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Thursday, July 05, 2012

Where does the ESM stand?

Keeping track of the European bailout funds is hard enough, let alone trying to figure out when the changeover between the two largest ones, the EFSF and ESM, will take place.

Originally the plan was for the ESM to come into force on 1 July. However, this was then adjusted to the 9 July with eurozone leaders hopeful that they could announce it following their meeting that day. Now even that looks optimistic. Below we outline the state of play for the ESM treaty in the relevant parliaments:
Ratified: France, Greece, Slovenia, Portugal, Finland, Slovakia, Belgium, Netherlands, Luxembourg, Spain, Austria, Cyprus and Ireland

In the process of ratifying: Italy and Germany

In the next month: Malta and Estonia 
So when will it come into force? 

The next obvious target is the newly announced Eurogroup meeting on 20 July. One important point to remember is that it really comes down to Italy and Germany since, once it is ratified by members representing 90% of the capital subscription, it will automatically come into force. However, the process in these two countries is still uncertain and putting a definite date on completion is tricky.

In Italy the Senate needs to vote on it first, before the lower house can approve it, although there is no vote scheduled for the next week at least (the agenda gets updated on a weekly basis).

In Germany, both houses of the parliament have approved it, however, the Constitutional Court has asked the President to delay signing off on it due to the large number of challenges against the legality of the treaty – something which he agreed to. The court will analyse these challenges (thought to be around six distinct complaints) on the 10 July, although this could take a few days to complete. It will then decide whether to issue a temporary injunction against the treaty if any of the cases have merit. This seems unlikely and even Eurosceptic MPs such as the CDU’s Wolfgang Bosbach have said, "The judges do indeed decide only according to legal and constitutional criteria, but they also know what kind of impact a categorical 'no' would have in terms of foreign policy and financial policy."

So the situation is still unclear in the two countries that matter, but will hopefully become clearer in the next couple of weeks. There is still plenty of opportunity for a surprise but ultimately it looks increasingly likely that the ESM will be in force towards the end of the month. Whether Spain and Cyprus will be able to wait until then is even less certain though, and as we’ve heard today (and covered before) using the EFSF to disperse the funds throws up plenty of problems in itself (such as Finnish collateral demands).

Update 05/07/12 16.50

During his statement on the EU summit earlier this afternoon, Mario Monti has urged the Italian parliament to complete the ratification of both the fiscal treaty and the ESM "by the end of the month." Italian news agency AGI notes that only some 40 (out of 205) MPs from Silvio Berlusconi's party were listening to the statement. 

Update 05/07/12 15.30

It looks as if Malta has actually ratified the treaty, although in practice that makes no difference to when the ESM will come into force.

One final point to note is that, if the ESM does come into force quickly enough and does disperse the Spanish bailout, these loans will still be senior to other Spanish debt. The recent summit only concluded that loans which are issued by the EFSF then transferred to the ESM will remain pari passu (same seniority) with other debt.


Rik said...

The German Constitutional Court also last time clearly tried to draw the borderline.

Another relevant issue is if it doesnot make things complete clear now there almost certainly will be another case (more likely several).
Highly unlikely that the present capacity of ESM/EFSF will be enough.
It is also clear seen earlier remarks made by the Court's President (see the 2 interviews) that the borderline will be drawn considerably before the capacity needed to bail Italy and Spain out.

Seeing the above there are several important not direct legal issues to be considered by the Court.
1. As you said a negative decision will have considerable foreign policy consequences.
2. Going too far with the government would make the Court look a bit like a Kangaroo court (like the EU one often is). Doubtful if they want that.
3. This case looks great to give a clear verdict on. Much better than some rescue of a PIIGS.

Seen the above and seen the earlier jurisprudence imho we will see the case be accepted and likely a clear ruling implicating till here and from there we are in referenda-territory. As they effectively have already done but people are either too stupid to see or just find it pretty convenient not to see it (probably the latter).

Which will open another can of worms. Effectively several.
Within a few hours it will be pretty clear that a referendum in Germany is effectively a no go. 80% is against and hardly 10% pro. And these percentages look very stable.

Meaning the ESM and Co will be at the borderline of its capacity with the 500 Bn. Meaning capacity will not be enough for a proper rescue and half the world will start to dump Italy and Spain. So they better start working at a plan B.

Having said that it also makes ECB intervention more unlikely. It will simply look like getting around the German and other voters via backdoors. Effectively creating a fiscal union without any popular/democratic legitimacy (and clearly outside its mandate as well). And it is not a good idea for Merkel to try otherwise close to elections.

A German referendum would likely also start the discussion thereon in Holland (and likely France and a few others).

Merkel can simply not risk a referendum. She would have to ask for one for proposals backed by her. An 80% defeat is simply the end of her political career.
So she might be forced to pull the plug out before that if she wants to survive politically. And the alternative is not getting in the historybooks for saving Europe. There simply would be someone else to pull the plug out and she would go into the historybooks as the one who messed it up big time.

All no 100% certainties but probabilities high enough for markets to worry and take action when they have analysed things. And likely a political or legal issue combined with market pressure will take the thing down.

Denis Cooper said...

Hang about, originally the ESM was supposed to come into operation NEXT summer, not this summer.

That's why it could be agreed that the enabling EU treaty change would not come into force before January 1st 2013, because there was no need for it to do so.

European Council Decision 2011/199/EU of March 25th 2011, "amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro":


"Article 2

Member States shall notify the Secretary-General of the Council without delay of the completion of the procedures for the approval of this Decision in accordance with their respective constitutional requirements.

This Decision shall enter into force on 1 January 2013, provided that all the notifications referred to in the first paragraph have been received, or, failing that, on the first day of the month following receipt of the last of the notifications referred to in the first paragraph."

So if the ESM comes into operation this summer then it will do so without any legal basis in the EU treaties, just as the EFSF was set up without any legal basis; and under its Article 2 that would still be the case even if all 27 EU member states had already ratified the EU treaty change.

It's hard to say how many of the 27 EU member states have ratified the EU treaty change, but it was reported here:


that the Bundestag had voted to approve it on June 29th after the votes on the ESM treaty and the fiscal pact.

While in the case of the UK the Bill to approve it has just moved from the Lords to the Commons:


"European Union (Approval of Treaty Amendment Decision) Bill"

"A Bill to make provision for the purposes of section 3 of the European Union Act 2011 in relation to the European Council decision of 25 March 2011 amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro."

Anonymous said...

That's the older version of the treaty - a newer one was drafted in February 2012.

Denis Cooper said...

Factsheet, February 2nd 2012:


"the target date is July 2012, a year earlier than originally planned."

But under its own Article 2 the enabling EU treaty change, European Council Decision 2011/199/EU of March 25th 2011, cannot come into force before January 1st 2013 and that has not been amended.