Thursday, 2 October 2008

EU: No-bailout rule I

Central banks, such as the European Central Bank, have injected massive amounts of liquidity into financial markets and governments are busy shoring up tottering private sector banks, but what if the failing entities in EU countries were public, like member states themselves or public sector undertakings?

The European Union (EU) is not a federal state, ready to pick up the tab for government failure. On the contrary, economic and monetary union (EMU) is designed only to ensure responsible government borrowing in each nation state separately.

The present financial turmoil is an added reason to look at some of the basic economic policy rules within the European Community.

After the prohibitions on overdraft facilities (monetary financing) and privileged access for the public sector, we turn to the ‘no-bailout’ rule in Article 103 of the Treaty establishing the European Community (TEC). The avoidance of excessive government deficits ─ a problem on the rise ─ will be taken up after the posts on the ‘no-bailout’ clause.

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Article 103 (ex Article 104b) 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 103 TEC

1. The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

2. If necessary, the Council, acting in accordance with the procedure referred to in Article 252, may specify definitions for the application of the prohibition referred to in Article 101 and in this Article.

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Objective

Article 103 TEC (originally Article 104b) is in force and directly applicable from 1 January 1994.

The objective of the ‘no-bailout’ rule in Article 103 TEC is to promote responsible budget policies, by stating that neither the European Community nor other member states shall be liable for or assume public debt in another ─ less responsible ─ member state.

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Cooperation procedure

Economic and monetary union (EMU) is one of the rare areas where the cooperation procedure (Article 252 TEC) still applies with regard to the specifying measures mentioned in paragraph 2. Cf. Articles 99(5), 102(2) and 103(2).

Here is how the cooperation procedure is laid out in Article 252 TEC (OJ 29.12.2006 C 321 E/84):

Article 252 TEC

Where reference is made in this Treaty to this Article for the adoption of an act, the following procedure shall apply.

(a) The Council, acting by a qualified majority on a proposal from the Commission and after obtaining the opinion of the European Parliament, shall adopt a common position.

(b) The Council's common position shall be communicated to the European Parliament. The Council and the Commission shall inform the European Parliament fully of the reasons which led the Council to adopt its common position and also of the Commission's position.

If, within three months of such communication, the European Parliament approves this common position or has not taken a decision within that period, the Council shall definitively adopt the act in question in accordance with the common position.

(c) The European Parliament may, within the period of three months referred to in point (b), by an absolute majority of its component Members, propose amendments to the Council's common position. The European Parliament may also, by the same majority, reject the Council's common position. The result of the proceedings shall be transmitted to the Council and the Commission.

If the European Parliament has rejected the Council's common position, unanimity shall be required for the Council to act on a second reading.

(d) The Commission shall, within a period of one month, re-examine the proposal on the basis of which the Council adopted its common position, by taking into account the amendments proposed by the European Parliament.

The Commission shall forward to the Council, at the same time as its re-examined proposal, the amendments of the European Parliament which it has not accepted, and shall express its opinion on them. The Council may adopt these amendments unanimously.

(e) The Council, acting by a qualified majority, shall adopt the proposal as re-examined by the Commission.

Unanimity shall be required for the Council to amend the proposal as re-examined by the Commission.

(f) In the cases referred to in points (c), (d) and (e), the Council shall be required to act within a period of three months. If no decision is taken within this period, the Commission proposal shall be deemed not to have been adopted.

(g) The periods referred to in points (b) and (f) may be extended by a maximum of one month by common accord between the Council and the European Parliament.

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In short, the cooperation gives the European Parliament more influence than consultation, but less than the co-decision procedure.

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Prohibitions specified

Council Regulation (EC) No 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions referred to in Articles 104 and 104b (1) of the Treaty (OJ 31.12.1993 L 332/1) is in force and directly applicable from 1 January 1994.

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


Ralf Grahn