Tag Archive: European Central Bank


The EU Sovereign Debt Crisis: Some Legal Causes

A lot of attention surrounding the EU sovereign debt crisis has ostensibly focused on the allocation of blame to Member-States individually, often leaving out the EU institutions themselves. Responsibility for the current financial situation does in large part reside with the more indebted EU states such as Greece, Spain, Italy, and Ireland. However, there are additional causes that also deserve some of the attention.

The Treaty of the European Union (TEU) created the Eurozone and the European Central Bank (ECB). This final level of economic integration completed the three stage monetary and economic union that began in 1990. As the introduction of the Euro drew near, legitimate concerns were being raised by Member States regarding the economic stability of this new Eurozone. In response, the Stability and Growth Pact (SGP) was adopted in 1997. A specific resolution of the SGP, formally recognized as Council Regulation (EC) No 1467/97, implemented a targeted deficit reduction procedure for member-states that possessed excessive debt, imposing a deficit limit, an overall debt limit, and empowered the ECB to levy fines for non-compliance. However, the SGP has been inadequately enforced since its adoption. Such inadequate enforcement of the SGP may very well underlie the troubling economic situation the EU finds itself in today.

The most striking example of this questionable attitude toward the SGP came in November 2003, when the European Council (EC) chose not to implement recommendations of the European Commission (Commission) pursuant to the national budgets of two Member States. France and Germany’s national did not conform to SGP standards and the EC decided against enforcing SGP deficit reduction procedures previously agreed upon. This controversy eventually arrived at the European Court of Justice (ECJ). The Commission raised the issue that the EC’s failure to enforce the SGP’s debt re-structutring mechanisms against the Member States of Germany and France. Although the ECJ did rule against the EC for its refusal to pursue the SGP’s enforcement mechanisms, the checks and balances between EU institutions have been called into question and the authoritativeness of the SGP has been seriously undermined.

For example, the ECJ stated that the EC “cannot break free from rules laid down by Article 104 TEC and those for which it set forth for itself in Regulation No. 1467/97(SGP)”. Article 104 of the Treaty of the European Community (TEC) codifies the discretion of EC to assess a Member-State’s debt [104(6)], make recommendations on remedying that debt [104(7)], and the procedures for non-compliance [104(9)]. However, the SGP subsequently stipulated additional procedures to be implemented against a Member State in the case of non-compliant debt structure. The ECJ opinion alludes to an interesting question regarding the scope of the relationship between Art 104 TEC and the SGP. Understandably, however, they remind the parties that such a question “had not been presented”.

As Professor Larry Eaker of the American University of Paris has explained, this ECJ decision has potentially created a troubling conflict between the broad discretion afforded the EC in matters of economic and monetary policy, as expressed in Art. 104 TEC, and the monetary restrictions that were envisaged in the SGP. It would seem that the subsequent addendum of the SGP to the TEC would resolve this conflict just as a matter of chronology, but things are often never that simple.

The ECJ’s decision prompted subsequent legislation by the European Commission that intended to correct issues raised in the 2004 Commission v. Council case. But the conflict between the EU institutions and Member States is certain to continue, given the lack of resolution concerning the scope of the SGP.

 

Germany’s Rejection of European Stabilization Mechanism Threatens Economic Recovery

After the recent declaration of a proposed European Stabilizing Mechanism (ESM), and Germany’s subsequent approval of such a measure, it appeared as though a potential resolution to the persisting Eurozone crisis was approaching. These hopeful sentiments have quickly receded, as Germany, Finland, and the Netherlands have now backtracked on their commitment to the ESM, instead introducing troublesome stipulations which have inflamed the Community and cast clouds on any hopes of an imminent resolution to the crisis.

A joint statement by the finance ministers of Finland, Germany, and the Netherlands issued on September 25th promulgated two controversial proposals. First, the statement calls for national governments, not the ESM, to be responsible for ‘legacy assets.” This essentially calls for delinquent states- specifically Spain and Ireland- to take care of their own current and previous financial woes, rather than be recapitalized by the ESM. Instead, the ESM would only deal with costs incurred after its enactment. The second proposal advocates using private capital first and public capital second to recapitalize the national banks of member states, with the ESM as a purely last resort.

Some implications of this announcement are addressed in an editorial by economist Karl Whelan, who states that Germany, Finland, and the Netherlands are basically telling Spain and Ireland to “drop dead.” Whelan describes the ominous consequences these proposals would hold for Ireland, which he argues would be denied any serious debt relief by the ESM.

Likewise, the Economist details the repercussions for Spain’s national debt if this proposal is enacted. Currently, Spain’s banks are roughly 59 billion Euros in the hole, and Germany’s plan would tremendously stifle the relief which Spain seeks from the ESM. This may very well throw into jeopardy any potential of economic recovery in Spain.

The immediate reverberations of Germany’s decision to reverse its commitment to the ESM will be financial, as evidenced by the Spain’s precarious national debt. Ultimately, however, its impact may be existential for the European Union and the Euro. The continued reluctance of economically strong states to lend to weaker states has transitioned to flat-out refusal, which some may argue is a betrayal of the precept of solidarity central to the Community, as explicated by Title IV of the Charter of the Fundamental Rights of the European Union. The refusal to cooperate emphasizes the growing disillusionment of member states with being roped in with delinquent states, which a growing chorus of political voices argues threatens national sovereignty. These political and inter-Community tensions threaten to not merely prolong the common market’s economic malaise, but dissolve the Union altogether.

Eurozone Economic Crisis and Jobless Rate

European leaders are attempting to resolve the debt crisis and economic slump that they now face. This crisis has caused a leap in unemployment rates in Eurozone countries because governments and companies are trimming their payrolls in order to address their high debts and to compensate for weak consumer spending. European leaders plan to put an end to the joblessness, and through it the economic crisis, by boosting the confidence of their citizens in government finances; through this, they hope to stabilize the economies of those countries who use the euro as their single form of currency.

The idea of a single euro currency began in 1991, where the Maastricht Treaty was created by the European Union, and the Maastricht Treaty laid the foundation for the creation of a monetary union by 1999. The goal of the Economic and Monetary Union (EMU) is stability; another goal of the EMU is to make the euro less sensitive to those fluctuations in currency exchange.

In July, Eurostat, the European Union’s statistical agency, said that 88,000 more people were without jobs, and in the Eurozone the current rate of unemployment reached a record high of 11.3 percent in July. The cause of the unemployment is tied to several factors, one of which is the cuts to public sector payrolls, benefits and tax hikes. Because of these cuts citizens are hesitant to invest their money and make large purchases, while companies are not willing to take the risk of hiring new employees.

In early August of this year, the statistics gathered by Eurostat were addressed in a meeting with the European Central Bank’s (ECB) governors. There were opposing views as to how the ECB would potentially solve the economic crisis. News agencies believed that the ECB would use the European Financial Stability Facility (EFSF) rescue fund to bring back stability to those countries in trouble, but Germany argues that it is illegal for the ECB to use the EFSF rescue fund to “bankroll government borrowing.”

On the other hand, it was speculated by financial analysts Holger Schmieding and Christian Schulz that the ECB would do nothing more than provide “strong verbal intervention.” Regardless, the head of the ECB, Mario Draghi, said that he would do “whatever it takes” to preserve the euro. It wasn’t until this week that his plan was unveiled. Draghi proposes to buy unlimited government bonds in order to boost the confidence of those countries that are in economic crisis. While this sounds like a good plan there are still many groups that have to agree to it, namely politicians and bankers.

Hopefully, if everyone agrees, this will be the solution to resolving the economic crisis in the Eurozone, and through it lower the rate of joblessness.

 

 

Proposed Expansion of European Central Bank Power

The European Commission has called for a mass overhaul of the current banking system in the Eurozone. It involves the European Central Bank being allowed to monitor banks in each of the 17 countries that use the euro. This in an attempt to deal with the monetary crisis in the Eurozone.

The European Central Bank (ECB) was created in 1998 prior to the adoption of the euro as common currency for Europe.The ECB’s current role is setting interest rates and printing money, but this proposition would expand its power to allowing the institution to monitor banks more closely in their everyday business practices.  There are staunch supporters as well as those who oppose this proposal for many different reasons.

The opposition includes some non-Eurozone countries that are concerned with the effect that this banking union would have on their banks. For instance Sweden and Denmark are concerned with having to bail out weak Eurozone banks or having to relinquish some of their power to run their own banks. These non-eurozone countries do not want to weaken “national supervision”, and this banking union proposal has caused some countries to re-consider adopting the euro as currency. Moreover some EU officials are apprehensive about the ECB being able to dictate the direction of banking policy and legislation surrounding those policies, and whether or not expanding the powers will actually help.   Some member states want to “keep them {ECB} at arms length as it’s none of their business”.

In contrast some support the expansion of the ECB’s power because of the institutions budgetary reforms and steadfastness during the fiscal crisis.  For instance,  Jörg Asmussen believes that ECB’s approach was necessary but that there must be controls subject to parliamentary and judicial review, and that it’s difficult to have a common currency without common fiscal policies. In addition France’s Financial Minister, Pierre Moscovici, does not think issues surrounding the banking union will prevent the legislation from being passed before the end of this year.

Either way the heads of European Parliament and Council have to approve this legislation before any major changes can take effect, and it seems that this will be a hard fought battle whatever the outcome may be in the end.




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