legal developments in the economicand monetary

LEGAL DEVELOPMENTS INTHE ECONOMICAND MONETARYUNION DURINGTHE DEBT CRISIS:THE MECHANISMS OFFINANCIALASSISTANCE

ALBERTO DE GREGORIO MERINO*

1. Introduction

The Economic and Monetary Union has gone through an important process oftransformation in the last two years, pursuant to the deep debt crisis that hasaffected some euro area Member States since early 2010.

The Union and its Member States have undertaken a twofold approach toface the debt crisis: on the one hand, they have provided financial assistance tothe Member States suffering problems of solvency and liquidity, devising anumber of mechanisms that have become ever more complex. On the otherhand, they have reinforced the economic governance of the Union, throughinstruments based on the Treaties – notably the so called “six pack”: six legalacts adopted in November 2011, that aim at improving the coordination of theeconomic policies of the Member States,1 to be supplemented by the “twopack”, a Brussels minted expression designating two legislative proposalstabled by the Commission in November 2011 – which are under discussion atthe moment of drafting this article.2 Economic governance has been also

* Member of the Legal Service, Council of the European Union.The views expressed by theauthor are strictly personal and do not engage the institution for which he works.

1. Regulation EU No 1173/2011 of the European Parliament and of the Council of 16 Nov.2011 on the effective enforcement of budgetary surveillance in the euro area, O.J. 2011, L306/1; Regulation EU No 1174/2011 of the European Parliament and of the Council of 16 Nov.2011 on enforcement measures to correct excessive macroeconomic imbalances in the euroarea, O.J. 2011, L 306/8; Regulation (EU) No 1175/2011 of the European Parliament and of theCouncil of 16 Nov. 2011 amending Council Regulation (EC) No 1466/97 on the strengtheningof the surveillance of budgetary positions and the surveillance and coordination of economicpolicies, O.J. 2011, L 306/12; Regulation (EU) No 1176/2011 of the European Parliament andof the Council of 16 Nov. 2011 on the prevention and correction of macroeconomic imbalances,O.J. 2011, L 306/25; Council Regulation (EU) No 1177/2011 of 8 Nov. 2011 amendingRegulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessivedeficit procedure, O.J. 2011, L 306/33; Council Directive 2011/85/EU of 8 Nov. 2011 onrequirements for budgetary frameworks of the Member States, O.J. 2011, L 306/41.

2. See proposal for a Regulation of the European Parliament and of the Council on commonprovisions for monitoring and assessing draft budgetary plans and ensuring the correction ofexcessive deficit of the Member States in the euro area (COM(2011)821 final) and proposal fora Regulation of the European Parliament and of the Council on the strengthening of economic

Common Market Law Review 49: 1613–1646, 2012.© 2012 Kluwer Law International. Printed in the United Kingdom.

reinforced through instruments not rooted in the EU Treaties, of a political orof an international law nature, the “Euro plus pact”3 and the Treaty onStability, Coordination and Governance (the TSCG),4 respectively. Financialassistance and strengthened economic governance are the two pillars of thenew architecture of the economic and monetary union and both form part of acomprehensive resolution effort of the Union and its Member States.

Such developments are of a very high importance from an institutional andconstitutional point of view. Actions undertaken in the field of financialassistance and strengthened economic governance have far-reachingconsequences in economic and financial terms, and one could say that they arethe embryo – if not the foetus – of a new conception of the EU where thebudgetary co-responsibility of its Member States – or at least those whosecurrency is the euro – might lead to a substantially higher level of politicalintegration.

Mechanisms of financial assistance and the reinforcement of economicgovernance have been done through the means of Union law and throughintergovernmental acts outside the Union, in this latter case to the extent thatthe EU Treaties did not contain the necessary powers to tackle the crisis.

The present article examines the instruments of financial assistanceundertaken by the Union and by its Member States, addressing the mostimportant legal aspects thereof. Our examination will however not coverthe second part of the resolution efforts referred to above, namely thestrengthening of the mechanisms of economic governance withinthe economic union. We will thus not deal with the “six-pack” or with theenvisaged “two-pack”, nor will we examine the TSCG. One cannot howeverlose sight of the fact that the two responses to the crisis, financial assistanceand economic governance, go hand in hand.5 They are the two rails of the trainof the Economic and Monetary Union that run parallel. Developments in the

and budgetary surveillance of Member States experiencing or threatened with seriousdifficulties with respect to their financial stability in the euro area (COM(2011)819 final). Theplenary of the European Parliament has adopted on 13 June 2012 its amendments on the twoCommission’s proposals (see respectively Parliament documents A7-0172/2012 andT7-0242/2012).

3. The euro plus pact has been signed by the euro area Member States, together withBulgaria, Denmark, Latvia, Lithuania, Poland and Romania. See the text of the euro plus pactas Annex I to the conclusions of the European Council of 24/25 March 2011, doc. EUCO10/1/11, REV 1.

4. The TSCG was signed on 2 March 2012 in the margins of the European Council; it wassigned by all the Member States of the Union bar the Czech Republic and the UK. At themoment of drafting this article it is still subject to the ratification of the signatory parties. Seethe text of the TSCG at <european-council.europa.eu/media/639235/st00tscg26_en12.pdf>.

5. See e.g. Adamski, “National power games and structural failures in the Europeanmacroeconomic governance”, 49 CML Rev. (2012), 1319–1364.

CML Rev. 20121614 de Gregorio Merino

chapter of assistance are – and will be – commensurate to paralleldevelopments in the chapter of governance. The deepening in the assistanceeffort is supplemented by a strengthening of the budgetary and economicco-responsibility of Member States.

We will follow a method of “impressionism and analysis”: we will firstdescribe each of the mechanisms of financial assistance devised by the Unionand its Member States, with thin brush strokes, outlining then the mostimportant aspects of their functioning and operations, as well as the financialand political context where they appeared. We will afterwards analyse themost significant legal issues and problems that the creation and application ofthe different mechanisms have entailed. These are their compatibility with theno-bailout clause, the limited revision of the Treaties to include the newArticle 136(3) TFEU, the use of Article 122(2) TFEU as the only legal basisunder the Treaties to provide financial assistance, the relationship between theintergovernmental mechanisms of assistance and the law of the Union, and thejudgment of 7 September 2011 of the German Constitutional Court on thecompatibility of mechanisms of assistance with the German Constitution.

2. The mechanisms of financial assistance:A description

The different mechanisms of financial assistance respond to a “law ofevolution” rather to a preconceived plan. Their architecture follows an“incremental” approach. This is logical when one is navigating in unchartedwaters. Each new instrument has been designed in an ever more sophisticatedway than the previous one. Political leaders and economic, financial and legalexperts have been pushed to design increasingly complex instruments capableof facing the challenges of the debt crisis.

Our examination of the different instruments of assistance will be made intheir chronological order of creation. They are four: the Greek loan facilityagreement, the European Financial Stability Mechanism, the EuropeanFinancial Stability Facility and the European Stability Mechanism. We willhowever not address the measures of intervention adopted by the EuropeanCentral Bank (ECB) during the debt crisis.6

6. Such as the suspension of the minimum rating threshold for collateral requirementsrelated to the eurosystem’s credit operations for marketable instruments issued or guaranteedby the Greek government and, notably, the ECB’s securities market programme on the basis ofwhich it has acquired huge amounts of debt issued by some Member States (see Decision2010/5 of the ECB of 14 March 2010 establishing a securities market programme, O.J. 2010, L124/8).

Financial assistance 1615

2.1. The Greek loan facility agreement

In October 2009, with the change of government in Greece, the Greekauthorities communicated to Eurostat that their estimated deficit for 2009 wasnot 3.7 percent of its GDP – as notified in spring of the same year – but 12.5percent of the GDP.7

The recognition by the Greek authorities that they had provided inaccuratedata sowed a huge mistrust in the markets on the solvency and sustainability ofthe public finances of Greece: during the first months of 2010 the interest rateof Greek bonds increased to levels comparable to those of emergingeconomies such as India, Ecuador or the Philippines (the interest rate of the2-year bonds was 15% and of the 5-year bonds 10.6%). At the end of April2010 the credit rating agency Standard & Poors downgraded the rating ofGreek long term bonds from BBB- to BB+ (considered as junk bond).8 Itbecame evident that Greece could not continue financing itself on the marketat sustainable interest rates.

In the margins of an informal meeting of the Heads of State or Governmentof the European Union on 11 February 2010, the euro area Member Statesdeclared their intention to take determined and coordinated action, if needed,to safeguard financial stability in the euro area as a whole, whilst recalling thatthe Greek Government had not requested any financial support.9 Shortlyafterwards, on 25 March 2010, the Heads of State or Government of the euroarea met again but this time to agree on the essential features of a mechanismof assistance to be granted to Greece should it decide to ask for it. Theydecided to contribute by means of “coordinated bilateral loans” that wouldsupplement assistance to be granted by the International Monetary Fund (theIMF). Any decision on the disbursement on the loan would be decided byunanimity of the euro area Member States and subject to “strictconditionality”. The Heads of State or Government recalled that interest ratesunder the facility should be “non-concessional i.e. not containing any subsidyelement”.10 Eventually, Slovakia decided not to participate in the pool ofbilateral loans. Assistance was officially requested by Greece on 23 April2010.

7. See Report of the Commission of 8 Jan. 2010 on Greek Government deficit and debtstatistics, COM(2010) 1 final.

8. See <www.reuters.com/article/2010/04/27/us-greece-idUSLDE63P0LU20100427>.9. See text of the statement at <www.consilium.europa.eu/uedocs/cms_data/docs/

pressdata/en/ec/112856.pdf>.10. See text of the statement of the Heads of State or Government of the euro area of 25

March 2010 at <www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/113563.pdf>.


A Task Force of the euro area lender Member States was organizedimmediately afterwards and worked with the objective of devising the basiccharacteristics and practical arrangements of the pool of bilateral loans. Itstotal amount was fixed at 80 billion euros – the IMF further contributing witha loan of 30 billion euros.

The loan facility to Greece is founded on two agreements signed on 8 May2010.11 First, an inter-creditors agreement among the lenders, where certainarrangements on their mutual relationship are defined, notably the totalamount of the loans, their respective contribution to the pool of loans –calculated on the basis of their ECB capital subscription key -, and theprocedure to authorize the disbursement of the different instalments of theloans – to be agreed by unanimity of all the lenders after having determinedthat Greece has complied with the conditionality measures agreed. Second, aloan facility agreement was signed between the lender Member States andGreece where the terms and conditions of the 80 billion euro pooled loans arelaid down (including the procedure for drawdown and net disbursement, thecalculation of the interest rate, costs and expenses and the repayments by theborrower).12 Notably, the loan facility agreement introduced provisions onconditionality: the release of the different disbursements would be subject tocompliance by Greece with a memorandum of understanding containing anumber of economic policy measures related to its budgetary discipline.

After the activation of the loan facility to Greece, it became evident thatofficial assistance to Greece would not be enough for the country to get backonto the path of debt sustainability. The participation of the private sectorthrough an ordered restructuring of the debt it held was needed. Themodalities of involvement of the private sector in the Greek crisis were agreedat the very important summit of the Heads of State or Government of 21 July2011, after negotiations with the Institute of International Finance (a globalbank association).13

The Heads of State or Government declared however that the private sectorinvolvement in the Greek crisis was an “exceptional and unique solution” that

11. The text of the two agreements may be found in this link, <www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/30/2d/05/302d058d2ca156bc35b0e268f9446a71c92782b9/application/pdf/sn_kyrwtikoimf_2010_06_04_A.pdf>.

12. Germany was however not party to the loan facility Agreement. The German financialinstitution “Kredietanstalt für Wiederaufbau”, KfW, acted instead as Lender on behalf ofGermany, in the “public interest, subject to the instructions of and with the benefit of theguarantee of the Federal Republic of Germany”. KfW is a German financial institution of publiclaw, regulated by the German Act of 5 Nov. 1948, whose capital is subscribed jointly by theFederal Republic of Germany and the German Länder.

13. See statement of the Heads of State or Government of the euro area and EU Institutionsof 21 July 2011 at <www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/123978.pdf>.


could not be extrapolated to any other operation of assistance. It was essentialthat the participation of the private sector was made on a voluntary basis,otherwise the restructuring of the Greek debt could be seen by credit ratingagencies as a credit event or a default.14 Under the plan endorsed at the 21 Julysummit, banks and insurance companies were invited to voluntarily swap theirGreek government bonds for longer maturity paper at lower interest rates. Therestructuring of the Greek public debt with the private sector was successfullycompleted in the first week of March 2012 with a haircut of around 53.5percent of the face value of Greek bonds.

2.2. The European Financial Stability Mechanism (EFSM) and theEuropean Financial Stability Facility (EFSF)

During the course of 2010, it also became clear that the public debt crisis wasnot confined to Greece. The markets begun to mistrust the creditworthiness ofcountries such as Ireland and Portugal – and to some extent Spain and Italy –and exercised huge pressure on their debt. The Heads of State or Governmentof the euro area held an extraordinary meeting on 7 May 2010 where theystated that “taking into account the exceptional circumstances, theCommission will propose a European stabilization mechanism to preservefinancial stability in Europe. It will be submitted for decision to anextraordinary ECOFIN meeting that the Spanish presidency will convene thisSunday May 9th”.15

2.2.1. The European Financial Stability Mechanism (the EFSM)The Commission services worked against the clock on a proposal for aCouncil Regulation establishing a European financial stabilizationmechanism, which was put on the table of the hastily convened Councilmeeting of 9 May 2010.16 It was based on Article 122(2) TFEU. The legalbasis will be examined in detail below. The proposal was adopted asRegulation 407/2010, establishing a European financial stabilizationmechanism (EFSM).17 Under this mechanism, the Council may decide byqualified majority on a proposal from the Commission to grant assistance toMember States in the form of loans or credit lines, with a view to preservingthe stability, unity and integrity of the euro area as a whole (seeArts. 1 and 2(1)

14. A credit event could have triggered the feared credit default swaps and made it verydifficult for the ECB to accept Greek debt as collateral for its liquidity injections to the Greekfinancial sector.

15. See text of the statement at <ec.europa.eu/commission_2010-2014/president/news/speeches-statements/pdf/114295.pdf>.

16. COM(2010)2010 final.17. O.J. 2010, L 189/1.


of Regulation 407/2010). Assistance is to be granted subject to a number ofeconomic policy conditions, that the Member State in question must respect inorder to receive the loans or credit lines (see Art. 4 of Regulation 407/2010).

As the EFSM is a Union instrument, the amount of loans or credit lines to begranted to Member States is limited to the margin available under the ownresources ceiling for payment appropriations – see Article 2(2) of Regulation407/2010. In other words, the total amount for financial assistance under theEFSM is limited to the moneys available within the budget of the Union,which at the moment of adopting the Regulation was around 60 billion euro.18

However, 60 billion euro was a close to negligible amount for a mechanismthat should be perceived by the markets as a credible and powerful firewallcapable of assisting some larger economies of the euro area, which were in the“radar of the markets”. It was estimated that an envelope of around 500 billioneuro would be needed for a last resort mechanism to be effective.

Hence, in the course of the 9 May 2010 Council, the euro area MemberStates decided to act outside the Treaties and create an intergovernmentalmechanism, a Special Purpose Vehicle, eventually named the Europeanfinancial stability facility (the EFSF).19

2.2.2. The European Financial Stability Facility (the EFSF)The EFSF has been incorporated as a public company (Société Anonyme)under Luxembourg law. Its shareholders are the euro area Member States,which may grant assistance up to a limit of 440 billion euro. It has beenconceived as a temporary mechanism that expires on 30 June 2013. It financesits activities by issuing bonds in the markets for which the shareholders issueseveral guarantees – each guarantor being thus liable for the part that itguarantees and not for the totality of the debts of the EFSF. Guaranteecommitments of each party are calculated on the basis of their capitalsubscription key in the ECB. At the beginning of its activities, guaranteecommitments by the participating Member States were equivalent to the totallending capacity of the EFSF (namely 440 billion euro), though they weresubsequently increased, as explained below. The EFSF grants assistance withthe proceeds of the bonds it issues. Again, the granting of assistance is

18. The Commission proposal included however a provision that aimed at permitting theEFSM to grant assistance above the Union budget ceiling (see Art. 3 of the Commissionproposal). Loans or credits above the ceiling would have been guaranteed directly by the euroarea Member States. During the 9 May 2010 Council this provision disappeared from the textfinally adopted.

19. See Council conclusions at document 9602/10 and Decision of the representatives ofthe governments of the Euro area Member States meeting within the Council of the EU, atdocument 9614/10.


contingent upon compliance by the beneficiary Member State with certaineconomic policy measures laid down in the framework of the EFSF.

The euro area Member States concluded on 8 June 2010 a “frameworkagreement” with the EFSF, where the basic arrangements for the guaranteesgranted by the Member States as well as for the loans and for the procedure togrant assistance are laid down – including pricing and conditionality.Assistance is to be agreed by the unanimity of all the euro area Member States(to the logical exception of the beneficiary State).20

Early experience showed however some pitfalls in the functioning of theEFSF: first, it could not deploy all its muscle of 440 billion euro mainlybecause only some of the euro area Member States that guarantee itstransactions had a AAA rating;21 second, the EFSF was conceived with a verylimited assistance “toolbox”. At its inception it could only grant loans. It didnot have at its disposal other means of assistance that would certainlycontribute to stabilizing the markets, such as public debt purchases in theprimary and secondary markets.

Against this background, the Heads of State or Government of the euro areadecided on 21 July 2011 to enlarge the EFSF’s scope of action throughinterventions in the primary and secondary markets, precautionaryprogrammes, and the financing of recapitalization of financial institutionsthrough loans to governments.22 In addition, on 11 March 2011 they decidedto make the EFSF lending capacity of 440 billion euro fully effective throughan increase of the guarantee commitments by the participating Member Statesfrom the initial 440 billion euros to 780 billion euro.23

Up to now, two Member States, Ireland and Portugal, have been grantedassistance under the EFSM and the EFSF. Moreover, a second programme for

20. See the text of the framework agreement at <www.efsf.europa.eu/attachments/20111019_efsf_framework_agreement_en.pdf>.

21. As explained above, the EFSF finances its loans through the issuance of bonds. If EFSFbonds are to have the highest possible rating (AAA) – and this is a financial must -, it isnecessary that euro area Member States guaranteeing EFSF bonds also enjoy that highestrating.This is however only the case of a limited number of euro area Member States.Therefore,at its inception the EFSF could only issue bonds with the highest rating up to a proportion thatwas covered by the AAA Member States (approximately 250 billion euros, or half of the totalloans it might grant).

22. See statement of the Heads of State or Government of the euro area and EU Institutionsof 21 July 2011 at <www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/123978.pdf>.

23. See conclusions of the Heads of State or Government of the euro area of 11 March 2011at <www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/119809.pdf>.


assistance to Greece, in addition to the loan facility agreement referred toabove, has also been agreed under the EFSF.24

2.3. The European Stability Mechanism (the ESM)

The establishment of the EFSF and of the EFSM contributed certainly tocalming the markets during the summer of 2010. However, in many capitals itwas clear that the EFSF and the EFSM would only buy time. Marketsperceived the mechanism as a simple conjunctural remedy. A solution of apermanent and structural nature, that could be seen as forming part of thesystem – a kind of European Monetary Fund – was needed.

This is why in the autumn of 2010, the European Council agreed on the needto establish a “permanent crisis mechanism”, of an intergovernmental nature,to safeguard the financial stability of the euro area as a whole.25 The mainfeatures of the new mechanism were agreed shortly afterwards at theEuropean Council of 16–17 December 2010,26,27 together with a simplifiedamendment of the Treaties adding a provision – Article 136(3) TFEU – thatdeclares the power of euro area Member States to constitute such a permanentmechanism. This Treaty amendment will be explored later.

The permanent crisis mechanism has been called the “European StabilityMechanism” (the ESM). It was negotiated during almost one year as a Treatyof international public law whose signatories are the euro area Member States.Although euro area finance ministers signed it on 11 July 2011, the ESMTreaty was reopened for negotiation immediately afterwards to incorporatenew provisions that the development of the crisis made necessary. Those newprovisions enlarged the type of instruments of financial assistance to whichthe ESM could have recourse (as had been the case for the EFSF, as explained

24. Ireland has a 3 year programme with a total of 85 billion euro, of which the EFSF isscheduled to finance 17.7 billion euro. The remainder is to be financed by a 17.5 billioncontribution from Ireland itself, 22.5 billion euro from the IMF, 22.5 billion euro from theEFSM and bilateral loans from the UK (3.8 billion euro), Denmark (0.4 billion euro) andSweden (0.6 billion euro). Portugal has a programme for 3 years that amounts to 78 billion euro,of which the EFSF finances 26 billion euro. The second programme for Greece amounts to 109billion euro to be financed by the EFSF and the IMF, with private sector involvement.

25. See conclusions of the European Council of 30 Nov. 2010, doc. No EUCO 25/1/10,REV 1, at <www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/117496.pdf>.

26. See Annex II to the conclusions of the European Council of 16–17 Nov. 2010, doc.EUCO 30/1/2010 REV 1, at <www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/118578.pdf>.

27. See Jansen, “The European Financial Stability Facility (EFSF) and the EuropeanStability Mechanism (ESM) – A legal overview”, 4 Euredia: Revue Européenne de droitbancaire et financier (2011), 417 et seq.


above).28 It was eventually signed on 2 February 2012, and at the moment ofdrafting this article it is subject to the ratification of the 17 euro area MemberStates.29

Until the complete rundown of the EFSF, the consolidated ESM and EFSFlending capacity may not exceed 500 billion euro, though euro area ministersof finance agreed to raise it to 700 billion euro in the margins of the Eurogroupmeeting of 30 March 2012.30 The financial and operational design of the ESMTreaty is largely inspired by the EFSF: the ESM finances its activities throughthe proceeds resulting from the issuance from bonds in the markets; it grantsassistance subject to compliance with strict conditionality; the different typesof assistance it may grant are identical to those available under the EFSF (i.e.,precautionary assistance, assistance for the re-capitalization of financialinstitutions, loans, primary market interventions and secondary marketinterventions: see Arts. 14 to 18 of the ESM Treaty).

There are however some important differences between the EFSF and theESM:

First, as referred to above, the ESM is constituted on a permanent basis. TheESM is not a mere public company, unlike the EFSF (or a “special purposevehicle”, name of commercial bias with which the EFSF was initiallybaptized), but an international organization – an international financialinstitution – endowed with governing bodies with the power to adopt legallybinding decisions.31

Second, ESM transactions are not covered by guarantee commitmentsissued by its members, as in the case of the EFSF, but by the capital of the

28. See statement of the Heads of State or Government of the euro area and EU Institutionsof 21 July 2011 at <www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/123978.pdf>, point 8.

29. See the text of the ESM Treaty at <www.european-council.europa.eu/media/582311/05-tesm2.en12.pdf>.

30. See recital (6) of the preamble to the ESM Treaty andArt. 41(2) of the Treaty. The Boardof Governors of the ESM has however the capacity to review and amend the maximum lendingcapacity of 500 billion euro, in accordance with Art. 10(1) of the ESM Treaty. See statement ofthe Eurogroup of 30 March 2012 on the increase of the total lending capacity at<www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/129381.pdf>.

31. These are: the Board of Governors, where ministers of the Contracting Parties arerepresented, which adopts the most important decisions under the ESM, such as the activationof financial assistance; the Board of Directors, in charge of the day to day management of theESM; and the managing director, who chairs the meetings of the Board of Directors andconducts the current business of the ESM under the direction of the Board of Directors (seeArts. 4 to 7 ESM Treaty).


ESM, which amounts to 700 billion euros, distributed among the members onthe basis of their key for subscription of the ECB’s capital.32

Third, the ESM incorporates some mechanisms of flexibility for itsmanagement. On the one hand, certain provisions aim at facilitating itsdecision making: although the most important ESM decisions are adopted by“mutual agreement” – equivalent to unanimity under the EU Treaties -, undercertain circumstances where assistance must be granted urgently, decisionsmay be adopted under a super-qualified majority of 85 percent of the votescast.33 On the other hand, and very importantly, the Board of Governors isentitled to amend certain provisions of the ESM Treaty through a simplifiedprocedure – thus obviating the need to submit the amended Treaty to a fullprocess of ratification. This is notably the case for changes to the authorizedcapital stock and to the maximum lending volume as well as the review of thetype of instruments of assistance available to the ESM – see Articles 10 and 19of the ESM Treaty respectively.

Fourth, the parties to the ESM Treaty have recognized that ESM loans enjoypreferred creditor status vis-à-vis the other debts contracted by the beneficiaryState, while accepting preferred creditor status of the IMF loans vis-à-vis theESM.34

Finally, the Heads of State and Government of the euro area have agreed on29 June 2012 that when an effective single supervisory mechanism isestablished, involving the ECB, the ESM may have the possibility to

32. The 700 billion euro capital stock of the ESM is divided into paid-in shares and callableshares. The initial total aggregate value of paid-up shares amounts to 80 billion euro. See Arts.8 to 11 ESM Treaty.

33. See Art. 4(4) of the ESM Treaty. In accordance with Art. 4(7) of the Treaty, the votingrights of each ESM Member shall be equal to the number of shares allocated to it in theauthorized capital stock of the ESM. This flexibility mechanism was incorporated in the ESMTreaty after some negative experiences with the unanimity rule under the EFSF, where theinternal political disputes in one Member State – Slovakia – were about to veto the whole EFSFamendment procedure.

34. The preferred creditor status of the ESM has been recognized by the contracting partiesin the preamble to the ESMTreaty as a matter of fact (see recital 13 thereof), mirroring to a largeextent the practice of the IMF. The IMF claims to have the status of privileged creditor, thoughthe IMF’s Articles of Agreement do not confer on it such status, nor is there any principle orgeneral rule in public international law which confers on international organizations the qualityof preferred creditors. In the case of the IMF, the status of preferred creditor has been acquiredas a matter of fact. Assistance is granted by the IMF to the beneficiary State on theunderstanding that its credits are senior vis-à-vis any other outstanding credits held against suchState. It is in the members’ interest to be in good standing with the IMF if they want to beeligible for assistance (see Art. XXVI, section 2(a) of the IMF’s Articles of Agreement).


recapitalize banks directly, without going through the means of a loan to theESM Member concerned.35

3. Analysis of certain legal issues related to the mechanisms offinancial assistance

A number of legal issues and problems have appeared during the making of themechanisms described above. The most significant ones are the following:

– the compatibility of the mechanisms of assistance with Article 125 TFEU– the “no-bailout” clause – and new Article 136(3) TFEU;

– the use of Article 122(2) TFEU as a legal basis to provide financialassistance to Member States suffering a debt crisis;

– the relationship between the intergovernmental mechanisms of assistanceand the law of the Union;

– the judgment of the German Constitutional Court of 7 September 2011on the participation of Germany in the Greek loan facility and in theEFSF.

35. See text of the statement of the euro area summit of 29 June 2012 at<consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131359.pdf>. Under Art. 15 ofthe ESM Treaty, which envisages the financial assistance for the recapitalization of financialinstitutions, such assistance is to be channelled through loans to the ESM Member concerned.This has created huge financial and political problems with Spain, where the recapitalizationneeds of its financing sector could go up to 100 billion euros. The fact that the recapitalizationis operated through loans to Spain could fatally increase its public debt, and hence furtherdeteriorate its financing conditions in the markets. The possibility for the ESM to directlyrecapitalize financial institutions aims at avoiding this conundrum.This will indeed make of theESM not only a budgetary fund but also a bank rescue fund. Of course, in the same manner thatbudgetary assistance is to be accompanied by enhanced surveillance and conditionality over thebeneficiary country, banking assistance has to be accompanied by a system of prudentialsupervision with powers to oversee financial institutions. This is why the statement of 29 June2012 makes direct recapitalization contingent upon the establishment of a single supervisor forbanks in the euro area, through Art. 127(6) TFEU, which enables the Council to confer on theECB specific tasks concerning policies relating to the prudential supervision of creditinstitutions and other financial institutions with the exception of insurance undertakings. Allthis connects with the report of the president of the European Council “Towards a genuineEconomic and Monetary Union”, presented during the European Council of 28/29 June 2012,that advises the establishment of an “integrated supervision” and a “European resolutionscheme”. See text of the report at <www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131201.pdf>.


3.1. The compatibility of the mechanisms of assistance with Article 125TFEU – the “no-bailout” clause – and new Article 136(3) TFEU

3.1.1. The interpretation of Article 125 TFEUArticle 125(1) TFEU reads as follows,

“The Union shall not be liable for or assume the commitments of centralgovernments, regional, local or other public authorities, other bodiesgoverned by public law, or public undertakings of any Member State,without prejudice to mutual financial guarantees for the joint execution ofa specific project. A Member State shall not be liable for or assume thecommitments of central governments, regional, local or other publicauthorities, other bodies governed by public law, or public undertakings ofanother Member State, without prejudice to mutual financial guaranteesfor the joint execution of a specific project”.

Article 125(1) TFEU is part of Chapter I of Title VIII of the TFEU, oneconomic policy. It is closely linked toArticles 123 and 124TFEU.Article 123TFEU prevents central banks from granting overdraft facilities or any othertype of credit facility to the Union or to Member States, whilst Article 124TFEU prohibits measures establishing privileged access by the Union orMember States to financial institutions. As with those two provisions, the aimof Article 125(1) TFEU is to ensure monetary stability: it aims to forceMember States to comply with their budgetary discipline by following thelogic of the markets when incurring public debt.36

36. The Monetary Committee, working on the preparation of the Treaty of Maastricht,where the no-bailout clause was incorporated, stated in a non-published report of 19 July 1990:“Budgetary discipline is a necessary condition for stable prices and a stable currency. It musttherefore be one of the foundation stones of EMU. The Treaty should lay down -(I) that monetary financing must be excluded,(II) that neither the other Member States nor the Community stand behind any Member State’sdebts,(III) that excessive deficits must be avoided….The Member States will follow budgetary policies which respect the principles of budgetarydiscipline.… these principles include the following.(I) Monetary and compulsory financing of public deficits should be excluded. This implies thatgovernment should have no access to central bank financing and that financial institutionsshould not be obliged to acquire government paper for the purpose of financing the publicsector deficit.….(II) Each Member State must bear the responsibility for its own debt management and mustensure that it is in a position to honour its engagements. It must be clear that neither theCommunity nor the other Member States stand behind a Member State’s debts. This ‘nobail-out’ rule would ensure that the financial markets exercise a degree of discipline on anyMember State pursuing unsound budgetary policies, by imposing differential terms on its paper,and ultimately by refusing to lend.


Coming immediately before the excessive deficit procedure (Art. 126TFEU), the prohibition under Article 125(1) TFEU rests on the principle thatMember States are responsible for their own budgets. Article 126 TFEU laysdown the obligation to avoid excessive deficit as well as the procedure fordealing with such problems. The bailing out of one Member State by another,or by the Union, would indeed be inconsistent with Article 126 TFEU.

The compatibility of the EFSM with Article 125 TFEU will be examinedlater on, in conjunction with the analysis of Article 122(2) TFEU, i.e. the legalbasis on which the EFSM was constituted. But, what about the other threeintergovernmental instruments?Ratione personae, the prohibition under Article 125 TFEU is addressed to

the Union and to the Member States. The Greek loan facility falls clearlywithin the personal scope of Article 125 TFEU, as it consists of a pool ofbilateral loans granted directly by Member States. On the other hand, the factthat both the EFSF and the ESM are autonomous legal entities, endowed withlegal personality, distinct from the participating Member States does not makethem fall outside the scope of Article 125 TFEU, as they constitute no morethan an emanation of the participating Member States, which remain theirowners. The two mechanisms replace the Member States for the sole purposesof managing a collective assistance that they have agreed to undertake. TheEFSF and the ESM can be assimilated to the “Member States” in the sense ofArticle 125 TFEU and fall then within its scope of application rationepersonae. Otherwise, the Member States could interpose legal entities inwhatever form in order to circumvent the application of the no-bailout clause.

Does intergovernmental assistance fall within this prohibition rationemateriae? Does the granting of loans and credits under these mechanismsamount to “being liable or assuming the commitments” of the beneficiaryMember State within the meaning of Article 125 TFEU? At first sight onecould interpretArticle 125TFEU as prohibiting, any kind of financial support,including of course the financial assistance described above.37 Arguably,

(III) Excessive deficits must be avoided, even if there is no monetary financing. This mustbecome a key principle of EMU. They are likely to be associated with an economic policystance which may jeopardize the stability-oriented monetary policy and reach beyond nationalfrontiers. They may force partner countries to alter their policy mix, and monetary authorities toraise interest rates.” (emphasis added).

37. See in this sense Ruffert, “The European debt crisis and European Union law”, 48 CMLRev. (2011), 1777, Fassbender, “Der europäische ‘Stabilisierungsmechanismus’ im Lichte vonUnionsrecht und deutschem Verfassungsrecht”, 13 Neue Zeitschrift für Verwaltungsrecht(2010), 800; Jeck, Van Roosebeke and Vosswinkel, “Keinen euro nach Athen tragen – Warumein Bail-out Griechenlands ökonomisch und juristisch unzulässig ist”, (2012) Centrum fürEuropaïsche Politik (CEP), 12; Smits, The European Central Bank. Institutional aspects(Kluwer Law International, 1997), p. 77; Bandilla, “Das Recht der EU II, Stand: Januar 2000,Art. 103”, edited by Grabitz and Hilf.


however, a different view can be maintained. My interpretation of Article 125TFEU takes into account its letter, context and purpose which, as recalledpreviously, is to ensure budgetary discipline by forcing Member States tofollow the logic of the market when incurring public debt.

Article 125(1) TFEU prohibits the Union or another Member State fromguaranteeing the debt of any Member State. Guarantees would amount to“being liable for or assuming the commitments” of the guaranteed party. Anydirect relationship of guarantee with a Member State’s creditors would breachthe no-bailout clause. However, this prohibition does not appear to extend totypes of financial assistance, such as loans or credits, which are not includedin the letter of Article 125(1) TFEU, where the beneficiary of the assistance isheld to pay them back – otherwise assistance would genuinely consist of aguarantee scheme in favour of the recipient Member State. In support of theinterpretation that loans or credits are not included in the letter of Article125(1) TFEU, one could note the difference in wording between Articles 125and 123TFEU, which prohibits “Overdraft facilities or any other type of creditfacility…” being guaranteed by the ECB or by central banks of the MemberStates.The prohibition of monetary financing under Article 123 TFEU refersexpressly to loan or credit schemes and is made in stricter terms that theprohibition of financing by the Union or its Member States under Article 125TFEU.

But not all kinds of loans would be compatible with Article 125 TFEU:loans must not defeat the purpose of budgetary discipline that the provision isintended to ensure. The fact that under the three intergovernmentalmechanisms the granting of loans or credits is conditioned to the adoption andrespect of measures of strict budgetary adjustment by the beneficiary MemberState is an evident indication that assistance pursues, and does not betray, theaim and spirit of Article 125(1) TFEU.38

To put it in a different way, whilst it is true that loans and credits under themechanisms aim at substituting the finance that the markets have not been ina position to provide, such assistance is intended to bringing about thebudgetary discipline that the logic of the markets – and the Stability andGrowth Pact – was not capable to ensuring.39

38. See in this sense Middleton, “Not bailing out… Legal aspects of the 2010 sovereign debtcrisis”, in Aman for allTreaties. Liber amicorum en l’honneur de Jean-Claude Piris (Bruylant,2011), pp. 421 et seq.

39. Assistance consisting in the purchase of bonds in the primary and secondary markets, asthe case may be under the EFSF and the ESM, can be assimilated to loan and credit transactions.Actually, bonds, where the issuing State has the obligation to pay the principal and interests atmaturity, may be regarded as securitized loans, to which the above reasoning of compatibilitywith Art. 125 TFEU would be fully applicable.


3.1.2. The simplified amendment of the Treaties: New Article 136(3)TFEU in the light of Article 125 TFEU

The interpretation of Article 125 TFEU cannot be separated from thesimplified amendment procedure of theTreaties, whereby a new paragraph (3)was added to Article 136 TFEU. Actually, this new provision reflects theinterpretation of Article 125 TFEU advanced above.

The amendment takes place in the context of the debate on the compatibilityof a permanent mechanism of financial assistance withArticle 125 TFEU. TheGerman participation in the Greek rescue package and in the EFSF had beenthe object of actions by German individuals before the German ConstitutionalCourt (this is the object of analysis below). Among other arguments, theplaintiffs in these cases claimed that by granting loans to Greece and byparticipating in the EFSF, Germany had breached the principles of monetaryand price stability on which the monetary union is based. For Germany, therespect of the principle of monetary stability (of which Art. 125 TFEU is anevident expression) was an essential condition for its participation in themonetary union. The monetary union should not become a “transfer union”.40

In the midst of the political discussions on a permanent mechanism ofassistance – that eventually became the ESM – the need to introduce aprovision in the Treaties that guaranteed the compatibility of such amechanism with Article 125 TFEU was specially felt. However, any suchmodification could not alter the scope and extent of the prohibition under thatArticle. From a German legal and political perspective, Article 125 TFEU isan essential provision for the monetary union to exist, whose contours areaccordingly rather untouchable.

The European Council of 16–17 December 2010 agreed on theestablishment of the ESM together with an amendment to the Treaties,pursuant to the simplified amendment procedure laid down in Article 48(6)TEU, whereby the Treaty can be amended by a decision of the EuropeanCouncil, without having recourse to a Convention and to an IntergovernmentalConference.41 The entry into force of the decision of the European Councildepends on the approval of the decision by all the 27 Member States. The

40. See judgment of the German Constitutional Court of 12 Oct. 1993 on the ratification ofthe Treaty of Maastricht by Germany, Cases 2 BvR 2134/92 & 2159/92, English version at[1994] 1 C.M.L.R. 57. The German Constitutional Court stated that “this conception of thecurrency union as a community based on stability is the basis and subject-matter of the GermanAct of Accession. If the monetary union should not be able to develop on a continuing basis thestability present at the beginning of the third stage within the meaning of the agreed mandate forstabilization, it would be abandoning the Treaty conception” (point 90 of the judgment).

41. See Annex I of the conclusions of the European Council of 16–17 Dec. 2010, documentEUCO 30/1/10, REV1, at <www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/118578.pdf>.


decision was formally adopted by the European Council at its meeting of24–25 March 2011. It adds the following paragraph (3) to Article 136 TFEU“The Member States whose currency is the euro may establish a stabilitymechanism to be activated if indispensable to safeguard the stability of theeuro area as a whole. The granting of any required financial assistance underthe mechanism will be made subject to strict conditionality”.42

Article 136(3) TFEU is not a legal basis or an authorization for MemberStates to establish mechanisms of financial assistance among themselves.From this point of view and, legally speaking, the entry into force of the ESMis not contingent upon the entry into force of the European Council decisionamending Article 136(3) TFEU. Article 136(3) TFEU has a declaratory value.It recognizes the power of Member States whose currency is the euro toestablish inter se a mechanism of assistance, namely the ESM. Article 136(3)TFEU provides legal certainty as to the fact that mechanisms of assistancereferred to therein (the ESM) are compatible with Article 125 TFEU, as allprovisions of the Treaties must be consistent with each other.

Article 136(3) TFEU may be regarded as a provision of a fundamentalinterpretative value according to which mechanisms such as the ESM do notrun counter to the no-bailout clause. But Article 136(3) TFEU does notmodify, restrict, or deprive of sense Article 125 TFEU. Its two sentences buildupon and reconcile two different concepts of stability, on the one hand thestability of the euro area and, on the other hand, monetary stability – foundedon budgetary discipline. Whilst up to now the Treaties had used the concept of“stability” as exclusively linked to price,43 Article 136(3) TFEU introduces anew meaning of “stability” – “of the euro area as a whole” – linked then to thevery existence of the monetary union whose establishment is an EU objectiveunder Article 3(4) TEU.

True, the first sentence of Article 136(3) TFEU refers to an “ultima ratio”instrument of financial assistance, “indispensable” to safeguard a greatergood, the stability of the euro area as a whole. Preserving the stability of theeuro area cannot, however, be to the detriment of the monetary stabilityenshrined in the DNA of the single currency project since its inception: inaccordance with the second sentence of Article 136(3) TFEU, the activation offinancial assistance is subject to “strict conditionality” in pursuance of the

42. European Council Decision of 25 March 2011 amending Art. 136 of the Treaty on theFunctioning of the European Union with regard to a stability mechanism for Member Stateswhose currency is the euro, O.J. 2011, L 91/1.

43. Price stability is mentioned in Art. 3(3)(1) TEU, in Arts. 119(2) and (3) and 282(2)TFEU and in Art. 2(1) of the Statute of the ESCB and ECB. In accordance with Art. 127(1)TFEU, the primary objective of the European System of Central Banks (ESCB) shall be tomaintain price stability.


objective of budgetary discipline, intrinsically linked to the monetary stabilitythat the no-bailout clause is intended to guarantee.

3.1.3. The mutualization of public debt or “eurobonds” and Article 125TFEU

Although this section deals with the compatibility of the existing mechanismsof assistance with Article 125 TFEU, it is nonetheless worthwhile – and tosome extent unavoidable – to make a brief excursus on the compatibility of thepossible mutualization of public debt (the so-called eurobonds) with theno-bailout clause. Eurobonds are at the centre of the discussion on the publicdebt crisis.44 They are seen by some as the promised land to which themonetary union must direct its evolution; they are regarded by others as atreason to the principle that each Member State must remain liable for itsbudgetary decisions.

According to the public debate, under a system of eurobonds euro areaMember States would transfer, totally or partially, to a European supranationalentity (which could be the Union) their power to issue public debt. Debtissuance of the euro area Member States would be pooled in one single debtinstrument. The supranational entity would establish a budget to be fed by theproceeds of eurobonds issuances (to be probably supplemented by chargesand taxes); it would allocate the proceeds of the issuances to the euro areaMember States in accordance with a predetermined allocation key. The entityin charge of issuing the debt would respond for the whole of the debt payment.Euro area Member States would be the guarantors of the issuances, and eachof the guarantors would be liable indistinctly (jointly and severally) for thewhole of the issuances. Contrary to the current mechanisms of financialassistance, where the guarantees committed by each participating MemberState are limited and separate from the guarantees of all the others, under thejoint and several eurobonds the liability of each Member State couldpotentially go up to the total volume of the issuances.45

44. See Commission Green Paper of 23 Nov. 2011 on the feasibility of introducing StabilityBonds (COM(2011) 818 final). Delpla and Von Weizsäcker, “The blue bond proposal” Bruegelpolicy brief, 2010/03, May 2010 and “Eurobonds: The blue bond concept and its implications”,Bruegel policy contribution, 2011/02, March 2011. See also the proposals on the pooling ofpublic debt formulated by the president of the European Council in “Towards a genuineEconomic and Monetary Union”, op. cit. supra note 35.

45. Common issuance of debt subject to several (but not joint) liability, where eachparticipant responds only for the part of the debt allocated to it, has also been evoked as analternative, or a previous step, to eurobonds. Under this modality the Treasury of each euro areaMember States would remain fully liable for the debt issued in its name and on its behalf by acentral agency (see Commission Green Paper on the feasibility of introducing stability bonds,cited supra note 44 and “Towards a genuine Economic and Monetary Union”, cited supra note35, that hints towards this kind of common issuance as an intermarry step towards eurobonds)


In our view, a system of mutualization of debt such as the one describedabove would clearly breach Article 125 TFEU: each euro area Member Statewould guarantee, indistinctly, the totality of the issuances. Each euro areaMember State would then be “liable or assume the commitments” of the rest ofits euro area partners, in the sense of the no-bailout clause.46 However, whenexamining the issue of eurobonds it is difficult to make a “photo finish” of thelaw of the Union in its current state of development. One cannot ignore thatfrom a political, economic and legal/constitutional point of view, to make euroarea Member States share the responsibility for each other debts in anindistinct and unspecified fashion would only be feasible as long as they werealso to share responsibility for their respective expenditure decisions. Themutualization of debt of the euro area Member States may not take place ifthere is not a corresponding mutualization of their budgetary policies. In otherwords, the transfer from euro area Member States to a supranational entity ofthe power to issue public debt on a joint and several basis should beaccompanied by a transfer of budgetary powers, whereby the fiscal policies ofthe euro area Member States are integrated – and not merely coordinated (asthe case is at present) – and the power to adopt their national budgets wouldyield to the power of a supranational entity. Of course, the transfer ofbudgetary power to which we refer would most probably require of a revisionof the current Treaties – where the economic policy is devised as a matter ofcoordination among Member States (see Arts. 2(3) and 5(1) TFEU).47

Under this scenario of budgetary and economic integration, the issue of thecompatibility of eurobonds with Article 125(1) TFEU (the no-bailout clause)would most probably lose its relevance: as already explained, Article 125(1)TFEU, together with Articles 123 and 124 TFEU, aims at ensuring thebudgetary discipline of Member States by prohibiting the Union or MemberStates from being liable or assuming the commitments of other MemberStates. The rationale of the prohibition, founded on the logic that MemberStates remain sovereign for their budgets, would not exist any more shouldeuro area Member States no longer be sovereign for their budgetary decisions.Euro area Member States, as guarantors of eurobonds, would actually not

This modality of common issuance however would not respond to the aim of establishing agenuine European Treasury where risks are pooled into one single debt instrument.

46. Conversely, a system of common issuance subject to several (but not joint) liability,where each participant would remain liable exclusively for the part of the debt allocated to it(see supra note 45) would not pose any problem of compatibility with Art. 125 TFEU.

47. This dynamic view of the mutualization of debt is evoked in the Commission GreenPaper on the feasibility of introducing stability bonds, cited supra note 44 (see page 12 thereof),as well as in “Towards a genuine Economic and Monetary Union”, cited supra note 35, whichrefers to an “integrated budgetary framework” where the pooling of decision making inbudgetary matters would be accompanied by a pooling of risks of the public debt (see p. 5thereof).


assume the commitments of other Member States, as prohibited by Article125(1) TFEU; they would not bear responsibility for the fiscal decisions ofother Member States; they would rather jointly and severally assume thecommitments entered into by a European supranational entity (a “EuropeanTreasury”), distinct and autonomous from them – to the extent that it has takenover their Treasury functions; an entity that would fulfil its issuing activities inaccordance with budgetary decisions subject to the control of the Union.48

3.2. The use of Article 122(2) TFEU as a legal basis to provide financialassistance to Member States suffering a debt crisis

We have previously described the mechanisms of financial assistanceestablished by the Union and its Member States during the last two years. Allthe mechanisms referred to are of an intergovernmental nature, with theexception of the EFSM, created by Regulation 407/2010 on the

basis of Article 122(2) TFEU. According to this provision,

“Where a Member State is in difficulties or is seriously threatened withsevere difficulties caused by natural disasters or exceptional occurrencesbeyond its control, the Council, on a proposal from the Commission, maygrant, under certain conditions, Union financial assistance to the MemberState concerned….”49

Is it legitimate to use Article 122(2) TFEU to provide financial assistance toMember States suffering a debt crisis? Can the debt crisis of a Member Statebe understood as an “exceptional occurrence” beyond the control of aMember State, within the meaning of Article 122(2) TFEU?

At first sight one could say that as the Treaties – Articles 123 to 126 TFEU– are based on the logic that each Member State is responsible for its ownbudget, budgetary matters remain per se within the control of each MemberState, and that in consequence budgetary assistance should be excluded fromArticle 122(2) TFEU.

48. Art. 125 TFEU would however remain applicable vis-à-vis those Member States thatwere not part of the eurobonds scheme and vis-à-vis the tranches of public debt issuance thatwere still made by the participating Member States.

49. Under Art. 143 the Council may also grant mutual assistance. However such assistanceis limited to non-euro area Member States and does not, in principle, cover budgetary solvencyproblems but situations where the Member State concerned is in difficulties or seriouslythreatened with difficulties as regards its balance of payments. See also Council Regulation(EC) No 332/2002 establishing a facility providing medium-term financial assistance forMember States’ balances of payments, O.J. 2002, L 53/1.


However, a historical, contextual and literal interpretation permits theconclusion that Article 122(2) TFEU empowers the legislator to assistMember States suffering budgetary problem.

Article 122(2) TFEU was introduced by the Treaty of Maastricht, as part ofthe provisions on economic and monetary union. Actually, the problem ofMember States suffering financing difficulties, and above all, the negativeconsequences that this financing problem could have in the economic andmonetary union, did not go unnoticed during the negotiation of the Treaty ofMaastricht. The Commission had proposed a financial support scheme forMember States that could suffer problems of budgetary insolvency, to beintroduced in the Treaty. The scheme would be activated when majoreconomic problems arose in one or several Member States or when economicconvergence called for a particular Community effort alongside nationaladjustment strategies in the sense of positive conditionality. Such amechanism of assistance was not, however, retained in the final version of theTreaty of Maastricht.50 Article 122(2) TFEU became, however, thecompromise between those Member States that feared that the establishmentof mechanisms of financial assistance would amount to a transfer union andthe Commission, who during the Maastricht negotiations had advocated theintroduction of a scheme of financial assistance for Member States underbudgetary distress.51

From a contextual perspective, the reading of Article 122(2) TFEU cannotbe dissociated from Article 125 TFEU, referred to above, which is part of thesame chapter of the Treaty: as Louis put it, Article 122(2) TFEU has beenconceived as a counterweight or exception, a kind of escape clause to therigorous no-bailout clause.52 Assistance under Article 122(2) TFEU isnecessarily compatible withArticle 125TFEU, as recognized by the authors ofthe Treaties themselves.53 In the very limited cases foreseen in that provision

50. See “Intergovernmental conferences, contributions by the Commission,communication of the Commission of 21 August 1990”, Bull. EC, 2/91. Interestingly, the 1989Report on Economic and Monetary Union in the community of the committee for the study ofEconomic and Monetary Union (also known as the Delors Committee, created by the HanoverEuropean Council of June 1988 to study and propose concrete stages leading towards monetaryunion) stated the following: ”… it might be necessary in certain circumstances to providefinancing flows through official channels. Such financial support would be additional to whatmight come from spontaneous capital flows or official borrowing and should be granted onterms that would prompt the recipient to intensify its adjustment efforts” (see p. 19, para 29).

51. See in this sense Pipkörn, “Legal arrangements in the Treaty of Maastricht for theeffectiveness of the economic and monetary union”, 31 CML Rev., 263.

52. See Louis, “Guest editorial: The no-bail out clause and rescue packages”, 47 CML Rev.(2010), 971.

53. See declaration No 6 of the intergovernmental conference of the Treaty of Nice on Art.100 [122 TFEU] according to which “The Conference recalls that decisions regarding financial


(i.e., natural disasters or exceptional occurrences beyond the control ofMember States), the Council may decide to grant assistance to the MemberState concerned without breaching Article 125 TFEU, even if assistance aimsat financing the national budget of a Member State. Under Article 122(2)TFEU, the granting of financial assistance is to be subject to conditionality.Conditionality is indeed a fundamental element in bringing together Article122(2)TFEU with the rationale ofArticle 125TFEU, as conditionality permitsthe budgetary discipline of Member States to be ensured in exchange forassistance.

Finally, a literal reading of Article 122(2) TFEU shows that the Council isgranted a very wide margin of discretion to assess whether a Member State is“is in difficulties or is seriously threatened with severe difficulties causedby… exceptional occurrences beyond its control”, and to decide the kind ofassistance to grant. Nothing in Article 122(2) TFEU permits the conclusionthat a debt crisis is excluded from its scope of application, provided that, whengranting assistance, the Council is able to show that the crisis has been causedby exceptional causes beyond the control of the Member State in question. Inthe particular case of Regulation 407/2010, the legislature acted afterassessing that the serious deterioration in the international financialenvironment had led to a severe worsening of the borrowing conditions ofseveral Member States, beyond what could be explained by economicfundamentals (see recitals 3 to 5 of the preamble to the Regulation). The sameanalysis was made by the Council when agreeing assistance to Ireland andPortugal.54 It was evident that a degree of speculation on the part of themarkets, and not only the mismanagement of their national budgets, hadcontributed to the debt crisis of some Member States.This was especially clearin Member States of virtuous accounts during the years preceding the crisis,such as Ireland.

However, the system of the Treaties itself dictates some limits to the widepower of discretion that may be exercised by the Council in granting financialassistance under Article 122(2) TFEU: the simple occurrence of an excessivedeficit in a Member State cannot be assimilated to an exceptional occurrencebeyond the control of Member States within the meaning of Article 122(2)TFEU, without depriving of all effect their obligation to avoid excessivedeficits as laid down underArticle 126(1)TFEU. It seems also clear that, as theoccurrence of exceptional occurrences is by nature temporary, the Council

assistance, such as are provided for in Article 100 [122] and are compatible with the ‘nobail-out’ rule laid down in Article 103 [125]….”.

54. See Council implementing decision 2011/77 of 7 Dec. 2010 on granting Unionfinancial assistance to Ireland (O.J. 2011, L 30/34) and Council implementing decision2011/344 of 30 May 2011 on granting Union financial assistance to Portugal (O.J. 2011,L 159/88).


may not establish mechanisms of financial assistance of a permanentcharacter on the basis of Article 122(2) TFEU.55

3.3. The relationship between the intergovernmental mechanisms ofassistance and the law of the Union

As already explained, because of the restricted scope for its use and the limitedamounts that it can serve – confined to the budgetary possibilities of the Union-, Article 122(2) TFEU offers a quite small capacity of action, especially in theface of a situation where the financial needs of the Member States in questionare so impressively high. This has led to euro area Member States devisingmechanisms of assistance outside the EUTreaties – the Greek loan facility, theEFSF and the ESM.

However, the fact that assistance instruments have been created outside theEU Treaties does not mean that they are completely unrelated to the law of theUnion. The three mechanisms are instrumental to the achievement of theobjectives of the EU, notably the establishment of a monetary union. Asalready explained, this is recognized by Article 136(3) TFEU, which sees inthe ESM a mechanism to “safeguard the stability of the euro area as a whole”.This policy relationship is reflected in a number of links of a substantive (1),institutional (2) and budgetary (3) nature.

3.3.1. Substantive linksThe three intergovernmental mechanisms incorporate clauses of consistencyby virtue of which conditionality measures laid down on their basis must becompatible with measures of economic coordination under the EU Treaties.56

In fact, conditionality measures under the instruments – typically agreedthrough memoranda of understanding – aim at ensuring budgetary disciplineof Member States, in the same way that the EU Treaties provide for measuresof budgetary discipline of Member States, notably those adopted under theexcessive deficit procedure (Arts. 126(2) to (12) TFEU) and under Article136(1) TFEU, which empowers the Union to adopt measures specific to euroarea Member States addressed at strengthening the coordination andsurveillance of their budgetary discipline.

The objective of the provisions of consistency is to avoid building a rivaluniverse of economic coordination outside the EU Treaties to the detriment of

55. Under Art. 9 of Regulation 407/2010 the Commission has to elaborate a report on thecontinuation of the exceptional circumstances that justify the adoption of the Regulation sixmonths after its entry into force and, where appropriate, every six months thereafter.

56. See Art. 4(1) and (2) of the Greek loan facility intercreditor agreement and recital (6) ofthe preamble to the Greek loan agreement; Art. 2(1) of the EFSF framework Agreement; Art.13(3) ESM Treaty.


the competence of economic coordination under the EU Treaties. This kind ofprovision is not without precedent. Other intergovernmental arrangements,such as the Schengen and Prüm Conventions had already introducedconsistency clauses.57 Consistency provisions are the corollary of theprinciples of sincere cooperation laid down by Article 4(3) TFEU, and ofprimacy of EU law as developed by case law.

Under the principle of sincere cooperation, Member States shall take anyappropriate measure, general or particular, to ensure fulfilment of theobligations arising out of the Treaties or resulting from the acts of theinstitutions of the Union, and they shall facilitate the achievement ofthe Union’s tasks and refrain from any measure which could jeopardize theattainment of Union objectives. In our view, the principle of sincerecooperation does not prevent Member States from agreeing in anintergovernmental way conditionality measures that correspond in substanceto those that the Union may adopt under its existing competences of economiccoordination – particularly pursuant to Article 136(1) TFEU – nor fromagreeing on measures of economic conditionality for whose adoption the EUTreaties do not provide the necessary competences for the Union to act.Actually, new Article 136(3) TFEU, referred to above, recognizes the power ofMember States to agree such conditionality outside the law of the Union.

Notwithstanding the above, the overlapping between the two spheres ofeconomic coordination should not lead to inconsistencies or conflicts of legalprovisions, impede the exercise of the EU competences in the field ofeconomic coordination, or render it inefficient or superfluous, nor should itamount to a circumvention of the obligations of Member States under theTreaties or of the procedures laid down therein.58

In the case of a conflict between the two spheres, the principle of primacywould apply, and conditionality measures outside the EU Treaties should yieldto the law of the Union in the same way as if they were purely national rules.59

57. See, Art. 134 of the Convention implementing the Schengen agreement of 14 June1985, according to which “The provisions of this convention shall apply only insofar as they arecompatible with Community law” and Art. 47 of the Prüm Convention on the stepping up ofcross-border cooperation, particularly in combating terrorism, cross-border crime and illegalmigration (Council doc. 10900/05), drafted in identical terms.

58. On the relationship of the agreements concluded by Member States inter se and theprinciple of sincere cooperation, see De Witte, “Old-fashioned flexibility: Internationalagreements between Member States of the European Union”, in De Burca and Scott (Eds.),“Constitutional change in the EU: From uniformity to flexibility?” (Hart publishing, 2000), pp.30 et seq. See also Capdevila, “Son los acuerdos inter se una alternativa a la cooperacionreforzada en la UE? Reflexiones al hilo del Tratado de Prüm”, 40 Revista espanola de derechoeuropeo (2011), 419.

59. E.g. the Court of Justice has considered that conventions for the avoidance of doubletaxation concluded between Member States must respect the law of the Union, in casu the EC


In this sense, a practice has developed whereby conditionality attached toassistance has been agreed with the beneficiary Member States concurrentlywith Council Decisions adopted on the basis of Article 136 TFEU (in the caseof Greece), or on the basis of Regulation 407/2010 on the EFSM (in the caseof Portugal and Ireland). Memoranda of understanding, adopted outside theTreaties, mirror and expand the measures on budgetary discipline contained inthe different Council Decisions.60 Moreover, under the proposals of the socalled “two pack” currently under discussion, referred to at the beginning ofthis article,61 Member States under assistance of the EFSF or of the ESM arerequired to submit to the Council for its approval a so-called“macro-economic adjustment programme”. This programme aims atincorporating in the law of the Union the conditionality measures agreedexternally under the EFSF or the ESM.62

3.3.2. Institutional linksThe intergovernmental instruments make use of institutions of the Union – theCommission and the Court of Justice – for the execution of some of some oftheir tasks.

As far as the Commission is concerned, certain powers of management andexecution have been conferred on it. These powers include, in particular, theassessment of the appropriateness of granting financial assistance as well as ofthe financial needs of the Member State concerned,63 the

negotiation and signature of memoranda of understanding with thebeneficiary Member State on behalf of the lenders64 – the other euro area

Treaty provisions on the free movement of workers, and that they should be set aside by thenational judge in case of conflict (see Case C-385/00, De Groot v. Staatssecretaris vanFinanciën, [2002] ECR I-11819, para 110).

60. For Greece, see Council decision 2010/320 of 10 May 2010 addressed to Greece with aview to reinforcing and deepening fiscal surveillance and giving notice to Greece to takemeasures for the deficit reduction judged necessary to remedy the situation of excessive deficit(O.J. 2010, L 145/6). For Portugal, see Council implementing decision 2011/344 (cited supranote 54). For Ireland, see Council implementing decision 2011/77 (cited supra note 54).

61. See supra note 2.62. See Art. 6 of the proposal for a Regulation on the strengthening of economic and

budgetary surveillance of Member States experiencing or threatened with serious difficultieswith respect to their financial stability in the euro area. Recital (2) to the preamble of theproposal motivates this provision by stating that “The full consistency between the Unionmultilateral surveillance framework established by theTreaty and the possible policy conditionsattached to this financial assistance should be enshrined in Union law”.

63. See Arts. 2(1)(a) of the EFSF framework agreement and 13(1) of the ESM Treaty.64. See Arts. 2(1) of the Greek intercreditor agreement, 2(1)(a) of the EFSF framework

agreement and 13(3) of the ESM Treaty. In the particular case of the Greek loan agreement, theCommission is also empowered to negotiate and sign the loan facility agreement on behalf ofthe lenders.


Member States, the EFSF or the ESM as the case may be – and the monitoringof compliance with the conditionality measures laid down in the context of thedifferent mechanisms.65

The powers of the Commission in relation to the three intergovernmentalinstruments have been conferred by means of intergovernmental decisions ofthe representatives of all the 27 Member States.66 A limited group of MemberStates, the 17 whose currency is the euro, could not freely dispose of an EUinstitution, the Commission, for the performance of actions not foreseen in theTreaties for the purposes of an intergovernmental structure created by themoutside the Union. The common accord of all the 27 Member States – as“co-owners” of the institutions – is needed.

The allocation of powers of management and execution to the Commissionin connection with intergovernmental structures has been blessed by the Courtof Justice as compatible with the principle of conferral of powers, in theBangladesh judgment, which dealt with the constitution of a fund of aid toBangladesh, an extra-EU instrument.67

As for the Court of Justice, jurisdiction is conferred on it to rule on disputesbetween the Member States concerning the interpretation and the applicationof the three instruments. In the Greek facility, the Court of Justice isempowered to rule on any dispute concerning the legality, validity,interpretation or performance of either the loan facility agreement or theinter-creditor agreement; in the EFSF, Member States undertake to submit

65. See Arts. 4(1) of the Greek intercreditor agreement, 3(1) of the EFSF frameworkagreement and 13(7) of the ESM Treaty.

66. For the Greek loan facility, see decision of the representatives of the governments of the27 Member States of 5 May 2010 in Council at document No 9417/10. For the EFSF, see thedecision of the representatives of the governments of the 27 Member States at Councildocument No 9614/10; for the ESM, see decision of the representatives of the Governments ofthe 27 EU Member States of 20 June 2011, at Council document No 11758/11.Moreover, the representatives of the governments have agreed on 27 July 2012 on tasking withcertain technical functions the European Banking Authority (EBA) – one of the threemicro-supervision authorities of the Union – together with the European Insurance andOccupational Pensions Authority and the European Securities and Markets Authority, in theframework of the assistance for recapitalization of Spanish financial institutions to be made bythe EFSF and, eventually, by the ESM (see supra note 35). The intergovernmental decision iscarefully drafted, specifying that the role of the EBA in the Spanish recapitalization programmeis temporary (up to 31 Dec. 2012, when Member States will have to agree on a renewal of itsmandate), will be carried out on an exceptional basis and shall not prejudge the setting up of asingle supervisory mechanism, as agreed in the euro area summit of 29 June 2012 (see the textof the intergovernmental decision in Council document 12971/12).

67. In this judgment the Court stated that “The…Treaty does not prevent the Member Statesfrom entrusting the Commission with the task of coordinating a collective action undertaken bythem on the basis of an act of their representatives meeting in the Council”. See Joined CasesC-181 & 248/91, Parliament v. Council and Commission, [1993] ECR I-3685, para 20.


their disputes to the jurisdiction of the Court of Justice.68 For its part, the ESMTreaty confers on the Court of Justice jurisdiction to rule on disputes betweenthe parties, or between the parties and the ESM, on the interpretation andapplication of the ESM Treaty, including any dispute about the compatibilityof the decisions adopted by the ESM with that Treaty (see Art. 37(3) ESMTreaty). The specificity of the ESM Treaty is that recital 16 of its preamblemakes explicit what was implicit in the other two instruments, namely that theattribution of jurisdiction to the Court of Justice is operated by means ofArticle 273 TFEU.69 According to this provision, the Court shall havejurisdiction in any dispute between Member States which relates to the subjectmatter of the Treaties if the dispute is submitted to it under a special agreementbetween the parties.70 Article 273 TFEU aims at avoiding a situation wherecourts or bodies other than the Court of Justice interpret issues related to EUlaw and adopt decisions binding for the Member States. It is a provisiondesigned to protect the unity of EU law and, in particular, the unity of itssources of interpretation.

The provisions attributing jurisdiction to the Court constitute the “specialagreement” to submit a dispute to the Court. It seems clear that all the threemechanisms of assistance are related to the “subject matter” of the Treaties,within the meaning of Article 273 TFEU, to the extent that they aim at

68. See Arts. 14(2) of the Greek loan and inter-creditors agreement, respectively, and Art.16(2) of the EFSF framework agreement. In both the Greek facility and the EFSF, the partieshave chosen English law as the law that governs the agreements and the non-contractualobligations deriving from it.

69. There are only two precedents where international conventions not based on the EUTreaties have attributed to the Court of Justice jurisdiction to rule on disputes between MemberStates, without however mentioning expressly Art. 273 TFEU: the Internal Agreement on themeasures and procedures required for implementation of the fourthACP-EEC Convention (Art.6 of O.J. 1991, L 229/301) and the Convention of 19 Apr. 1972 setting up a European UniversityInstitute (see Art. 29(2) thereof at <www.eui.eu/Documents/AboutEUI/Convention/ConsolidatedConventionRevising.pdf>). There are other precedents where conventionsconcluded between Member States have granted to the Court powers of interpretation throughpreliminary rulings. These conventions stemmed from former Art. 293 TEC – repealed by theTreaty of Lisbon – which required Member States, so far as necessary, to conclude agreementsin certain areas linked to the policies of the Treaties, notably the internal market (see e.g. theConvention of 27 Sept. 1968 on Jurisdiction and the Enforcement of Judgments in Civil andCommercial Matters, the Brussels Convention and the protocol on the interpretation by theCourt of Justice of the Brussels Convention – a consolidated version of the Brussels conventionand the protocol may be found at O.J. 1998, C 27/1). Whilst recognizing that they are linked tothe law of the Union, the Court of Justice has never questioned the attribution of jurisdictionoperated by these conventions (See Case C-398/92,Mund & Fester, [1994] ECR I-467, paras.11 and 12). See Lenaerts, Arts and Maselis, Procedural law of the European Union (Sweet andMaxwell, 2006), pp. 502 et seq.

70. The procedural aspects of actions based on Art. 273 TFEU are laid down in Art. 38(6) ofthe Rules of procedure of the Court of Justice and other instruments governing the Court (O.J.1991, L 176/7).


safeguarding the stability of the euro area. In any event, the term “subjectmatter” should be interpreted broadly, as Article 273 TFEU cannot apply tocases that are already covered by the Court’s compulsory jurisdiction – aswould be the case for infringement actions among Member States underArticle 259 TFEU. Article 273 TFEU must therefore permit the submission ofdisputes over matters which are not covered by a Treaty legal basis.71

3.3.3. Budgetary linksUnder the law of the Union, the proceeds of sanctions imposed on MemberStates by virtue of the Stability and Growth Pact for breach of their budgetaryand economic obligations constitute “other revenue” for the Union budgetwithin the meaning of Article 311 TFEU, and shall be earmarked to the EFSFand to the ESM.72

The basis for earmarking the proceeds of sanctions to the three instrumentsis to be found in Article 311 TFEU, which establishes that the Union shallprovide itself with the means “to attain its objectives and carry out itspolicies”. Union revenue and expenditure must therefore be related to theattainment of objectives of the Union and to the execution of its policies. Asthe purpose of the three instruments of assistance is related to the EU Treaties’objective of establishing a monetary union, they are clearly eligible for theUnion’s budget financing.

3.4. The judgment of the German constitutional Court of 7 September2011 on the compatibility of the participation of Germany in theGreek loan facility and in the EFSF

For financial and political reasons Germany has clearly taken the lead in theprocess of negotiation and establishment of the mechanisms of financialassistance. However, the participation of Germany in those mechanisms hasbeen fiercely contested by German public opinion which feared assistanceturning into a transfer Union, in betrayal of the principles of monetary andprice stability that shape the German collective understanding of public

71. See in this sense Lasok, Millet and Howard, Judicial control in the EU: procedures andprinciples (Richmond, 2004), pp. 114 and 115.

72. SeeArt. 16 of Regulation 1467/97 (O.J. 1997, L 209/6, as amended by the six pack),Art.10 of Regulation 1173/2011, on the effective enforcement of budgetary surveillance in the euroarea (referred to above, see supra note 1) and Art. 4 of Regulation 1174/2011, on enforcementmeasures to correct excessive macroeconomic imbalances in the euro area (referred to above,see supra note 1). See also Art. 24(2) ESM Treaty. Art. 18(1) (b) and (2) of Council Regulation1605/2002 on the Financial Regulation applicable to the general budget of the EuropeanCommunities (the Financial Regulation), permits the earmarking of some revenues, amongwhich the proceeds of sanctions under the excessive deficit procedure.


finance. Public criticism has often been accompanied by legal doubts as towhether the participation of Germany is compatible at all with the Germanconstitution and with the EU Treaties.

The constitutional constraints of Germany have certainly informed theprocess of negotiation of the mechanisms of assistance and have undoubtedlycontributed to the simplified revision of theTFEU – the introduction ofArticle136(3) TFEU, referred to above. The German constitutional understanding ofthe economic and monetary union is fundamental to understand thearchitecture of the euro area assistance construction and of its futureevolution. In this context, the judgment of the German Constitutional Court of7 September 2011 concerning euro rescue measures is of special relevance.73

It upheld the participation of Germany both in the Greek loan facilityagreement and in the EFSF, whilst underpinning a certain number ofprerogatives of the German legislature.

3.4.1. The criteria for the examination of constitutionalityThe judgment sets two fundamental standards for its judgment ofconstitutionality. First, as was the case in the Bundesverfassungsgerichtjudgment on the Treaty of Lisbon, the right to vote enshrined in Article38(1) GG would be infringed if the German legislature were to giveaway its budgetary powers so that the Bundestag were no longer able toexercise its budgetary responsibility on its own account. For theBundesverfassungsgericht, “compliance with democratic principles dependson whether the German Bundestag continues to be the forum in whichdecisions on revenue and expenditure are taken independently, even in respectof international and European obligations”.74

Second, the budgetary sovereignty of the Bundestag, and therefore the rightto vote, would be breached if the legislature transferred its budgetaryresponsibility to others in an “unspecified fashion”. This means in particularthat the Bundestag cannot commit to a mechanism which may lead to“incalculable, economically significant burdens without prior consent asrequired by the Constitution, whether in cases of expenditure or loss ofrevenue” or that entail that “the automatic provision of guarantees orpayments, is not governed by strict conditions, is not limited in its effects and– once set in motion – will be removed from the Bundestag’s control and

73. BVerfG, BvR 987/10. The complainants, German individuals, contested the twoGerman laws on granting of guarantees for maintaining the solvency of the HellenicRepublic which is required to ensure financial stability in the Monetary union (theWährungsunion-Finanzstabilitätsgesetz of 7 May 2010, BGBl I S. 537) and on granting ofguarantees in the context of the EFSF (theEuro-Stabilisierungsmechanismus-Gesetz of 21 May2010, BGBl I S. 627).

74. See paras. 121 to 124; our translation from the German original text.


influence”. Each and every individual decision on granting assistance requiresthe assent of the Bundestag, which must subsequently retain an influence overthe way in which the funds made available are used.The judgment accordinglyexcludes “permanent mechanisms under international law resulting in theassumption of liability for political decisions by other States”.75

3.4.2. Budgetary sovereignty of Germany and monetary stability under theEU Treaties

Throughout the whole judgment, the Bundesverfassungsgericht carefullyavoids entering into an open interpretation of the relevant provisions of the EUTreaties. Otherwise, the Bundesverfassungsgericht, as a last instancejurisdiction, would have had no choice but to request a preliminary rulingfrom the Court of Justice, in accordance with Article 267 TFEU. But theprovisions of the Treaties emerge in the judgment as a “starring guest” in asubtle way: the judgment links the budgetary autonomy of the Bundestag tothe provisions of theTreaties that shape the monetary union as a community ofstability – Articles 123 to 127 TFEU, and Article 136 TFEU. For theBundesverfassungsgericht these Treaty provisions take for granted thebudgetary autonomy of the Member States. The Bundesverfassungsgerichtmakes on this basis an equation: the respect of the Treaty provisions that shapethe monetary union as a community of stability secures the respect of thebudgetary autonomy of the Bundestag, whilst recalling that such a conceptionwas the basis on which Germany assented to being part of the monetaryunion.76

Very importantly, the judgment hints towards the compatibility of theinstruments of assistance with the EU Treaties by stating that “all the legalimplications of the two contested acts, and in particular of the furtherimplementing measures which they establish are considerably influenced bythe concept of monetary union in the Treaties”.77

3.4.3. The mutualization of public debt: The question of “eurobonds”It is on this basis that the Bundesverfassungsgericht excludes the creation “ofa basis for legitimizing the acceptance of liability of a confederation of states(Staatsverbund) for the voluntary decisions of other Member States by the

75. Paras. 125, 127 and 128. In our view, this passage of the judgment referring to“permanent” mechanisms of assistance would not rule out permanent institutional frameworksthat might provide for financial assistance, if ever activated, such as the ESM, to the extent thatthe Bundestag maintained a power of control on every specific granting of assistance. Thispassage excludes rather the creation of schemes of permanent and continued assistance whosebudgetary implications for Germany are unspecified and not calculable ex ante.

76. See para 129.77. Para 137.


direct or indirect pooling of national debt” (para 129 in fine). This is a clearreference to the so-called “eurobonds”, which were already examined abovefrom the viewpoint of their compatibility with Article 125 TFEU. Thisstatement sets a limit not only to the participation of Germany in anintergovernmental system of eurobonds but also to any possible amendment ofthe EU Treaties having this aim. Nevertheless the reference to eurobonds asincompatible with the German Constitution is laconic, and it is difficult toforesee its implications with any accuracy.

In any event, the debate on the compatibility of eurobonds with the GermanConstitution (and with the EU Treaties) must not lose sight of financial andpolitical reality: as we have already explained before, from a financial andpolitical viewpoint, to make euro area Member States share the responsibilityfor each other’s debts in an indistinct and unspecified way would only befeasible as long as they were also to share responsibility for their respectiverevenue and expenditure decisions. Eurobonds can only be the terminusstation of a process of budgetary federalization. In practice, the judgmentexcludes eurobonds as they entail the acceptance of liability for the “voluntarydecisions” (Willensentschließungen) of other Member States. But, what if theMember States were no longer the masters of their revenue and expendituredecisions, but had transferred certain powers of control to a supranationalentity?

The degree of intrusiveness of a supranational entity over the nationalbudgets necessary to allow a process of mutualization of debt is a politicalissue that this article will not address. But, ultimately, the real constitutionaldebate that precedes the one on eurobonds is how a transfer of the power ofcontrol over national budgets towards a supranational entity would beconsistent with the budgetary independence of the German legislature.Obviously, a low level of external intrusiveness on national budgets, wherenational parliaments preserve the last word but where a mere peer review ontheir adoption and execution is exercised by the other Member States (as is thecase under the Commission proposals based on Art. 136 TFEU that at presentform the so called two pack), would be compatible with the GermanConstitution but would, most probably, not be politically sufficient for thecreation of eurobonds. On the other hand, a higher level of intrusiveness wherean external body had a power of veto or of injunction and enforcement over thenational budgets would most probably run counter to the standard forbudgetary autonomy set by this judgment and by past case law.78 Any such

78. In its judgment of 30 June 2009 on the Treaty of Lisbon (BVerfG, 2 BvE 2/08, 30 June2009), the BVerfG ruled at point 256 that “A transfer of the right of the Bundestag to adopt thebudget and control its implementation by the government which would violate the principle ofdemocracy and the right to elect the German Bundestag in its essential content would occur if


process of budgetary federalization appears not to be possible under thecurrent German Constitution. Moreover, an amendment of the GermanConstitution in this sense appears not to be feasible as it would be likely toaffect provisions thereof which are protected against amendment by theso-called “eternity clause” (Art. 79(3) GG).79

4. Conclusion

The European Union of 2012 has inherited an economic and monetary unionoriginally conceived with some pitfalls and imbalances, notably the lack ofcompetences for economic policy commensurate to those that the Union holdsunder the monetary union and the lack of last resort mechanisms of assistancecapable of securing the stability of the euro area in the face of a sovereign debtcrisis.

The Union and its Member States have managed to devise, in scarcely twoyears, instruments aimed at solving the second of the imbalances. Increasinglycomplex mechanisms of assistance have been established under verycomplicated political and financial conditions. These mechanisms have so farpreserved the stability of the euro area. Indeed, the idea of stability of the euroarea is introduced in the EU Treaties by means of new Article 136(3) TFEU,though intertwined with the concept of monetary stability. The mechanisms of

the determination of the type and amount of the levies imposed on the citizen weresupranationalized to a considerable extent. The German Bundestag must decide, in anaccountable manner vis-à-vis the people, on the total amount of the burdens placed on citizens.The same applies correspondingly to essential state expenditure…. Budget sovereignty iswhere political decisions are planned to combine economic burdens with benefits granted bythe state. Therefore the parliamentary debate on the budget, including the extent of public debt,is regarded as a general debate on policy. Not every European or international obligation thathas an effect on the budget endangers the viability of the Bundestag as the legislatureresponsible for approving the budget. The openness to legal and social order and to Europeanintegration which the Basic Law calls for, includes an adaptation to parameters laid down andcommitments made, which the legislature responsible for approving the budget must include inits own planning as factors which it cannot itself directly influence. What is decisive, however,is that the overall responsibility, with sufficient political discretion regarding revenue andexpenditure, can still rest with the German Bundestag”.

79. In such a case, a new constitution, in substitution of the current one, would be needed inaccordance with Art. 146 GG. See in this sense the interview in the Frankfurter Allgemeine of25 Sept. 2011 with the president of the BverfG, Voßkuhle, where in connection with the issue ofa European economic government he stated that “There is little room left for giving up corepowers to the EU. If one wants to go beyond this limit – which might be politically correct anddesirable – then Germany must give itself a new constitution.A referendum would be necessary.This cannot be done without the people” (our translation). See the interview at <www.faz.net/aktuell/wirtschaft/europas-schuldenkrise/im-gespraech-andreas-vosskuhle-mehr-europa-laesst-das-grundgesetz-kaum-zu-11369184.html>.


assistance have not betrayed the EU Treaties’ conception of the monetaryunion as a community of stability, they are all rooted in the idea of budgetarydiscipline of the beneficiary Member States as a condition for their beingactivated.

When establishing the mechanisms of assistance, recourse has been had tothe intergovernmental method. This is not a political caprice but a necessity:the EU Treaties do not contain a power permitting the Union to provideassistance to euro area Member States suffering a debt crisis (with theexception of Art. 122(2) TFEU). However, the intergovernmental universe ofassistance has not been construed to the detriment of the EU Treaties. Anumber of substantial, institutional and budgetary links show that theintergovernmental sphere of assistance is not alien to the EU legal order nor isit an attempt to deconstruct it.

We see the mechanisms of assistance as the preliminary steps in anunavoidable process of further integration of the Member States that share acommon good, the euro, a process that might lead to fundamental changes inthe EU Treaties, including the creation of a European Treasury. Further stepsin this direction would require a budgetary federalization, where the nationalbudgetary sovereignty would yield to supranational control, for which majorquestions of a national constitutional character and of democratic legitimacywill certainly arise.


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