Tuesday, 30 September 2008

EU: Privileged access prohibited I

Price stability and budget restraint lie at the heart of economic and monetary union (EMU).

Article 102 of the Treaty establishing the European Community (TEC) prohibits privileged access to financial institutions by European Community institutions and member states’ public authorities.


Article 102 (ex Article 104a) of the Treaty establishing the European Community (TEC) is found in the latest consolidated version of the current treaties, published in the Official Journal of the European Union (OJ) 29.12.2006 C 321 E/84:

Part Three – Community policies

Title VII – Economic and monetary policy

Chapter 1 – Economic policy

Article 102 TEC

1. Any measure, not based on prudential considerations, establishing privileged access by Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States to financial institutions, shall be prohibited.

2. The Council, acting in accordance with the procedure referred to in Article 252, shall, before 1 January 1994, specify definitions for the application of the prohibition referred to in paragraph 1.


While much of economic policy coordination can be described as “soft law”, Article 102 TEC (originally Article 104a) is one of the hard rules aiming at price stability by cutting off public entities’ possibilities to legislate or administer their access to credit on more advantageous terms than their economic situation allows for. Thus, the public sector (governments at all levels and public undertakings) is subject to market realities when financing budget deficits.

Article 102 TEC is in force and directly applicable from 1 January 1994, the date mentioned for the specifying definitions in paragraph 2. At the present time, economic and monetary union (EMU) is one of the rare areas where the cooperation procedure (Article 252 TEC) still finds application.


Detailed rules are contained in Council Regulation (EC) No 3604/93 of 13 December 1993 specifying definitions for the application of the prohibition of privileged access referred to in Article 104a of the Treaty (OJ 31.12.1993 L 332/4–6).

The recital states that Article 104a is “an essential element of the submission of the public sector in its financing operations to the discipline of the market mechanism and so makes a contribution to the strengthening of budgetary discipline; whereas, moreover, it places the Member States on an equal footing as regards public sector access to financial institutions”.

In Article 1, Regulation 3604/93 defines 'any measure establishing privileged access', which includes obligations of financial institutions to acquire or hold public sector debt or confers tax advantages on financial institutions holding such debt.

There are exceptions to the prohibition, notably concerning social housing and disaster relief (paragraph 2).

Prudential considerations are described in Article 2 as having to be “consistent with EC law and designed to promote the soundness of financial institutions so as to strengthen the stability of the financial system as a whole and the protection of the customers of those institutions”.

Public undertakings are defined in Article 3 and financial institutions in Article 4 of Regulation 3604/93.


Next, we look at the corresponding proposal of the European Convention.

Ralf Grahn