Sunday, 23 November 2008

EMU: Balance of payments crisis and safeguard measures

EU institutions, finance ministries, corporations and EU citizens have reason to study the possible remedies to serious balance of payments difficulties, in case matters take a turn to the worse.

“Living in interesting times” as regards international financial markets, it may be good to know that the current Treaty establishing the European Community (TEC) and the Treaty on the Functioning of the European Union (TFEU) foresee temporary safeguard measures to protect economic and monetary union (EMU) in exceptional circumstances.

There are separate transitional provisions for the EU member states with a derogation, i.e. outside the eurozone.


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EMU safeguard measures

Current TEC

The European Community (European Union) prohibits all restrictions on the movement of capital and payments between member states and between member states and third countries, although abolishing existing restrictions with regard to third countries is a less absolute aim.

Within the context of economic and monetary union (EMU) restrictions are unthinkable, but in exceptional circumstances serious difficulties may give cause for temporary safeguard measures with regard to third countries.


The current Article 59 (ex Article 109i) of the Treaty establishing the European Community (TEC) is found in the latest consolidated version of the treaties (OJ 29.12.2006 C 321 E/65):

Article 59 TEC

Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council, acting by a qualified majority on a proposal from the Commission and after consulting the ECB, may take safeguard measures with regard to third countries for a period not exceeding six months if such measures are strictly necessary.

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Lisbon Treaty


The Treaty of Lisbon, still on its rocky road to possible entry into force, is the most up-to-date manifestation of what the member state governments want the treaties to say.

Article 66 of the Treaty on the Functioning of the European Union (TFEU) retains the current safeguard measures without substantial change. See the concolidated TFEU, published in the Official Journal of the European Union, OJ 9.5.2008 C 115/73:

Part Three ‘Policies and internal actions of the Union’

Title IV TFEU (ex Title III) ‘Free movement of persons, services and capital’

Chapter 4 ‘Capital and payments’

Article 66 TFEU
(ex Article 59 TEC)

Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council, on a proposal from the Commission and after consulting the European Central Bank, may take safeguard measures with regard to third countries for a period not exceeding six months if such measures are strictly necessary.


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Comment


We live “in interesting times” as regards the stability of the financial markets, so Article 59 TEC and Article 66 TFEU may be of more than purely theoretical interest.

The provision offers the EU possibilities to safeguard the operation of economic and monetary union (EMU) with regard to third countries.

These measures can not be taken lightly: ‘exceptional circumstances’, ‘serious difficulties’ and ‘strictly necessary’ all circumscribe recourse to such measures, which are contrary to the aims of free movement of capital and payments.

In addition, six months is the maximum duration of a measure (but the wording does not exclude a new decision).

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Transitional provisions

There are still twelve EU member states outside the eurozone. Denmark and the United Kingdom have negotiated exceptions (opt-outs) unlimited in time. The other member states with a derogation are Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia (until 1 January 2009) and Sweden.

The transitional EMU provisions take account of potential balance of payments problems at two levels, serious problems and a sudden crisis.

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Serious balance of payments difficulties

Existing TEC

Article 119 TEC (ex Article 109h) sets out the current rules, which illustrate how the problems of one member state may have repercussions for the rest, notably through the internal market and external trade (in relation to third countries).

Primarily, if a member state (with a derogation) is seriously threatened with balance of payments problems, the member state acts, within the provisions of the TEC, to remedy the situation. Then, the Commission investigates and may issue recommendations to the state.

If the actions are insufficient, the Commission can recommend that the Council grants mutual assistance to the member state in difficulties.

If mutual assistance is not granted, or if the assistance given and the measures taken prove to be insufficient, the Commission can authorise the member state to take (exceptional) protective measures. These are subject to ex post review by the Council.

The current Article 119 TEC (in the latest consolidated version of the treaties, OJ 29.12.2006 C 321 E/96-97):


Article 119 TEC

1. Where a Member State is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the common market or the progressive implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of this Treaty. The Commission shall state what measures it recommends the State concerned to take.

If the action taken by a Member State and the measures suggested by the Commission do not prove sufficient to overcome the difficulties which have arisen or which threaten, the Commission shall, after consulting the Committee referred to in Article 114, recommend to the Council the granting of mutual assistance and appropriate methods therefor.

The Commission shall keep the Council regularly informed of the situation and of how it is developing.

2. The Council, acting by a qualified majority, shall grant such mutual assistance; it shall adopt directives or decisions laying down the conditions and details of such assistance, which may take such forms as:

(a) a concerted approach to or within any other international organisations to which Member States may have recourse;

(b) measures needed to avoid deflection of trade where the State which is in difficulties maintains or reintroduces quantitative restrictions against third countries;

(c) the granting of limited credits by other Member States, subject to their agreement.
3. If the mutual assistance recommended by the Commission is not granted by the Council or if the mutual assistance granted and the measures taken are insufficient, the Commission shall authorise the State which is in difficulties to take protective measures, the conditions and details of which the Commission shall determine.

Such authorisation may be revoked and such conditions and details may be changed by the Council acting by a qualified majority.

4. Subject to Article 122(6), this Article shall cease to apply from the beginning of the third stage.


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Lisbon Treaty

Article 143 of the Treaty on the Functioning of the European Union (TFEU) takes over the substance of Article 119 TEC, but the updated wording more clearly presents the transitional character of the provision and that the provision concerns member states with a derogation.

Article 143 TFEU in the consolidated version of the Lisbon Treaty, OJ 9.5.2008 C 115/110-111:


Article 143 TFEU
(ex Article 119 TEC)

1. Where a Member State with a derogation is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the internal market or the implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of the Treaties. The Commission shall state what measures it recommends the State concerned to take.

If the action taken by a Member State with a derogation and the measures suggested by the Commission do not prove sufficient to overcome the difficulties which have arisen or which threaten, the Commission shall, after consulting the Economic and Financial Committee, recommend to the Council the granting of mutual assistance and appropriate methods therefor.

The Commission shall keep the Council regularly informed of the situation and of how it is developing.

2. The Council shall grant such mutual assistance; it shall adopt directives or decisions laying down the conditions and details of such assistance, which may take such forms as:

(a) a concerted approach to or within any other international organisations to which Member States with a derogation may have recourse;

(b) measures needed to avoid deflection of trade where the Member State with a derogation which is in difficulties maintains or reintroduces quantitative restrictions against third countries;

(c) the granting of limited credits by other Member States, subject to their agreement.

3. If the mutual assistance recommended by the Commission is not granted by the Council or if the mutual assistance granted and the measures taken are insufficient, the Commission shall authorise the Member State with a derogation which is in difficulties to take protective measures, the conditions and details of which the Commission shall determine.

Such authorisation may be revoked and such conditions and details may be changed by the Council.


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Balance of payments crisis

Protective measures

Current TEC

Article 119 TEC (and Article 143 TFEU) concerned serious balance of payments difficulties. The second level is represented by Article 120 TEC, which concerns even more serious imbalances, namely a sudden crisis, which may lead to (exceptional) protective measures:

Article 120 TEC in the latest consolidated version of the treaties, OJ 29.12.2006 C 321 E/97:
Page 97

Article 120 TEC

1. Where a sudden crisis in the balance of payments occurs and a decision within the meaning of Article 119(2) is not immediately taken, the Member State concerned may, as a precaution, take the necessary protective measures. Such measures must cause the least possible disturbance in the functioning of the common market and must not be wider in scope than is strictly necessary to remedy the sudden difficulties which have arisen.

2. The Commission and the other Member States shall be informed of such protective measures not later than when they enter into force. The Commission may recommend to the Council the granting of mutual assistance under Article 119.

3. After the Commission has delivered an opinion and the Committee referred to in Article 114 has been consulted, the Council may, acting by a qualified majority, decide that the State concerned shall amend, suspend or abolish the protective measures referred to above.

4. Subject to Article 122(6), this Article shall cease to apply from the beginning of the third
stage.

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Lisbon Treaty

The Articles 143 and 144 TFEU are closely linked. When balance of payments problems occur suddenly and on a massive scale, Article 144 TFEU with potential unilateral protective measures kicks in.

Article 144 TFEU does not change the substance of Article 120 TEC. Disturbances in the functioning of the internal market must still be minimal and the scope of the measures restricted to the strictly necessary.

These exceptional measures quickly become European Union (European Community) matters. The Commission and the Council (Ecofin) can act to grant mutual assistance to a member state hit by a balance of payments crisis, but the EU institutions also review the measures ex post.

The Lisbon Treaty wording clarifies and updates the provision. Because of the beginning of third stage of economic and monetary union (EMU), Article 144 TFEU clearly expresses that this provision directly concerns the member states with a derogation (OJ 9.5.2008 C 115/111):




Article 144 TFEU
(ex Article 120 TEC)

1. Where a sudden crisis in the balance of payments occurs and a decision within the meaning of Article 143(2) is not immediately taken, a Member State with a derogation may, as a precaution, take the necessary protective measures. Such measures must cause the least possible disturbance in the functioning of the internal market and must not be wider in scope than is strictly necessary to remedy the sudden difficulties which have arisen.

2. The Commission and the other Member States shall be informed of such protective measures not later than when they enter into force. The Commission may recommend to the Council the granting of mutual assistance under Article 143.

3. After the Commission has delivered a recommendation and the Economic and Financial Committee has been consulted, the Council may decide that the Member State concerned shall amend, suspend or abolish the protective measures referred to above.

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The existing and the proposed treaty provisions on responses to exceptional circumstances are clearly based on the idea of an evolving de facto solidarity between the member states of the European Union.

Serious difficulties and crises have to be faced together, although there are different provisions for the eurozone as a whole and the non-euro area member states (with a derogation), still forced to fight the financial tempests individually.


Ralf Grahn


P.S. A more detailed blog article on Article 119 TEC and Article 143 TFEU was meant to precede the above post, but it got stuck in technical problems, which have to be sorted out before publication.