BLBG: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, has reached the Luxembourg-based EU Court of Justice, which has the power to topple the European Stability Mechanism, or ESM. A hearing is scheduled for today, with a ruling possible as soon as the end of the year under a fast- track procedure.
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 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?”
The Luxembourg-based EU court has engaged its full force of 27 judges to consider the challenge -- the first time this has happened in a case referred by a national tribunal.
No-Bailout
Pringle argues that the ESM, which was declared operational on Oct. 8, violates the no-bailout provision under EU law and encroaches on the EU’s role in economic and monetary policy.
A March 2011 decision by EU governments to change a legal provision in a treaty to allow for the ESM’s creation was done incorrectly, Pringle argues. Even if found legal, the ESM cannot function until this treaty change has come into effect, Pringle claims, according to court documents.
The ESM will replace the temporary European Financial Stability Facility, 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 creation of the ESM, which like the EFSF can offer financial aid in return for budget-austerity conditions on governments, needed a change in the treaty on the functioning of the EU.
This addition said that “member states whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole.” According to the change, “the granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”
Euro Stability
The German court’s interim decision on Sept. 12 rejected efforts to block the ESM, in response to several cases after German 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.
To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net
