Constitutional Framework of the Response to the Eurozone Crisis

Holden 19

Constitutional Framework of the Response to the Eurozone Crisis

Nathan T. Holden | Comparative Constitutional Law 358 | Professor Michael Wise | Willamette University College of LawSpring 2015

The problem is as follows: Greece is a sovereign country with a public and private debt crisis. Greece is also a country with a common currency shared by treaty and an economic constitution with its currency partners. Typically, when faced with a fiscal, monetary, or debt crisis, a country may default on their debts, or inflate their currency. However, because of their treaty obligations, constitution, and economic realism, Greece does not have this option. The goal of this piece is to address the two-fold concerns of the Eurozone crisis: how did we get here? And, what do we do now?In 2007, the Treaty of Lisbon finalized a constitutional framework for human and civil rights, and economic cooperation and interdependence in Europe[footnoteRef:1]. These frameworks and agreements provided for how these sovereign nations were to operate their economic, fiscal, and monetary policies. The Treaty of Lisbon and its predecessors sets out to balance the demands of a common currency with the individual national self-interests of the Eurozone, as well as providing a framework for economic cooperation with nations subject to the treaty, but non-participants in the common currency. Unbeknownst to the framers, the viability of their agreement, the disparate positions of the participants, and the idea of a common currency would all be tested, to the point that the European Union as a series of treaties, much less a constitution, remains unclear. [1: Ralph Folsom, European Union Law In A Nutshell. 7th Edition, West, (2010). at 38]

In late 2007 and early 2008, as the private and public debt crises began to boil over, the 50 year European project faced an existential crisis. The national level solutions of independent monetary policy, such as easing or default, were unavailable to the extent that they violated both international treaties and the economic constitution by such measures. In order to effectuate a monetary union and constitution, the economic provisions for member states were far more specific than prior constitutions in history. As opposed to the generalities of adhering to the principles of Marx and Lenin, or being necessary and proper for the general welfare, the European Union required specific targets and requirements. The downside of the benefit of the long arc of history as guidance is the temptation to quantify and include everything. Such specific fiscal requirements in the treaties establishing the European Union were necessary to ensure accountability and agreement among such diverse nations and economies. However these same considerations have tied the hands of policymakers from implementing the most effective policies to stem the crisis. This paper hopes to explore and explain 1) The history of the European Union, and the treaties that make up a common legal system and economy; 2) the powers and limitations of the European Unions legal framework and constitution; 3) the legitimacy, legal basis, and effectiveness of the response to the Euro crisis. The focus will mainly be on Greece, because that is the member state where the greatest conflict between the social constitution and economic constitution of the EU has occurred, and will likely determine how larger, similarly situated member states, such as Spain will be treated. I. Constitutional Framework - Brief History of the EU, EMU, Etc.Treaty of Rome (1958) Economic ConstitutionAfter World War 2 ended, French and West German civil servants and business leaders created a series of treaties which integrated the raw materials and manufacturing capacity of the coal and steel industries in continental Europe[footnoteRef:2]. In 1951, The Treaty of Paris created the European Coal and Steel Community (ECSC[footnoteRef:3]). This pooled and increased the industrial capacity of France and West Germany, and insured peace because one nation could not produce war materials without the other. By the time the Treaty of Rome was signed in 1958, similar agreements to the ECSC on nuclear energy, common markets, common defense, and a common political assembly formed the basis for the European Union[footnoteRef:4]. [2: Kaarlo Touri & Klaus Touri, The Eurozone Crisis: A Constitutional Analysis 18 (Cambridge, 2014).] [3: Please refer to the glossary in the appendix for abbreviations.] [4: Franz A.M. Alting von Geusau, European Unification into the Twenty-First Century (2012)]

Balancing dirigisme and marketsThe ongoing debate throughout these treaties and the formation of the EU is between dirigisme and market economies. The French model, dirigisme, represents an economic system that although centrally planned, is still a capitalist model because it allows capital-accumulation and a free market. The German planners advocated the Bundesbank Model, which is not centrally planned like dirigisme, but has its monetary policy dictated by an independent central bank. The TEU, both at the initial drafting and presently, more closely resembles the Bundesbank model, assigning competencies to member states and their independent central banks. A sort of economic separation of powers, but under the consistent policy guidance of an independent European Central Bank. The Bundesbank model also provides a very limited mandate of inflation control and price stability as the primary objective of the economic constitution.Under Bretton-Woods, member state currency exchange rates were tied to the gold backed U.S. Dollar. This facilitated consistent monetary policies and exchange rates across Europe until the Nixon Administration abandoned the Bretton-Woods system and any gold backing to the U.S. dollar[footnoteRef:5]. Without a benchmark for their various currencies, the TEU signatories needed to develop a new mechanism to facilitate a common monetary policy. [5: Touri, at 21]

Maastricht treaty (1993) Creation of the EuroThe Maastricht Treaty[footnoteRef:6] combined several Europes existing supranational institutions, and established the European Parliament, European Court of Justice and European Communities[footnoteRef:7]. For our purposes the Maastricht Treaty also established the criteria for a member state to adopt the Euro currency, also called the convergence criteria[footnoteRef:8]. The criteria has three main components: inflation, debt, and deficits. The inflation rate must not be more than 1.5 points higher than the average of the 3 best performing member states; deficit to GDP ratio must not exceed 3% at the end of the preceding fiscal year, and debt to GDP ratio must remain under 60%, unless specific conditions met, then must be approached at a satisfactory pace[footnoteRef:9]. It should also be noted that nearly all of the Eurozone countries, including France and Germany, the primary creditor states, have violated this criteria at some point since the signing of the Maasctricht treaty, and since the beginning of the Eurozone crisis[footnoteRef:10]. [6: Also called the Treaty for the Functioning European Union (TFEU)] [7: Folsom, at 31] [8: TFEU Article 140] [9: Id.] [10: Id.]

Stability and Growth Pact (1997) and Fiscal Compact (2012)[footnoteRef:11] These next two treaties provide the policy creation and compliance enforcement authority to facilitate the fiscal and monetary consolidation under Maastricht. The two major components of these treaties (together called the two-pack) are the surveillance provisions and macroeconomic provisions. Together these provisions gave the European Commission[footnoteRef:12] supervisory and advisory roles in draft budget plans of member states[footnoteRef:13]. Although these treaty did not make major alterations to the economic provisions of Maastricht, it did solidify in the constitution the two tiered economic union between the Eurozone and non-Eurozone member states[footnoteRef:14]. Most notably, these treaties include both Eurozone and non-Eurozone countries in the fiscal and budgetary requirements[footnoteRef:15]. Scholars have proposed separating EU policy to create a Two-Speed EU policy[footnoteRef:16]. This means allowing more economic independence for the non-euro countries: the UK, Sweden, and Denmark. [11: What is the Stability and Growth Pact? The Guardian, UK, 27 November, 2003. ] [12: The European Commission is executive body of the European Union, TFEU Art. 17] [13: TFEU Articles 136, 121(6) ] [14: Touri at 31] [15: Council of the European Union, Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. 2013. (http://www.consilium.europa.eu/en/documents-publications/agreements-conventions/agreement/?aid=2012008)] [16: F. Sharpf, Legitimacy Intermediation in the Multilevel European Policy and its Collapse in the Euro Crisis (Cologne: Max Plank Institute for the Study of Societies) (2012) ]

Treaty of Lisbon (2007) Also called the Treaty for a European Constitution, or the social constitution, The Treaty of Lisbon was most notable for expanding the power and structure of the European Parliament, and ratifying the European Union Charter of Fundamental Rights (EUCFR)[footnoteRef:17]. We will return to this treaty as it offers another avenue for constitutional conflict. The Treaty of Lisbon consolidated the Rome and Maastricht treaties which together provide the fiscal, monetary and economic frameworks for member states, an accountability mechanism, a central bank, and a parliamentary body. [17: References to the social constitution refer to the European Union Charter on Fundamental Rights, and European Social Charter, and European Union Charter of Human Rights.]

The Major Economic Provisions Although the Treaty of Rome (TEU) is the foundation of the economic constitution[footnoteRef:18] of Europe, and the monetary union and the modern economic constitution of Europe was set forth in the Maastricht Treaty (TFEU). The principles of the economic constitution are[footnoteRef:19]: [18: References to the economic constitution in this paper refer to the 2007 consolidated and amended versions of the Treaty of the European Union (TEU), and Treaty on the Functioning of The European Union (TFEU) ratified at the Lisbon Treaty. (http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:C:2008:115:TOC)] [19: European Monetary Institute, Progress Towards Convergence. November 1995.]

European Commission granted exclusive review and supremacy in monetary policy Price stability is the primary objective of ECB[footnoteRef:20] [20: European Central Bank, discussed further at p. 6]

Independent ECB, and National Central Banks Member States responsible for supervising financial institutions Member States sovereignty in fiscal and economic policy, but EU coordinates national policies Member States obligated to heed their economic policy to common concern and externalities Primacy of EBC mandate (price stability) over national fiscal and policy objectives Sound public finances Prohibition on shared liability on government debts

In addition to the convergence criteria is the foundation of the European Central Bank (ECB). The ECB acts as the central bank to national central banks, and is composed of the heads of the member states central banks. Compared with The United States central bank, the Federal Reserve, whose mandate is 1) price stability, 2) full employment, 3) interest rate stability, the ECBs mandate is solely price stability[footnoteRef:21]. Like the Federal Reserve, the ECB is independent from its constituent parts. [21: Treaty for the European Union (TEU), Article 3(3)-(4)]

II. Introduction to the Eurozone CrisisThe Financial Crisis in Europe, similar to the United States was triggered by the collapse of Lehman Brothers and AIG in the United States, and several European banks with the same or similar investments (and undercapitalization)[footnoteRef:22]. Three factors not addressed in treaties converge, Debt Crisis, the Great Moderation, and Globalization. [22: Touri, at 86]

The debt crisis is the most newsworthy aspect of the Eurozone crisis, especially in the American Media. Debt issues contributing to the crisis are two-fold: Sovereign Debt and Private Debt. Sovereign debt is what we think of as national debt or public debt. Essentially, sovereign debt is the governments budgetary liabilities (operating expenses and entitlements) and its debt liabilities (bond payments). Nearly all countries have a national debt, as maintaining and growing the debt increases the velocity of money in the economy, and is necessary for GDP growth, and economic expansion. However, when states are unable to pay interest on the bonds which finance their debt, or are unable to find a market for new bonds at manageable interest rates, or collect tax revenue, states find themselves in dire economic straits very quickly. This is where the questions about national sovereignty and self-determination become the most problematic in a monetary union, because the fiscal policy objectives are no longer unified[footnoteRef:23]. [23: Touri, at 61]

Private Debt, and Sub-Prime Debt In addition to the fiscal management at the national level, the ability of the citizens and businesses to pay impacts the national economy, the states ability to collect tax revenue, thus exacerbating issues with the public debt[footnoteRef:24]. As we are familiar with in the United States, sub-prime lending, especially in real estate became incredibly popular in Europe in the 00s. Similar to the United States, this lead to a bubble in asset prices, that when normalized, destroyed a great deal of wealth, and in turn the Governments ability to tax that wealth. [24: Touri, at 69]

The other two factors in the Eurozone crisis get much less attention, as they are harder to explain, quantify (or attach to an ideology) than issues of public and private debt. These issues are the Great Moderation lower volatility in GDP and inflation. Great Moderation or historically lower volatility in GDP and inflation, and Globalization or greater independence of global markets[footnoteRef:25]. This stability has caused financial institutions to underestimate risk, as a result many invested and capitalized themselves according to this apparent stability. [25: Joseph Stiglitz, Globalization and its Discontents. (New York, 2002), 2]

Globalization is a term coined by former World Bank President Joseph Stiglitz used to describe global market interdependence which emerged in the latter half of the 20th century[footnoteRef:26]. The effect of globalization on the crisis is self-evident, as a united Europe is exemplary of trade liberalization and broader common markets. The negative effects have been that markets have greater exposure to financial crises in other parts of the world, such as the United States, and are forced to compete with a much larger and lower wage labor force in Asia. [26: Id.]

III. Constitutional LimitationsIn addition to the causes of the crisis are the response by an as of yet untested economic system, and the limits placed on the system by its members. The Maastricht treaty created significant limitations on the mechanisms that the EU could utilize to contain the worst of the sovereign debt crisis[footnoteRef:27]. Also called the no-bailout clause Art. 125 TFEU explicitly forbids liability for and assumption of commitments of a member state[footnoteRef:28]. [27: Claire Kirkpatrick, Are the bailouts immune to EU social challenge because they are not EU law?, 10(3) Eur. Const. L.Rev 393, ] [28: Treaty for the Functioning of the European Union, Article 125.]

1. 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.2. The Council, on a proposal from the Commission and after consulting the European Parliament, may, as required, specify definitions for the application of the prohibitions referred to in Articles 123 and 124 and in this Article.

Furthermore, both national central banks and the ECB are prohibited from purchasing government bonds from member states under Art. 123[footnoteRef:29]. In order to provide financial assistance to member states, in 2012 creditor member states and the Troika[footnoteRef:30] amended Art. 136 TFEU and signed a separate Eurozone-only treaty to give the ESM[footnoteRef:31] legal legitimacy. Art 136 now allows member states to establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole.[footnoteRef:32] This meant that early on in the crisis, the ECB was only able to facilitate bank bailouts, and some private debt bailouts. The Federal Reserve by comparison was able to immediately begin government bond buying and monetary easing without such limitations[footnoteRef:33]. [29: TFEU art. 123] [30: Troika is the name given to the European Central Bank, International Monetary Fund, and European Commission when acting in concert on financial assistance programs in Europe.] [31: ESM European Stability Mechanism, discussed in greater detail on p.9] [32: TFEU Art. 136] [33: Ben Bernanke, the Crisis and the Policy Response.Federal Reserve (13 January 2009)]

The Pringle CaseThe Pringle Case offers the first constitutional challenge to the implementation of the bailout packages. In 2012, Thomas Pringle, an Irish TD (equivalent of a MP or member of parliament) challenged the legality of the ESM before the Irish Supreme Court, which in turn referred the case to the EU Court of Justice[footnoteRef:34]. The Pringle Case asked three questions: whether the ESM involve ceding sovereignty to such an extent that it amounted to a breach of the Irish Constitution; whether the Irish Supreme Court should refer the question of ratification to the Court of Justice for the European Union; and whether interlocutory judgement should be granted to prevent the state from ratifying the ESM Treaty, pending final judgement on the matter[footnoteRef:35]. [34: European Court of Justice Case C370/12 Thomas Pringle v. Government of Ireland] [35: Id.]

The court requested that the CJEU produce its judgment under an accelerated procedure due to the urgency of the proceedings and the risk that the delay poses to the stability of the euro zone[footnoteRef:36]. The court agreed to make a reference to the Court of Justice for a preliminary ruling. Pringle submitted that the amendments to the TFEU, which allow the formation of the ESM are invalid, because the amendment provided by the Council Decision should have been made by the ordinary revision procedure rather than the simplified revision procedure[footnoteRef:37]. He further argued that it is an infringement of the EU Treaties and the general principles of EU Law. The court referred these questions to the CJEU. It further asked if the entitlement of a Member State to enter into and ratify the ESM Treaty is dependent on the entry into force of the Decision. The court considered that the ESM did not involve ceding sovereignty to such an extent that it amounted to a breach of the Constitution[footnoteRef:38]. The court viewed it as an agreement to pursue a defined policy of the government rather than an inappropriate transfer of executive powers. Pringle can be traced as the legal basis and legitimization of the ESM. [36: Bloomsbury Professional Online, CASE SUMMARY: Pringle v. Govt of Ireland, August 7, 2012 (http://www.bloomsburyprofessionalonline.com/applib/newsitem/216/case-summary-pringle-v-government-of-ireland-and-others-)] [37: European Council Decision2011/199/EU] [38: Id.]

Workarounds - European Stability Mechanism and Bail-insAfter the Pringle decision, several workarounds were implemented by, special purpose vehicles and Bail-in. Bail-ins restructure the maturity and interest rate of bonds with private sector cooperation, and are similar to the bank bailouts in the United States because they primarily focused on stabilizing private financial institutions as a means of stabilizing the economy, as opposed to directly addressing sovereign debt[footnoteRef:39]. [39: Touri, at 100.]

Another workaround from the limitations on bailouts are special purpose vehicles. The ESM is the third, and current iteration of special purpose vehicles created by treaty to facilitate financial stability packages to economically distressed member states[footnoteRef:40]. Because of the limitations on direct assumption of liabilities of Art. 125, the ESM instead provides for various forms of lending, including direct loans to member states, loans to recapitalize financial institutions, buying bonds on the open market and secondary market (an indirect form of loans to member states), and finally a precautionary line of credit to member states. The ESM is based on bi-lateral agreements, or non-binding memoranda of understanding. Memorandum of Understanding (MoUs) are multilateral agreements which modify the terms of existing treaties, but do not require parliamentary approval[footnoteRef:41]. [40: The first two special purpose vehicles, the European Financial Stability Fund, and European Financial Stability Mechanism, were incorporated into the European Stability Mechanism after they expired in 2012.] [41: https://treaties.un.org/pages/ParticipationStatus.aspx]

The competing provision to Art. 125 is the Emergency Provision Art. 122(2)[footnoteRef:42]. While Art. 125 prohibits assumption of liabilities by a member state and by the EU, Art. 122(2) allows the EU to provide direct financial assistance to member states necessary for recovery from a natural disaster or exceptional circumstances[footnoteRef:43]. The Pringle court held that these ESM is constitutional for three reasons. [42: Treaty for the Functioning of the European Union, Art 122(2).] [43: Id.]

First, because the ESM is not a member state, nor is it the EU, the ESM is not covered or prohibited by Art. 125. Even if, as critics of the ESM and Pringle decision claim, the ESM is effectively an assumption of liabilities prohibited by Art. 125, it is permissible because of its indirect structure, meaning that neither the EU, EU institutions, nor member state governments are directly assuming the liability of another member state[footnoteRef:44]. [44: European Court of Justice Case C370/12 Thomas Pringle v. Government of Ireland]

Second, the CJEU determined that because the circumstances of the financial crisis are sufficiently outside of the control of the member states such that they would not promote moral hazard[footnoteRef:45] as contemplated by Art. 125. The court recognized that although sovereign debt, and institutional debt were a factor, which directly fit into the moral hazard category, that the global financial crisis was a sufficiently exceptional circumstance to fit under Art. 122(2)s emergency provision. [45: Moral Hazard is a concept in economics describing when one takes more risk because someone else bears the burden of the risk. See: Kenneth Arrow Essays in the Theory of Risk- Bearing. (Chicago 1971).]

Finally, the Pringle court held that the ESM does not conflict with Art. 125 because providing a mechanism for financial stability invokes the objective of Art. 1, stabilizing the EU as a whole. Like the CJEUs recognition of the exceptional circumstance of the financial crisis, so too did they recognize the importance of a financial stability mechanism in maintaining the stability and entirety of the EU[footnoteRef:46]. [46: European Court of Justice Case C370/12 Thomas Pringle v. Government of Ireland]

Supremacy and Federal PreemptionIn addition to addressing conflicts with Art. 125; the Pringle court in their approach addressed the force of EU law as preempting the laws of its constituent member states, as occurs in federalist constitutions. Although Art. 4(3) calls on the courts of member states to accord precedence of EU law over conflicting national law, the Pringle court instead focuses on the surveillance provision Art 121, and excessive deficit procedure Art. 126 as a basis for the ESM[footnoteRef:47]. This is reiterated in the amendment to Art. 136 providing that MoUs be fully consistent with the economic policy of coordination in the TFEU, in particular with any act of EU law, [footnoteRef:48] Intersection of The EUs Social and Economic Constitutions [47: TFEU Article 136] [48: Id.]

An emergent problem on top of the economic crises, and constitutional and legal limitations on economic intervention, is that the response, and attempt to preserve the economic union may contradict and even violate the social constitution of Europe, and the Human Rights convention agreed upon in the Treaty of Lisbon[footnoteRef:49], and possibly may violate the constitutional rights and guarantees of the national constitutions of the member states. [49: Touri, at 215]

While the primary focus thus far has been to challenge the legal basis for the bailouts under the economic constitution, be it from Pringles challenge to independent policy making by member states, or by the German view of increased moral hazard and undermining the bailout provisions, challenges based on the social constitution are gaining popularity[footnoteRef:50]. However, challenges based on the social constitution are not without their own constitutional conflict. The main limitation of arguments based on the social constitution is that the structure of the bail-out measures, have been interpreted as being outside the social constitution in order to comply with the economic constitution[footnoteRef:51]. The European Parliament's Economic Committee in its report stated that it: [r]egrets that the [programs] are not bound by the EUCFR, the European Convention of Human Rights and the European Social Charter, due to the fact that they are not based on Union primary law[footnoteRef:52]. The Law Professor Clare Kilpatrick thoroughly discusses how the Greek and Cypriot bailouts in particular have been interpreted as immune to challenge under the social constitution[footnoteRef:53]. In her view, Art. 143 provide an EU law basis for the MoUs, and opens them to social challenge. However the CJEU found that a basis in EU law is not the same as EU law subject to constitutional challenge[footnoteRef:54]. The arguments used by the CJEU finding the bail-outs and MoUs are immune to challenge are primarily based on the idea that the agreements are bilateral, discretionary, and do not draw upon EU law in their implementation[footnoteRef:55]. However, if that is the case, and these agreements cannot be challenged under the social constitution, it stands to reason that they could be challenged under the guarantees of rights under the national constitutions of the member states. Bringing a challenge under the guarantees of the national constitution of the member state would then go back to the conflict discussed earlier relating to supremacy under Art. 4(2)[footnoteRef:56]. [50: A. Fischer-Lescano, Human Rights in Times of Austerity Policy: The EU Institutions and the Conclusions of Memoranda of Understanding, Bremen 2014.] [51: EP Report, supra n.6, para. 80.] [52: Id.] [53: Kilpatrick at 394] [54: T-541/10 and T-215/11, ADEDY and others v. Council supported by the Commission, 27 November, 2012.] [55: Id.] [56: TFEU Art. 4(2)]

Previous attempts to challenge the bailouts under the national constitutions raise doubts about the ability of national courts to challenge the bailouts and MoUs. In 2012 the Portuguese Constitutional Court heard challenges to cuts in public sector pay based on Arts 28 and 31 of the EUCFR, which guarantee non-discrimination, right to collective bargaining, and dignity of workers. The Portuguese court held that the case was not admissible to consider under the preliminary reference article, because the referring courts made no reference to the bailouts or MoUs as the sources of the national law responsible for the pay cut[footnoteRef:57]. [57: Kilpatrick at 418]

Art. 263 provides an avenue for challenging EU measures a breaching the EU social constitution[footnoteRef:58]. However, while member states and EU institutions are considered privileged applicants to bring such a case for an individual, or group like a trade union to bring a case to the ECJ they must establish that they are a direct and individual concern[footnoteRef:59] The difficulty of this avenue of redress is exemplified by an Art. 263 challenge brought by the Greek Civil Servants Union. The Union challenged the reduction in holiday bonuses paid to civil servants as a result of an excessive deficit decision addressed to Greece by the European Commission. The ECJ found that because the decision was addressed to Greece, and allowed discretion, that the Union was not a direct concern and could not bring the challenge[footnoteRef:60]. [58: Article 263, Treaty for the Functioning of the European Union] [59: Id.] [60: T-541/10 and T-215/11, ADEDY and others v. Council supported by the Commission, 27 November, 2012.]

In addition to Art. 263, Art. 267 provides the only alternative avenue for challenging bailout measures compatibility with the EU social constitution, called the preliminary reference. In looking at the constitutional basis for preliminary reference challenges, we turn to Professor KilpatrickYet, to date, the preliminary reference avenue has not worked well . Unions, affected workers and civil society associations need to go to their national courts with well-crafted arguments showing clearly the applicability of the respective components of the EU social constitution and the incompatibility of measures adopted with what the EU social constitution requires. Such litigation before the EU Courts has important functions not fulfilled by findings by non-EU human rights' courts and bodies: EU accountability to those whose lives are dramatically affected by these measures, judicial assessment of the EU legality of the social bailout measures, and the integrity and evolution of the EU Constitution post-crisis, especially its social components[footnoteRef:61]. [61: Claire Kirkpatrick, Are the bailouts immune to EU social challenge because they are not EU law?, 10(3) Eur. Const. L.Rev 393,]

Another argument based on the social constitution bases their criticism on earlier arguments against the conditions which the IMF places on loans. This argument focuses on the poor track record of economic recovery after the budget-balancing and privatization policies imposed on IMF loan recipients[footnoteRef:62]. Part of this argument centers around odious debt, or liabilities incurred as a result of corruption or unfavorable loan conditions (including those imposed by the IMF). The other side of incurring odious debt, is tax avoidance and tax evasion, which further inhibits the ability to pay sovereign debt obligations. These arguments, also draw on De Grauwes contention that the supply-side reforms and austerity measures on which the MoUs are based, are themselves unsound and politically motivated. [62: Joseph Stiglitz, Globalization and its Discontents. (New York, 2002).]

IV. Enacted and Proposed SolutionsThere are three basic arguments on how the bailouts should be administered and how these economic interventions fit into the constitutional framework. The first two, loosely the German argument, and the SYRIZA argument agree on the legitimacy and constitutionality of the framework, which is that after Pringle, the rescue packages are permissible under TFEU, but disagree on technical aspects of the MoUs. The third and most interesting argument is that the bailouts, and conditions of the MoUs are subject to challenge based on the human rights guarantees of the social constitution[footnoteRef:63]. The other side of the same argument is that the MoU are not legally binding because they are not EU law. [63: Claire Kirkpatrick, Are the bailouts immune to EU social challenge because they are not EU law?, 10(3) Eur. Const. L.Rev 393]

German/ PASOK Status Quo Austerity and Memorandum of UnderstandingThe present status of the Greek economy and budget are largely based around the conditions imposed on within the MoUs. to these loans and bailout packages have included the controversial and maligned budget targets, and weakening of collective bargaining and public sector involvement in the economy for bailout recipients. In Greece this has meant a 25% cut in all public sector wages[footnoteRef:64]. These deep cuts in the public sector, has been argued by many, including the current prime minister of Greece, to have caused a deflationary cycle in the economy, decreasing tax revenues and essentially making it impossible to ever pay back the loans[footnoteRef:65]. [64: Id.] [65: Id. ]

Adherence to the MoUs in turn means continuing the austerity measures, and further exacerbating the anti-democratic and social conflict created by adherence to austerity. Emergent political opposition to Austerity - SYRIZA Greek Coalition of the Left After the Socialist Party (PASOK) and New Democracy parties caught much of the ire and blame for Greeces financial woes, and weak negotiating position on the bailout terms, The SYRIZA[footnoteRef:66] Party formed a coalition government and put Alexis Tsipras into the Prime Minister seat in the 2015 elections[footnoteRef:67]. SYRIZA, first won parliamentary seats in 2009. [66: SYRIZA is an acronym for Coalition of the Radical Left (English), or ,Synaspisms Rizospastiks Arister (Greek). ] [67: SYRIZAs Tsipras sworn in after Greek Government formed with Right-wingers, The Guardian, UK. 26 January, 2015]

Contrary to many news sources that the SYRIZA government wants Greece to abandon the Euro, and possibly the EU as well, Tsipras and SYRIZAs policy stance is to negotiate a solution that resolves crises in member states within the EU parliament and treaties, rather than resorting to the ad hoc stability mechanisms that have so far been utilized to avoid conflict with the existing framework[footnoteRef:68]. [68: The Political Resolution of the 1st Congress of SYRIZA. July, 2013. (http://www.SYRIZA.gr/article/id/53894/The-political-resolution-of-the-1st-congress-of-SYRIZA.html#.VTaOQyFViko)]

As specific policy proposals, SYRIZA would like a multilateral, and ideally all EU debt conference to settle on terms of refinancing, and debt forgiveness, similar to the London Debt Agreement of 1953[footnoteRef:69]. The more radical of SYRIZAs policy proposals (and campaign promises) is to end of austerity, and adherence to the terms MoUs. This has been portrayed, especially in the German media, as an effective default on the sovereign debt, in violation of the Maastricht requirements, because violating the MoUs would call the loans provided by the ESM and trigger a default. Despite this, the SYRIZA government has begun to re-hire public employees, and restore some public sector wages[footnoteRef:70]. One figure which supports SYRIZAs demands for debt renegotiation is that despite the bailouts provision of capitol to prevent default, the majority of the bailout funds has been spent on interest, and to creditors, effectively only paying the institutional holders of Greek debt, but doing little to relieve the Greek debt burden[footnoteRef:71][footnoteRef:72]. [69: Eric Toussant, The Marshall Plan and the Debt Agreement on German Debt, Committee for the Abolition of Third World Debt, 24 October, 2006.] [70: The Political Resolution of the 1st Congress of SYRIZA. July, 2013.] [71: Paul Krugman, Europes Greek Test, New York Times, 30 January 2015. (http://www.nytimes.com/2015/01/30/opinion/paul-krugman-europes-greek-test.html?_r=0)] [72: International Montetary Fund, Fifth Review of Extended Arrangement under the Extended Fund Facility and Request for Waiver of Non Observance of Performance Criterion and Rephasing of Access. 16 May, 2014. (http://www.imf.org/external/pubs/ft/scr/2014/cr14151.pdf)]

Perhaps a more politically charged proposal by Greece has been the inclusion of war reparations as part of the debt renegotiations: In January 2015, in course of the2015 Greek legislative electionand amidst theGreek government-debt crisis,SYRIZAleaderAlexis Tsipraspromised to demand debt reduction and the money Germany owes [Greece] from World War Two, including reparations," linked to repayment of a 476 million markszero interest loan that occupied Greece had been forced to give Nazi Germany.[footnoteRef:73] [73: Tim Worstall, Does Germany Really Owe Greece A trillion In War Reparations? Probably Not, No,Forbes (9/12/2012). Retrieved 01 February 2015.]

SYRIZAs anti-austerity proposals are supported by economists like Paul de Grauwe, who argues that the Greek economy under the MoUs are a case study in the deleterious effects of austerity programs and supply side reforms on which the MoUs are modeled[footnoteRef:74]. De Grauwes contention becomes a constitutional question when posed as a challenge to the increased deference and authority granted to independent institutions like the ESM and Troika. Following this contention, SYRIZA is demanding an audit of the MoUs, existing loans, and bail-out provisions[footnoteRef:75]. [74: Paul de Grauwe, Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement, June 2013 ] [75: The Political Resolution of the 1st Congress of SYRIZA, Chapter 13. July, 2013]

German Orderly Default Also called the Grexit or Greek-exit, the orderly default proposition would develop a procedure to oust member states in danger of default from the Eurozone. While in the very short term this would provide Greece with the ability to negotiate a larger reduction in bond payments (or bond haircut), and to print beyond the inflationary limits in Maastricht, opponents warn of a domino effect. What makes a Grexit untenable according to opponents is not necessarily the direct effect of a slightly smaller Eurozone, but the possibility of a much larger member state following suit. Opponents of the Grexit within Germany also point to the benefit of a weak Euro on German exports. Finally, and an underlying concern throughout is the issue of triggering events to credit default swap contracts. Common to the United States financial crisis, credit default swaps are insurance against default on bonds. Because a default would trigger these obligations, as it did after the Lehman Brothers crash, opponents argue that the instability created by the default would be greater than the benefits[footnoteRef:76]. [76: Mark Baimbridge, Philip Whyman, Crisis in the Eurozone: Causes, Dilemmas, and Solutions. (London, 2015). ]

Other Policy RecommendationsIn addition to the constitutional and political challenges discussed above, there are other less drastic suggestions for addressing the Eurozone Crisis. Limiting the power of credit rating agencies such as Standard & Poors is one such suggestion, as some have argued that the failed bond auctions which have brought Ireland, Greece, Portugal to the brink of default were the result of junk status ratings that did not accurately reflect these countries ability to repay. Another reform, which had been discussed in the 2012 Fiscal Compact negotiations, would be Eurobonds. ConclusionsWhile the issue of constitutional basis for the bailouts is largely settled, the implementation and future remain contested and unclear. The debate over how to handle the economic struggles of the smaller economies reflects serious worries about the precedent that this could have on the larger EU member states, like Spain and Italy. While the Pringle court was able to give constitutional legitimacy to the ESM, and resolve direct conflict with Art. 125, the concerns about moral hazard created by bailouts still looms, preventing a true consensus on how these macroeconomic issues should be addressed going forward. Although Greece has presented the most vocal opposition to the conditions imposed under the MoUs, Ireland, Portugal, and Cyprus are all subject to MoUs, and could elect similarly dissatisfied leaders to challenge their own economic condition under their respective bailout packages. Despite the initial difficulty of bringing challenges under the social constitution, as the effects of the austerity policies imposed by MoUs drags on the need for such challenges may provide the impetus for member state governments and EU institutions alike to bring constitutional challenges. While Pringle, and the social constitution challenges have been this far ineffective in challenging the bail-out provisions, the SYRIZA party seats in the European Parliament could offer a political challenge as the alternative to the exhausted legal challenges.

Glossary of Abbreviations[footnoteRef:77]: [77: See Wikipedia: List of Acronyms Associated with the Eurozone Crisis (http://en.wikipedia.org/wiki/List_of_acronyms_associated_with_the_Eurozone_crisis)]

ESM European Stability Mechanism Combined provisions of EFSE and EFSM treaties after their expirationEFSF European Financial Stability FacilityEFSM European Financial Stabilization MechanismECSC European Coal and Steel Community MoUs Memoranda of UnderstandingTFEU Treaty on the Functioning Europe, Maastricht Treaty and the Lisbon Treaty consolidation and amendmentsTEU Treaty of the European Union, Rome Treaty and the Lisbon Treaty consolidation and amendmentsTSCG Treaty on Stability Coordination and GovernanceTroika International Monetary Fund, European Central Bank, European Commission