During last night’s Frontline debate, a significant legal question came into dispute. Sinn Fein claimed that if Ireland rejects the Fiscal Treaty in next week’s referendum, it will retain the right to access the funds of the European Stability Mechanism. This claim is not accurate, and does not reflect the core principles of interpretation in international law. In this post I will also examine this Treaty’s provisions, which are important given its possible centrality to delivering a credible source of funding to Ireland in the event of a second bailout. I also want to consider some aspects of Deputy Thomas Pringle’s constitutional challenge seeking another referendum on Ireland’s membership of the ESM.

The ‘Blackmail’ “Clause”

No provision of the European Stability Mechanism Treaty has received more attention, and indeed has been the subject such vexed political rhetoric. The final draft of the Treaty was amended to insert into the recital section a provision making access to the ESM conditional on ratifying the Fiscal Treaty. I first noted some confusion in Sinn Fein’s position when Deputy Pearse Doherty appeared vexed in a recent Dail debate as to why the requirement is placed in the recital (preambular section) of the Treaty and questioned whether it actually was a legal obligation. This claim was reiterated yesterday by a statement by Sinn Fein, which claimed that Articles 3 and 12, and not the recital, were the grounds of Ireland’s obligation. As a result the Board of the ESM would be free to lend to us if necessary to preserve the stability of the Eurozone.

Significantly, Deputy Doherty’s statement in the Dail relied on a European Court of Justice ruling that recitals cannot ground obligations. However, in doing so he was incorrectly using EU law rather than public international law, which governs this intergovernmental treaty. There is not doubt that it is not a clause of the Treaty, and not a fresh obligation. Instead the recital functions as a specific example of the power to impose conditions on bailouts given to the ESM in Article 3. It fills out the interpretation of that Article, with the result that legally the ESM cannot give us funding without ratification. This reflects a common position in public international law which, when interpreting treaties, values not merely the text, but also the purposes for which the Treaty was laid down. A preamble in an intergovernmental treaty is given such a role in interpretation of the under Article 31(2) of the Vienna Convention of the Law of Treaties. The interpretation is further supported by the fact virtually ever State made it clear their intention was to establish such conditionality.

To keep things in perspective, however, with its blocking veto on the provision of funding, Germany could politically insist on this anyway.  For the pessimists amongst us, they are getting by law what they could have gotten by their economic muscle. The ESM framework foregrounds and formalises its conditionality in the form of the Fiscal Treaty – a strategy which is wildly different from that of the IMF – which traditionally eschews placing formal legal obligations on parties, preferring only a memorandum of understanding.

While some of my writings regarding the legal absurdities of the Fiscal Treaty may have seemed to benefit the ‘No’ side, it is important to note the potential benefit to the ‘Yes’ side of that Treaty’s incoherence. I still wait for a  ‘Yes’ advocate, who, while making their usual arguments, will promise continual and all out war on the Fiscal Treaty – a legal document compromised by poor economics, a lack of direct effect and a Russian doll structure of exceptions. We should continually dare the Commission and Member States to go right ahead and complain to the ECJ, we should make legal reservations and be careful in our design of the national debt brake rules. That would mean more than inanities like being ‘for Europe’ or trains departing.

Deputy Pringle’s Difficult Challenge

This week, there was a further report regarding the progress of the Deputy Thomas Pringle’s attempt to prevent the Dail ratifying the ESM. This case would represent a chance for the Irish judiciary to look at again at the Crotty v An Taoiseach, a case recalled with admiration by the barrister Vincent Martin in today’s Irish Times.

I will focus on the ESM Treaty rather than the potential European Union law aspects of the action. I assume that Deputy Pringle does not wish to place Ireland’s membership of the IMF in doubt. It would therefore appear that the natural way to pitch this action is to argue that the powers of the ESM are distinct and of a more severe nature than the IMF. The constitution clearly contemplates the ability of Dail to bind us to committing money to international institutions (Article 29.3). Therefore the challenge will attempt to characterize Irish commitments under the ESM Treaty as being greater than ‘a charge on public assets’, but rather as being so large or open-ended as having the potential to remove or defacto influence the budgetary competence of the Dáil. It is worth noting that a similar challenge may be taken in Germany. In Estonia, a constitutional opinion is forthcoming centring on the right of larger states to impose their will on smaller states in the emergency context and on the scale of financial contribution involved. Deputy Pringle’s challenge to the ESM Treaty ratification by the Dáil will probably centre on:

-       The extent of the  potential contribution Ireland must make to the working capital of the ESM. The amount of paid in capital will constitute 1.273 billion (Ireland’s quota with the IMF is roughly set at 477 million euros but will soon increase due to quota reform). However, Deputy Pringle will point to the right of the Board of Governors to unconditionally and irrevocably call in 11 billion. A lot of focus has been placed on unconditionally and irrevocably but the point to remember is that it applies to authorised capital stock. The authorised capital can be increased, but after completion of national procedures for ratification.

-       Just like the Fiscal Treaty, there is a failure to provide for a right to unilateral withdrawal from ESM membership. I cannot overstate how frustrating I find this. Within the IMF’s Article’s of Agreement (Article XXVI) there is a perfectly rational and functional provision allowing withdrawal – so it is not an omission but a conscious policy to exclude withdrawal.

-       The Pringle action will rely on the open-ended statements of majority in Crotty which we have previously discussed, which condemn treaties which significantly impair sovereignty to a referendum. I have already discussed that the academic consensus that Crotty will be reined in, and complaints relying on a de facto transfer of competence may not be well received. I do not doubt that the judgments of Walsh and Hederman in particular do ground challenges such as the one Mr Pringle is considering.

-       However, appealing to these features ultimately, in my view, will likely not avail Deputy Pringle. The crucial issue as I see it is the lack of formalized sanctions for a non-compliant state. Unlike the Fiscal Treaty, which had the backstop of potential fines, the ECJ under this Treaty has a power similar to the arbitral tribunal under the IMF Articles of Agreement. There are no express provisions allowing for the fining of non-compliant States. Just as Ireland is open to reject the political bargain of a memorandum of understanding, we are fully empowered to refuse to contribute and effectively disconnect ourselves from the ESM. Counsel for the State can argue that the Treaty legally facilitates political co-operation rather than legally directing it through judicial power. As we’ve talked about regularly, Crotty is an abstract painting rather than a map, but I would wager that is how the High Court/Supreme Court could structure its reasoning.

Remaining Confusion

I accept that the reason for a referendum here, and no referendum there is confusing for people. We have had no clear statement from the Government as to why a referendum for the Fiscal Treaty was required. The Taoiseach’s statement that it wasn’t an EU Treaty so a referendum was required provided no significant insight.

I would like to praise Professor Gerry Whyte for pointing out before the Oireachtas EU Affairs committee that the current proposed amendment wording rules out the placing the debt brake in the constitution. It would appear, therefore, that the government did not regard Article 3 obligation to introduce a ‘permanent, preferably constitutional’ rule as the reason for the referendum. I think, therefore, it was the potentially extensive nature of the ECJ fining power that triggered our referendum. I would reiterate however, that the government’s determination that a constitutional debt brake rule is not required does present some risks – it remains possible (if politically unlikely) for a Member State to sue us arguing that a constitutional debt brake was required by the Treaty. It is a strange position for public understanding for us to remain unclear on why this referendum was ultimately required.

Responding to Criticisms of the ESM:

Ireland’s membership of the ESM involves two steps – ratifying the Treaty and the Dail passing an amendment to Article 136 of the EU Treaties. The amendment was demanded by Germany before a recent challenge to the temporary EFSF mechanism in its Constitutional Court. However, the EFSF survived the constitutional challenge. It remains possible to argue that ESM could proceed without the amendment. Certainly there would be attempted constitutional challenges around Europe, and even in the ECJ itself, but in effect, it remains possible to run arguments to enable the ESM to stay operational.

There has been some scaremongering regarding the immunity from legal process etc granted to the Governors of the ESM, but these mirror similar provisions within the IMF Articles of Agreement (Article IX). So what you say about the ESM, you must say about the IMF.  Furthermore I would stress the importance of terms such as ‘official capacity’ to the granting of immunity, and the fact that the ESM is subject to the judicial supervision (though not direct fining) of the ECJ. There is no doubt however, that as an institution there is a lack of oversight by national audit offices and parliaments, as well as by the European Parliament due to its position outside the EU framework.

Law and Technocracy: Debt-Restructuring and the Role of the ECB

The ESM Treaty fails to provide any effective legal commitment towards debt restructuring measures. Even at the political level, it provides the Board of Governors with little mandate to press for restructuring or private sector involvement, beyond goodwill, voluntary measures. For advocates of a selective and managed default, this Treaty merely underscores that the possibility remains largely unsupported, and recent events in Greece presented as entirely exceptional.

The Treaty now states that in accordance with IMF practice, in exceptional cases, an adequate and proportionate form of private sector involvement will be considered in cases where stability support is provided, accompanied by conditionality in the form of a macro economic adjustment programme. Significantly, however, this provision was moved from an operative article, in the initial treaty, to a recital in the update treaty (recital 12). The main body of the treaty contemplates only one form of private sector involvement, the Collective Action Clause. A Collective Action clause allows a supermajority of debt holders (usually 75%-80%) to agree debt reduction which the remaining 20-25% are legally bound to go along with. The Treaty requires collective action clauses to be included, as of 1 January 2013, in all new euro area government securities with maturity above one year (recital 11 and article 12(3)). This doesn’t cover the existing stock of securities which are already out there. It is worth noting that only Member States, not private actors, can take an action to the ECJ to hold an ESM restructuring policy invalid. Earlier this year, Greece defaulted, by retrospectively inserting a collective action clause into its domestically issued bonds, and then effectively demanded collaboration, shaving off approximately 100 billion off its debt. Would that be constitutional under Ireland’s property rights’ scheme?

Also significant in the Greek case was the role of the European Central Bank. It refused to accept that it, as a debt holder, would have to take the haircut, alongside the private actors, in the Greek deal. It is possible this was due to the no bailout provision of Article 125 of the EU Treaties, which seems to prohibit EU institutions participating in debt forgiveness of eurozone states. This is an under-researched area, but it seems that allowing collective action clauses to force a write down of ECB debt may be regarded as a violation of its basic rules. The fact the ECB can’t (or won’t?) accept haircuts means that they are senior in the queue to recovering their monies (they do rank below the IMF per this ESM Treaty). This adds an additional layer of cost and risk to debt across the Eurozone – and must be counterbalanced by the increased co-ordination and intervention powers which the ESM should enjoy. Of course the ECB, in particular through Lorenzo Bini Smaghi, has virulently opposed sovereign debt restructuring as a matter of policy, arguing imposing haircuts on the private sector would have the knock on making further bank recapitalizations necessary.

Both candidates in the French Presidential election proposed an array of possible ways for the ECB to fund the ESM. The ECB has rejected this as legally impossible, given both Article 122 and 125 TFEU – which prohibit the pooling of debt and the giving of bailouts. However, compare and contrast these express positions with the enormous legal grey areas that exist in relation to the ECB legal mandates to engage in ‘Target 2’ liquidity injections for national banks. A superb post by Kenneth Armstrong on the Eutopia blog brings that oft-hidden, highly technical area into sharp relief. Today’s EU Summit will no doubt provoke further controversy regarding the legal ‘limits’ and policy ideologies of the ECB, when the issue of eurobonds arises.

It is time, I believe to extract clear statements from the ECB regarding its legal authority, and indeed for politicians in Europe to confront the nature of the roadblocks to action we are faced with. The ESM Treaty fails to disturb the default position that those countries who wish to manoeuvre for a unilateral, organised default receive no co-ordinated support from European institutions. For those who believe re-structuring is inevitable, it leaves Europe fragmented and vulnerable in the face of market power and private actors. I would remind all parties, that for all the talk of European union hegemony and German domination, all action remains structured by the animal spirits of the markets.