Euro-Area Bailout Fund Faces Challenge at Highest Court

The euro area’s 500 billion-euro ($652 billion) bailout fund faces another test as the European Union’s highest court weighs claims that the firewall violates EU law and should be banned in its current form.

A complaint by Thomas Pringle, an independent member of the Irish parliament, today reached the EU Court of Justice, which has the power to topple the European Stability Mechanism, or ESM. A ruling is possible as soon as the end of the year under a fast-track procedure.

“Developed in haste, the ESM treaty is at odds with and undermines the EU legal order,” John Rogers, a lawyer for Pringle, told the court in Luxembourg today. “In trying to defend the compatibility of the ESM with the EU treaties, the intervening member states and institutions have had to engage in mischaracterization and distortion in the confusion of form and substance and in legal and conceptual contradictions.”

The EU court case follows a separate decision last month by Germany’s Federal Constitutional Court in Karlsruhe not to block the ESM. The German ruling handed a victory to Chancellor Angela Merkel, who championed the bailout facility as vital to save the euro area from a fiscal meltdown as it lurches between crises.

The EU court has engaged all 27 judges for the first time in a case referred by a national tribunal.

No-Bailout Provision

Pringle argues that the ESM, which was declared operational on Oct. 8, violates the no-bailout provision under EU law and encroaches on the bloc’s role in economic and monetary policy.

Koen Lenaerts, vice-president of the court, asked Pringle’s lawyer about the meaning of the word bailout.

“Are you really saying that member states would, as a matter of union law, be prohibited to help one another in whatever framework it would be?” Lenaerts asked.

Lenaerts is the reporting judge and will write the draft judgment that will serve as a starting point for discussion among the judges. The court’s final decision won’t show dissenting judges’ views or how the vote was split.

The creation of the ESM, which like the temporary European Financial Stability Facility can offer financial aid in return for budget-austerity conditions on governments, needed a change in the treaty on the functioning of the EU.

The March 2011 decision by EU governments to change a legal provision in the treaty to allow for the ESM’s creation was adopted incorrectly, Pringle argues. The amendment will enter into force on Jan. 1, 2013, at the earliest.

Even if legal, the ESM can’t function until this treaty change has come into effect, Pringle claims.

Circumvent Prohibition

He also describes the ESM as an inter-governmental treaty done outside the EU and an illegal mechanism to “circumvent” the bailout prohibition, according to court documents.

“We are concerned that a body outside the union and not subject to union law could take measures in connection with the union and dictate conditions that will be imposed on member states in matters so fundamental and integral to the union as its economy and its currency,” said Rogers.

There is no indication of any infringement of EU law and member states are allowed to let the ESM start before a treaty change has come into force, Thomas Henze, a lawyer for the German government, told the court.

Unforeseeable Situation

“The current financial crisis has led to the unforeseeable situation where some member states have been pushed to the brink of insolvency,” Henze said. “In such cases other member states can provide financial support to these countries, otherwise it would trigger a chain reaction which would bring about the collapse of the euro area.”

Ireland regards “the amendments to be fully compatible with the treaties,” Michael Cush, a lawyer for the country, told the court.

Pringle’s arguments “ignore the actual wording of the amendment” and “above all its purpose, which is to confirm that the euro-area member states may in times of crisis establish a stability mechanism,” said Cush.

The ESM will replace the EFSF, which has spent 192 billion euros of its 440 billion euros on loans to Ireland, Portugal and Greece. The two funds will run in parallel until the stability facility is phased out in mid-2013.

“The ECJ is likely to see the ESM for what it is: a necessary complement to the existing European monetary union structures, plugging a hole in the existing treaties,” said Marco Incerti, an analyst at the Centre for European Policy Studies in Brussels. “Why would they consider it unlawful?”

German Ruling

The German court’s interim decision on Sept. 12 rejected efforts to block the ESM, in response to several cases after lawmakers approved the ESM and the fiscal pact, a deficit-control treaty designed to impose budget discipline on European Union members.

Ireland’s Supreme Court, which is handling Pringle’s challenge, decided in July to refer three questions to the EU’s top court that could each put at risk the validity or immediate functioning of the ESM.

The EU court decided on Oct. 4 to treat Pringle’s case under an accelerated procedure “to remove as soon as possible that uncertainty, which adversely affects the objective of the ESM treaty, namely to maintain the financial stability of the euro area.”

The case is: C-370/12, Thomas Pringle v. Government of Ireland, Ireland and the Attorney General.