To bail out or not to bail out, that is the question

As Greece's troubles continue (save yesterday's temporary boost), the debate on whether the EU Treaties legally allow the EU to bail out one of its member states rages on. On his blog, the FT's EU correspondent Tony Barber claims that the "EU possesses the legal power to rescue Greece if necessary."

For what it's worth, we're not convinced it does, although there is so much ambiguity in the EU Treaties that it's probably going to be a case of 'where there's a will, there's a way'.

Barber refers to article 122 of the TFEU Treaty (former article 100), arguing:

The second clause states that when 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 [of national governments], on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the member-state concerned.'

However, as we set out last July, the 'no bail-out' clause in the EU treaties explicitly prohibits member states from taking on the financial 'commitments' of a national government (i.e. assisting in closing a budget deficit). And this is what the no bail-out clause says in full:

The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. (article 125 TFEU)

This 'no bail-out' article is supposed to guard against 'moral hazard', embodying the important principle that it us unreasonable and fundamentally undemocratic to let taxpayers in one country pay for the mistakes of governments (in Greece or elsewhere) in a different country (over which they have no democratic control).

In a written answer to former MEP Kathy Sinnott, the Council suggests that the 'no bail-out' clause is superior to the article allowing for financial assistance to member states. On how article 100 (now article 122) can be used, they said:

the Council recalls the terms of the Declaration on Article 100 of the Treaty establishing the European Community, which is attached to the Nice Treaty. According to this declaration, 'decisions regarding financial assistance, such as are provided for in Article 100 and are compatible with the 'no bail-out' rule laid down in Article 103...

The Council therefore refers to a "Declaration on Article 100" (that was attached to the Nice Treaty), which states that actions under article 100 must be "compatible with the 'no bail-out' rule".

But that may not be the end of the story. The EU doesn't exactly have a brilliant track record in abiding by its own rules (the EU hasn't managed to follow its own budget rules for 15 years).

The Council's written answer to Kathy Sinnott also reveals that the EU's member states have never thought to set out exactly what "exceptional occurrences" beyond the control of a member state might constitute. The Council said:

No definition of "exceptional occurrences beyond the control of a Member State" exists and the Council has never discussed it. Similarly, the Council has never discussed the possibility of invoking "exceptional occurrences" in the context of the current economic situation.

Tony Barber argues that "if you don’t define the 2007-09 world financial crisis as an 'exceptional occurrence', then it hard to see what type of event could ever fall into this category". With this reasoning the EU (including non-Eurozone members such as the UK) could be asked to bail out a eurozone member in trouble and as Barber notes, none of the Eurozone leaders have "any doubt whatsoever that, if the worst happens, they will have to rescue Greece.."

But such an interpretation would take some nerve. The Swedish and Finnish Finance Ministers have clearly said that a bail-out is legally impossible. And in the following interview with Frankfurter Allgemeine Zeitung, German EU law professor Matthias Ruffert completely rejects the idea that the financial crisis could credibly be defined as “exceptional occurrences beyond [the Greek government's] control”, saying: "state debt certainly cannot be counted among those." On whether "the financial crisis couldn't be seen as extraordinary and uncontrollable", he answers: "that wouldn't convince a judge. In other areas, jurisprudence strictly distinguishes between scientific and non scientific grounds in order to justify exceptions."

We suspect that this debate will drag on. One thing is for sure: the EU has an amazing ability to be creative with its own laws when the boat gets a bit rocky.