaties.

The first part of the preamble to the EFSF Framework distinguishes between the change to EU Treaties required to establish the EFSM (the other €60bn temporary fund) and the setup of the EFSF, which did not require EU treaty change.

In addition, the UK didn’t have to approve the creation of the EFSF, since it was not inside the EU treaties. However, the European Stability Mechanism (ESM), the permanent bailout fund, is inside the Treaties and its creation does require UK approval (see here) and the UK also had a vote on the EFSM. It is clearly confusing since both the EFSM and the ESM are part of EU Treaties but the EFSF is not; but the distinction is clear.

It also seems fairly clear in the framework of the EFSF (Article 10, part 5, page 17) that any decisions on disbursing funds or adjusting the mechanism must be made unanimously. The only way around this would be for all the members of the EFSF to unanimously agree to allow Finland to step out of its share of guarantees but, as the current debate shows, the likes of Austria, the Netherlands and Germany would not let Finland excuse itself while they have to take on a new burden for political reasons.

All in all it seems clear that this enhanced cooperation way out is not plausible for the expansion of the EFSF or for the release of the second Greek bailout.


Rollo said...

Well, the bailouts themselves were specifically disallowed in the treaties. Did that make any difference? These children that are the political class, and who have no clue what they are doing anyway, will doubtless find a way of chucking more tax-payers' money down into the bottomless pit, that of trying and failing to save the Old Euro.

JL said...

It is not true to say that the ESM is "part of the EU treaties". It is, as signed, an international treaty binding only the parties to it. Look up the text!

What will be part of the EU treaties is the changed Article 136 which allows a stability mechanism to be established which is an entirely different matter. In fact, it is rather ridiculous to change a treaty in order to allow a group of countries to agree a treaty that is outside the treaty being changed. Countries sign treaties - bilateral and multilateral - outside the competences of the EU - all the time.

But that is what Merkel insisted upon (i) to fireproof her action before the constitutional court and (ii) to ensure that the ESM would be subject to unanimity and not a "Community procedure" of any kind.

The quid pro quo for the UK was the ruling out of any further use of Article 122 establishing the EFSM which is based on a Community procedure and subject to decision by QMV.

Open Europe blog team said...

Thanks for the comment JL.

Of course you’re right that the ESM is not actually part of the treaties and our post could be clearer on that. The point we were making is that the EFSF is entirely independent of the EU treaties, to highlight the definitive fact that enhanced cooperation could not be used. As you rightly note the German government had clear reasons for keeping the ESM outside the EU treaties. We would note though, that the UK did not receive a binding commitment or a protocol which stops Article 122 being used for this purpose again in the future, only a broad political commitment.