Alberto de Gregorio Merino*




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

The crisis of the public debt of Greece made evident some major imbalances of the monetary Union:

a) The Treaties design a monetary union but they do not create a Treasury in charge of issuing public debt, nor a financial mechanism to assist Member States whose finance in the market is not any more feasible. They not only do not establish such crisis tools, but seem to restrict its creation by including the so called no bail-out clause enshrined in Article 125 TFEU.

b) Whilst there was a monetary union where Member States have granted their currency sovereignty to the Union, there was no economic government of the Union. The ECB, is the master of the monetary policies of the euro area Member States, whereas the Member States continue being the masters of their economic or fiscal policies. The competence of the Union in economic policy is for coordinating and not for integrating.

The response by the Union and its Member States to the debt crisis consisted of two pillars. Both pillars were addressed to correct the dysfunctions or the original sins with which the economic and monetary Union was born: on the one hand, they have provided financial assistance to the Member States suffering problems of solvency and liquidity, devising a number of mechanisms that have become ever more complex. On the other hand, they have reinforced the economic governance of the Union, through instruments based on the law of the Union – notably the so called “six pack”, six legal acts adopted in November 2011, that aim at improving the coordination of the economic policies of the Member States, to be supplemented by the “two pack”, a Brussels minted expression designating two legislative proposals tabled by the Commission in November 2011 to strengthen economic governance – and instruments not rooted in the EU Treaties, of a political or of an international law nature – notably the fiscal compact. Financial assistance and strengthened economic governance are the two pillars of the new architecture of the economic and monetary union and both form part of a comprehensive resolution effort of the Union and its Member States.

My presentation will be limited to the most important legal aspects of the instruments of financial assistance undertaken by the Union and by its Member States. It will not cover the mechanisms of economic governance within the economic union. One cannot however lose sight of the fact that the two responses to the crisis, financial assistance and economic governance, go hand in hand. They are the two rails of the train of the Economic and Monetary Union that run parallel. Developments in the chapter of assistance are – and will be – commensurate to parallel developments in the chapter of governance.

I will first present the different mechanism of assistance in their chronological order of creation. I will subsequently present the most important legal problems relating to them. I will however not address the measures of intervention adopted by the European Central Bank (ECB) during the debt crisis.

II         The mechanisms of financial assistance: a description:

The different mechanisms of financial assistance respond to a “law of evolution” rather to a preconceived plan. Their architecture follows an “incremental” approach. Each new instrument has been designed in an ever more sophisticated way than the previous one. I will present The Greek loan facility agreement, the European Financial Stability Mechanism, the European Financial Stability Facility and the European Stability Mechanism.

I would like to preliminary indicate two common characteristics that the mechanisms share: first, all of them, except the EFSM, are intergovernmental instruments created outside the Union legal order – though as we will see afterwards they are rooted in the Union legal order through a number of links; second, in all of them assistance is granted upon compliance with conditionality related, typically, to the budgetary discipline of the recipient Member State.

The pool of bilateral loans to Greece

The origin of the crisis is to be found in Greece. In October 2009, with the change of government in this country, the Greek authorities notified to Eurostat that their estimated deficit for 2009 was not 3,7% of its GDP – as notified in spring of the same year – but 12,5% of the GDP. The recognition by the Greek authorities that they had provided false or inaccurate data sewed a huge mistrust in the markets on the solvency and sustainability of the public finances of this country: during the first months of 2010 the interest rate of the Greek bonds increased until levels comparable to those of emerging economies such as the ones from India, Ecuador or the Philippines (the interest rate of the 2 years bonds were of 15% and of the 5 years bonds of 10,6%). At the end of April of 2010 the credit rating agency Standard & Poors downgraded the rating of Greece to junk bond (from BBB- to BB+).

Assistance to Greece was agreed in March 2010. This mechanism of financial assistance is intergovernmental and consists of a pool of bilateral loans granted to Greece by the other euro area Member States amounting to 80 billion euros. The amount of the loan granted by each Member State has been calculated bearing in mind their allocation key in the capital of the ECB. The interest rate imposed on Greece amounted to around a 7,5%, though it was subsequently decreased. Loans granted to Greece were accompanied by a set of measures of conditionality that this country was subject to respect. The 27 Member States granted the Commission certain tasks for managing the pool of loans. Finally, it is noted that one of the euro area Member States, Slovakia, decided not to participate in the system of bilateral loans.

The EFSM and the EFSF

As year 2010 advanced, it became more and more clear that the public debt crisis was not only confined to Greece. The markets did not trust in the creditworthiness of countries such as Ireland, Portugal – and to some extent Spain – and exercised a huge pressure on their debt. In an extraordinary meeting of the Ecofin Council that took place on 9 May, the Council adopted a regulation creating a Union mechanism of financial assistance based on Article 122(2)TFEU – the so called European Financial Stability Mechanism – that could provide financial assistance until the limits of the Union budget (no more than 60 billion euros). In the course of that meeting, it was clear that in order to pacify the markets, a much more robust mechanism was needed.

As underlined by Commissioner Rehn the day of the Council, 60 billion euros, was a non-starter with the markets, bearing in mind that potential victims such as Spain were in the focus of the markets. That is why for the amounts going beyond the limit of the Union budget, the Member States decided to act in an intergovernmental way.

They established a company located in Luxembourg, the so-called “European Financial Stability Facility” (the EFSF), whose shareholders are the euro area Member States, which may grant assistance until a limit of 440 billion euros. The EFSF was initially conceived as a temporal mechanism with an expiry date – in June 2013. It finances its activities issuing bonds in the markets that are guaranteed on a pro rata basis by the participating Member States. With the proceeds of the bonds, as initially conceived, it finances the beneficiary Member State trough loans. The euro area Member States guarantee the debt issued by the EFSF on the basis of their allocation key in the ECB.

The Commission and the ECB were given the task of managing some of its operations. The rescue of Ireland and of Portugal has used funds either from the EFSM and from the EFSM. Greece exhausted all the resources available under the pool of bilateral loans and needed a second programme.


The establishment of the EFSF and of the EFSM contributed certainly to calming the markets during the summer of 2010. However, in many capitals it was clear that the EFSF and the EFSM would only buy time. Markets perceived the mechanism as a simple conjunctural remedy. A solution of a permanent and structural nature, that could be seen as forming part of the system – a kind of European Monetary Fund – was needed.

This is why in the autumn of 2010, the European Council agreed on the need to establish a “permanent crisis mechanism”, of an intergovernmental nature, to safeguard the financial stability of the euro area as a whole. The main features of the new mechanism were agreed shortly afterwards at the European Council of 16-17 December 2010, together with a simplified amendment of the Treaties adding a provision – Article 136(3) TFEU – that declares the power of euro area member States to constitute such a permanent mechanism. This Treaty amendment will be explored later.

The permanent crisis mechanism has been called the “European Stability Mechanism” (the ESM). It was negotiated during almost one year as a Treaty of international public law whose signatories are the euro area Member States. It was eventually signed on 2 February 2012, and has enetered into force on 27 September 2012.

Until the complete rundown of the EFSF, the consolidated ESM and EFSF lending capacity may not exceed 500 billion euro, though euro area ministers of finance agreed to raise it to 700 billion euro in the margins of the Eurogroup meeting of 30 March 2012. The financial and operational design of the ESM Treaty is largely inspired by the EFSF: the ESM finances its activities through the proceeds resulting from the issuance from bonds in the markets; it grants assistance subject to compliance with strict conditionality; the different types of assistance it may grant are identical to those available under the EFSF (i.e., precautionary assistance, assistance for the re-capitalisation of financial institutions, loans, primary market interventions and secondary market interventions: see Articles 14 to 18 of the ESM Treaty).

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

First, as referred to above, the ESM is constituted on a permanent basis. The ESM is not a mere public company, unlike the EFSF (or a “special purpose vehicle”, name of commercial bias with which the EFSF was initially baptized), but an international organization – an international financial institution – endowed with governing bodies with the power to adopt legally binding decisions.

Second, ESM transactions are not covered by guarantee commitments issued by its members, as in the case of the EFSF, but by the capital of the ESM, which amounts to 700 billion euros, distributed among the members on the basis of their key for subscription of the ECB’s capital.

Third, the ESM incorporates some mechanisms of flexibility for its management. On the one hand, certain provisions aim at facilitating its decision making: although the most important ESM decisions are adopted by “mutual agreement” – equivalent to unanimity under the EU Treaties -, under certain circumstances where assistance must be granted urgently, decisions may be adopted under a super-qualified majority of 85% of the votes cast. On the other hand, and very importantly, the Board of Governors is entitled to amend certain provisions of the ESM Treaty through a simplified procedure – thus obviating the need to submit the amended Treaty to a full process of ratification. This is notably the case for changes to the authorized capital stock and to the maximum lending volume as well as the review of the type of instruments of assistance available to the ESM – see Articles 10 and 19 of the ESM Treaty respectively.

Fourth, the parties to the ESM Treaty have recognised that ESM loans enjoy preferred creditor status vis-a-vis the other debts contracted by the beneficiary State, while accepting preferred creditor status of the IMF loans vis-à-vis the ESM.

Finally, the Heads of State and Government of the euro area have agreed on 29 June 2012 that when an effective single supervisory mechanism is established, involving the ECB, the ESM may have the possibility to recapitalize banks directly, without going through the means of a loan to the ESM Member concerned.


i)    The interpretation of Article 125 TFEU

Article 125 TFEU prohibits the Union and its Member States to being liable for or assuming the commitments of other Member States. This is a paramount rule of the economic union which serves the purpose of guaranteeing the budgetary discipline of Member States. It is a rule introduced in the Treaty of Maastricht back in the 90s, of a clear German inspiration. It is telling Member States: you are in the monetary union but forget any hope of your partners bailing you out. It forces Member States to comply with their budgetary discipline by following the logic of the markets when incurring public debt.

For some Member States, in particular Germany, the respect of this provision was an essential condition for their participation in the monetary union, to avoid this latter to become a “transfer union” (see judgment of the German Constitutional Court of 12 October 1993 on the Treaty of Maastricht). Article 125 TFEU, together with other provisions of the Treaty such as the prohibition of monetarising debt (Article 123 TFEU) and the independence of the ECB, are essential provisions to ensure that the monetary union is rooted in the idea of monetary stability.

The mechanisms of financial assistance devised by the Union and by its Member States must therefore bear this provision into account if they did not want to breach the Treaties. How to match the creation of a mechanism of financial assistance with this provision?

At first sight one could interpret Article 125 TFEU as excluding any kind of financial assistance. This is a reading favoured by a particular school of thinking quite extended in Germany. This is not my reading however. My understanding of Article 125 TFEU is based in a literal and teleological interpretation of Article 125. From a literal point of view the prohibition to being liable for or assuming the commitments of other Member States does not seem to exclude types of financial assistance, such as loans or credits. In support of this interpretation one could note the difference in wording between Articles 125 and 123 TFEU, which prohibits “Overdraft facilities or any other type of credit facility (…)” being guaranteed by the ECB or by central banks of the Member States. The prohibition of monetary financing under Article 123 TFEU refers expressly to loan or credit schemes and is made in stricter terms that the prohibition of financing by the Union or its Member States under Article 125 TFEU. 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 is intended to ensure. The fact that under the three intergovernmental mechanisms the granting of loans or credits is conditioned to the adoption and respect of measures of strict budgetary adjustment by the beneficiary Member State is an evident indication that assistance pursues, and does not betray, the aim and spirit of Article 125(1) TFEU.

ii) 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 the simplified amendment procedure of the Treaties, whereby a new paragraph (3) was added to Article 136 TFEU. Actually, this new provision reflects the interpretation of Article 125 TFEU advanced above.

The amendment takes place in the context of the debate on the compatibility of a permanent mechanism of financial assistance with Article 125 TFEU. The German participation in the Greek rescue package and in the EFSF had been the object of actions by German individuals before the German constitutional court (as will be the object of analysis subsequently). Among other arguments, the plaintiffs in these cases claimed that by granting loans to Greece and by participating in the EFSF, Germany had breached the principles of monetary and price stability on which the monetary union is based. For Germany, the respect of the principle of monetary stability (of which Article 125 TFEU is an evident expression) was an essential condition for its participation in the monetary union. The monetary union should not become a “transfer union”.

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

The European Council of 16-17 December 2010 agreed on the establishment 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 European Council, without having recourse to a Convention and to an Intergovernmental Conference[1]. The entry into force of the decision of the European Council depends on the approval of the decision by all the 27 Member States.

The decision was formally adopted by the European Council at its meeting of 24-25 March 2011. It adds the following paragraph (3) to Article 136 TFEU “The 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. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality”.

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

Article 136(3) TFEU may be regarded as a provision of a fundamental interpretative value according to which mechanisms such as the ESM do not run counter the no bail-out clause.

But Article 136(3) TFEU does not modify, restrict, or deprive of sense Article 125 TFEU. Its two sentences build upon and reconcile two different concepts of stability, on the one hand the stability of the euro area and, on the other hand, monetary stability – founded on budgetary discipline. True, the first sentence of Article 136(3) TFEU refers to an “ultima ratio” instrument of financial assistance, “indispensable” to safeguard a greater good, the stability of the euro area as a whole; but preserving the stability of the euro area cannot be to the detriment of the monetary stability enshrined in the DNA of the single currency project since its inception: in accordance with the second sentence of Article 136(3) TFEU, the activation of financial assistance is subject to “strict conditionality” in pursuance of the objective of budgetary discipline, intrinsically linked to the monetary stability that the no bail-out clause is intended to guarantee.

As already explained, because of the restricted scope for its use and the limited amounts 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 the face of a situation where the financial needs of the Member States in question are so impressively high. This has led to euro area Member States devising mechanisms of assistance outside the EU Treaties – the Greek loan facility, the EFSF and the ESM.

iii) The links between the mechanisms of assistance and the law of the Union

However, the fact that assistance instruments have been created outside the EU Treaties does not mean that they are completely unrelated to the law of the Union. The three mechanisms are instrumental to the achievement of the objectives of the EU, notably the establishment of a monetary union. This policy relationship is reflected in a number of links of a substantial and institutional nature.

              a)     Substantial links

The three intergovernmental mechanisms incorporate clauses of consistency by virtue of which conditionality measures laid down on their basis must be compatible with measures of economic coordination under the EU Treaties. Actually, conditionality measures under the instruments

– typically agreed through memoranda of understanding – aim at ensuring budgetary discipline of Member States, in the same way that the EU Treaties provide for measures of budgetary discipline of Member States, notably those adopted under the excessive deficit procedure (Article 126(2) to (12) TFEU) and under Article 136(1) TFEU, which empowers the Union to adopt measures specific to euro area Member States addressed at strengthening the coordination and surveillance of their budgetary discipline.

The objective of the provisions of consistency is to avoid building a rival universe of economic coordination outside the EU Treaties to the detriment of the competence of economic coordination under the EU Treaties.

This kind of provision is not without precedent. Other intergovernmental arrangements, such as the Schengen and Prüm Conventions had already introduced consistency clauses. Consistency provisions are the corollary of the principles of sincere cooperation laid down by Article 4(3) TFEU, and of primacy of EU law as developed by case law.

Under the principle of sincere cooperation, Member States shall take any appropriate measure, general or particular, to ensure fulfilment of the obligations arising out of the Treaties or resulting from the acts of the institutions of the Union, and they shall facilitate the achievement of the Union’s tasks and refrain from any measure which could jeopardize the attainment of Union objectives.

In our view, the principle of sincere cooperation does not prevent Member States from agreeing in an intergovernmental way conditionality measures that correspond in substance to those that the Union may adopt under its existing competences of economic coordination –particularly pursuant to Article 136(1) TFEU, nor from agreeing on measures of economic conditionality for whose adoption the EU Treaties do not provide the necessary competences for the Union to act. Actually, new Article 136(3) TFEU, referred to above, recognizes the power of Member States to agree such conditionality outside the law of the Union.

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

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

In this sense, a practice has developed whereby conditionality attached to assistance has been agreed with the beneficiary Member States concurrently with Council Decisions adopted on the basis of Article 136 TFEU (in the case of Greece), or on the basis of Regulation 407/2010 on the EFSM (in the case of Portugal and Ireland).

Moreover, under the proposals of the so called “two pack” currently under discussion, referred to at the beginning of this article, Member States under assistance of the EFSF or of the ESM are required to submit to the Council for its approval a so called “macro-economic adjustment programme”. This programme aims at incorporating in the law of the Union the conditionality measures agreed externally under the EFSF or the ESM.

            b)     Institutional links

The intergovernmental instruments make use of institutions of the Union – the Commission and the Court of Justice – for the execution of some of some of their tasks.

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

negotiation and signature of memoranda of understanding with the beneficiary Member State on behalf of the lenders –the other euro area Member States, the EFSF or the ESM as the case may be – and the monitoring of compliance with the conditionality measures laid down in the context of the different mechanisms.

The powers of the Commission in relation to the three intergovernmental instruments have been conferred by means of intergovernmental decisions of the representatives of all the 27 Member States. A limited group of Member States, the 17 whose currency is the euro, could not freely dispose of an EU institution, the Commission, for the performance of actions not foreseen in the Treaties for the purposes of an intergovernmental structure created by them outside the Union. The common accord of all the 27 Member States – as “co-owners” of the institutions – is in my view needed.

The allocation of powers of management and execution to the Commission in connection with intergovernmental structures has been blessed by the Court of Justice as compatible with the principle of conferral of powers, in the “Bangladesh” judgment, which dealt with the constitution of a fund of aid to Bangladesh, an extra-EU instrument. In my view the Bangladesh case law is fully applicable in the case at stake. The allocation of tasks to the Commission in the framework of intergovernmental mechanisms of assistance is in my view feasible to the extend that the functions of the Commission, as defined by Article 17 TEU, are not denaturalized. The need not to denaturalize the tasks of the Commission has a double expression, both qualitative and quantitative: qualitative because the Commission may not develop functions that are alien to those that it holds under the Treaties; quantitative because the impact of these tasks in the Commission organization – human resources and budget – should be marginal, otherwise it would not be anymore the Commission of the European Union but, also, the Commission of an international organization external to the Union.

As for, the Court of Justice jurisdiction is conferred on it to rule on disputes between the Member States concerning the interpretation and the application of the three instruments.

In the Greek facility the Court of Justice is empowered to rule on any dispute concerning the legality, validity, interpretation or performance of either the loan facility agreement and the inter-creditor agreement; in the EFSF, Member States undertake to submit their disputes to the jurisdiction of the Court of Justice.

For its part, the ESM Treaty confers on the Court of Justice jurisdiction to rule on disputes between the parties, or between the parties and the ESM, on the interpretation and application of the ESM Treaty, including any dispute about the compatibility of the decisions adopted by the ESM with that Treaty (see Article 37(3) ESM Treaty). The specificity of the ESM Treaty is that recital (16) of its preamble makes explicit what was implicit in the other two instruments, namely that the attribution of jurisdiction to the Court of Justice is operated by means of Article 273 TFEU. According to this provision, the Court shall have jurisdiction in any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties.

The provisions attributing jurisdiction to the Court constitute the “special agreement” to submit a dispute to the Court. It seems clear that all the three mechanisms 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 safeguarding the stability of the euro area.




* Member of the Legal Service, Council of the European Union. The opinions issued in this paper are strictly personal and do not engage the institution for which the author works.

[1]    See Annex I of the conclusions of the European Council of 16-17 December 2010, document EUCO 30/1/10, REV1, at .